[Federal Register Volume 59, Number 60 (Tuesday, March 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7271]
[[Page Unknown]]
[Federal Register: March 29, 1994]
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DEPARTMENT OF LABOR
[Application Nos. D-9337 and D-9415]
Smith Barney Shearson (SBS), Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers,
Inc. (Shearson Lehman).
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed individual exemption
which, if granted, would replace PTE 92-77 (55 FR 45833, October 5,
1992). PTE 92-77 permits the purchase or redemption of shares by an
employee benefit plan, an individual retirement account (the IRA) or a
retirement plan for a self-employed individual (the Keogh Plan;
collectively the Plans) in the Trust for TRAK Investments (the Trust)
established by Shearson Lehman, in connection with such Plans'
participation in the TRAK Personalized Investment Advisory Service (the
TRAK Program). In addition, PTE 92-77 permits the provision, by the
Consulting Group Division of Shearson Lehman (the Consulting Group), of
investment advisory services to an independent fiduciary of a
participating Plan (the Independent Plan Fiduciary) which may result in
such fiduciary's selection of a portfolio (the Portfolio) in the TRAK
Program for the investment of Plan assets. These transactions are
described in a notice of pendency that was published in the Federal
Register on April 3, 1992 at 57 FR 11514. PTE 92-77 is effective as of
April 3, 1992.
If granted, the proposed exemption would replace PTE 92-77, which
as discussed below, expired by operation of the law. The new proposed
exemption would permit the replacement of Shearson Lehman with a newly-
merged entity known as ``Smith Barney Shearson, Inc.'' It would also
permit the adoption of a daily-traded collective investment fund (the
GIC Fund) for Plans providing for participant directed-investments (the
Section 404(c) Plans). The proposed exemption would provide conditional
relief that is identical to that provided by PTE 92-77. In addition,
the proposed exemption would affect participants and beneficiaries of,
and fiduciaries with respect to, Plans participating in the TRAK
Program.
DATES: Written comments and requests for a public hearing should be
received by the Department on or before the expiration of 60 days from
the publication of this proposed exemption in the Federal Register. If
granted, the proposed exemption will be effective July 31, 1993 for
transactions that are covered by PTE 92-77. With respect to
transactions involving the GIC Fund, the proposed exemption will be
effective as of the date the grant notice is published in the Federal
Register.
ADDRESSES: All written comments and requests for a public hearing
(preferably, three copies) should be sent to the Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210, Attention: Application Nos. D-9337 and D-9415.
The applications pertaining to the proposed exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, room N-5507, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, telephone (202) 219-8881. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed exemption that would replace PTE
92-77. PTE 92-77 provides an exemption from certain prohibited
transaction restrictions of section 406 of the Employee Retirement
Income Security Act of 1974 (the Act) and from the sanctions resulting
from the application of section 4975 of the Internal Revenue Code of
1986 (the Code), as amended, by reason of section 4975(c)(1) of the
Code. The proposed exemption was requested in an application filed by
SBS pursuant to section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures (the Procedures) set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, 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. Accordingly, this proposed replacement
exemption is being issued solely by the Department.
As stated briefly above, PTE 92-77 allows Shearson Lehman to make
the TRAK Program available to Plans that acquire shares in the Trust
subject to certain conditions. Specifically, PTE 92-77 provides
exemptive relief from section 406(a) 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 (D) of the Code, with respect to the
purchase or redemption of shares in the Trust by Plans investing
therein. In addition, PTE 92-77 provides exemptive relief from the
restrictions of section 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)(E) of the Code, with respect to the
provision, by the Consulting Group of Shearson Lehman, of investment
advisory services to an Independent Plan Fiduciary of a Plan
participating in the TRAK Program which may result in such fiduciary's
selection of a Portfolio in the TRAK Program for the investment of Plan
assets.
Subsequent to the granting of PTE 92-77, Shearson Lehman informed
the Department that it had signed an asset purchase agreement with
Primerica Corporation (Primerica) and Smith Barney Harris Upham &
Company, Inc. (Smith Barney), an indirect, wholly owned subsidiary. The
terms of the agreement provided for the sale of substantially all of
the assets of Shearson Lehman and its Asset Management Divisions
(collectively, the Shearson Divisions) to Smith Barney.1 The
transaction was completed on July 31, 1993. As a result of the
transaction, most of the assets and business of the Shearson Divisions
were transferred to Smith Barney which, upon merger with Shearson
Lehman, was renamed ``Smith Barney Shearson.'' (Smith Barney Shearson
is denoted herein as SBS.) Shearson Lehman received cash and an
interest-bearing note from SBS. As further consideration for the asset
sale, SBS agreed to pay future contingent amounts based upon the
combined performance of SBS and certain other Shearson Divisions
acquired from Shearson Lehman. Shearson Lehman also assigned to the
American Express Company (American Express) the right to receive 2.5
million shares of certain convertible preferred stock issued by
Primerica and a warrant. As consideration for the assignment, American
Express agreed to pay Shearson Lehman for the stock and the warrant
based on their value as of March 12, 1993, the date of the Asset
Purchase Agreement. At present, SBS offers the TRAK Program to
investors through one or more of its subsidiaries or divisions.
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\1\Shearson Lehman's other primary division, Lehman Brothers,
which is responsible for securities underwriting, financial
advisory, investment and merchant banking services and commodities
trading as a principal and agent, has been retained by Shearson
Lehman. It has been renamed ``Lehman Brothers Inc.''
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Since PTE 92-77 was granted, SBS informed the Department that it
wished to modify the exemption in order to improve the TRAK Program and
make it more responsive to the needs of investors. Specifically, SBS
proposes to add to the Portfolios currently available under the TRAK
Program, the GIC Fund, which is designed to invest primarily in
guaranteed investment contracts (the GICs), synthetic GIC products and/
or units of other GIC collective funds. The GIC Fund will not differ in
any material respects from the Government Money Investments Portfolio
which generally permits daily redemptions of its shares. In addition,
the GIC Fund will operate in a manner that is consistent with the
requirements of PTE 92-77. SBS believes it is important to offer the
GIC Fund to Section 404(c) Plans because these Plans may prefer to
offer participants this type of investment option instead of the
Government Money Investments Portfolio presently offered to such Plans
under the TRAK Program. Therefore, SBS requests exemptive relief in
order that the GIC Fund may be added to the Portfolios that are
available under the Trust.
The proposed GIC Fund will be a collective trust fund established
and maintained by Smith Barney Shearson Trust Company (SBS Trust), a
wholly owned subsidiary of Primerica. The GIC Fund will invest
primarily in a portfolio of GICs with varying maturities issued by
highly-rated insurance companies, and/or units of other collective
funds invested in GICs. The GIC Fund may also invest in asset-backed
investment products designed to offer risk and return characteristics
similar to those of GICs (i.e., synthetic GIC products). In addition,
the GIC Fund may hold short-term, low risk securities where the
investment of all fund assets in GICs and/or units of other GIC
collective funds is not feasible.
SBS Trust will serve as the trustee of the GIC Fund. SBS Trust will
employ a sub-adviser (the Sub-Adviser) which is independent of SBS and
its affiliates to make recommendations on purchases of GICs and/or
units of other GIC collective funds. Currently, SBS Trust employs
Morley Capital Management (Morley Capital) of Lake Oswego, Oregon as
the Sub-Adviser of the GIC Fund. SBS Trust will also employ Boston
Company Investors Services Group (ISG), a business group of The Boston
Company to provide custody and valuation services and The Shareholder
Services Group, Inc. (TSSG), an entity which is indirectly owned by
American Express, as transfer agent. Both ISG and TSSG are not
affiliated with SBS.
SBS represents that the GIC Fund will not pay a management or other
similar fee to it or SBS Trust. (SBS Trust's fees for general trust
services provided to a Section 404(c) Plan is included in such plan's
investment advisory or ``outside'' fee.) A management fee may be paid
to Morley Capital or any other Sub-Adviser which is independent of SBS
and its affiliates. The GIC Fund will pay ISG, as custodian and
provider of fund valuation services, a fee for such services, and TSSG,
as transfer agent, a fee of $8.50 to $9.50 per Section 404(c) Plan,
plus out-of-pocket expenses. With respect to the fees paid to SBS and
its affiliates, the GIC Fund will not differ materially from the
Government Money Investments Portfolio in that it will not pay a
management or other similar fee to SBS or SBS Trust.
SBS will describe the GIC Fund in the prospectus (the Prospectus)
and promotional materials it furnishes to Section 404(c) Plan
participants who are interested in investing in the GIC Fund. Such
disclosures will reflect, in all material respects, the information
discussed above.
Because of the foregoing material changes to the factual
representations supporting PTE 92-77, the Department has determined
that the prior exemption was no longer effective as of July 31, 1993,
the date Shearson Lehman sold the assets described above to SBS. Thus,
the Department is of the view that PTE 92-77 would be unavailable for
use by SBS and its subsidiaries with respect to the subject
transactions.
Accordingly, the Department has decided to publish a new exemption
which, if granted, would replace PTE 92-77. Under the replacement
exemption, all references to Shearson Lehman would be replaced with
references to SBS. In addition, the replacement exemption would
incorporate the new GIC Fund, SBS Trust, ISG and TSSG. Further, the
replacement exemption would have an effective date of July 31, 1993 for
transactions described in PTE 92-77. With respect to transactions
involving the GIC Fund, the replacement exemption would become
effective as of the date of the grant of the notice of pendency.
Notice to Interested Persons
Notice of the proposed exemption will be mailed by first class mail
to each Plan which invests in the TRAK Program. The notice will contain
a copy of the notice of proposed exemption as published in the Federal
Register and an explanation of the rights of interested persons to
comment on and/or request a hearing with respect thereto. Such notice
will be sent to the above-named parties within 30 days of the
publication of the proposed exemption in the Federal Register. Written
comments and hearing request are due within 60 days of the publication
of the proposed exemption in the Federal Register.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, a fiduciary to
discharge his or her 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 requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption can be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interest of the plan
and of its participants and beneficiaries and protective of the rights
of participants and beneficiaries of the plan; and
(3) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions. 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.
(4) In addition to transactions involving the GIC Fund, the
proposed exemption, if granted, will be applicable to the transactions
previously described in PTE 92-77 only if the conditions specified
therein are met.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the proposed replacement exemption to the
address above, within the time period set forth above. All comments
will be made a part of the record. Comments and requests for a hearing
should state the reasons for the writer's interest in the proposed
exemption. Comments received will be available for public inspection
with the referenced applications at the address set forth above.
Proposed 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 cited
above, the Department proposes to replace PTE 92-77 as follows:
Section I. Covered Transactions
(a) The restrictions of section 406(a) 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 (D) of the Code, shall not apply to
the purchase or redemption of shares by Plans in the SBS-established
Trust in connection with such Plans' participation in the TRAK
Personalized Investment Advisory Service.
(b) The restrictions of section 406(b) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(E) and (F) of the Code, shall not apply to the
provision, by the Consulting Group, of investment advisory services to
an Independent Plan Fiduciary of a participating Plan which may result
in such fiduciary's selection of a Portfolio in the TRAK Program for
the investment of Plan assets.
The proposed exemption is subject to the following conditions that
are set forth in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved
by an Independent Plan Fiduciary. For purposes of this requirement, an
employee, officer or director of SBS and/or its affiliates covered by
an IRA not subject to Title I of the Act will be considered an
Independent Plan Fiduciary with respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the
acquisition or redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares shall
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations based
upon objective criteria.
(f) Any recommendation or evaluation made by the Consulting Group
to an Independent Plan Fiduciary will be implemented only at the
express direction of such independent fiduciary.
(g) The Consulting Group will generally give investment advice in
writing to an Independent Plan Fiduciary with respect to all available
Portfolios. However, in the case of a Section 404(c) Plan, the
Consulting Group will provide investment advice that is limited to the
Portfolios made available under the Plan.
(h) Any Sub-Adviser that acts for the Trust to exercise investment
discretion over a Portfolio will be independent of SBS and its
affiliates.
(i) Immediately following the acquisition by a Portfolio of any
securities that are issued by SBS and/or its affiliates, the percentage
of that Portfolio's net assets invested in such securities will not
exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to
the Consulting Group for investment advisory services rendered to such
Plan will be offset by such amount as is necessary to assure that the
Consulting Group retains no more than 20 basis points from any
Portfolio (with the exception of the Government Money Investments
Portfolio and the GIC Fund Portfolio for which the Consulting Group and
SBS Trust will retain no investment management fee) which contains
investments attributable to the Plan investor.
(k) With respect to its participation in the TRAK Program prior to
purchasing Trust shares,
(1) Each Plan will receive the following written or oral
disclosures from the Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, SBS and its
subsidiaries and the compensation paid to such entities.
(B) Upon written or oral request to SBS, a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest,
the investment policies and strategies that the Portfolios may utilize
and certain risks attendant to those investments, policies and
strategies.
(C) A copy of the investment advisory agreement between the
Consulting Group and such Plan relating to participation in the TRAK
Program.
(D) Upon written request of SBS, a copy of the respective
investment advisory agreement between the Consulting Group and the Sub-
Advisers.
(E) In the case of a section 404(c) Plan, if required by the
arrangement negotiated between the Consulting Group and the Plan, an
explanation by an SBS Financial Consultant (the Financial Consultant)
to eligible participants in such Plan, of the services offered under
the TRAK Program and the operation and objectives of the Portfolios.
(F) Copies of PTE 92-77 and documents pertaining to the proposed
replacement exemption.
(2) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing, prior to purchasing Trust shares that such fiduciary has
received copies of the documents described above in subparagraph (k)(1)
of this section.
(3) With respect to a section 404(c) Plan, written acknowledgement
of the receipt of such documents will be provided by the Independent
Plan Fiduciary (i.e., the Plan administrator, trustee or named
fiduciary, as the recordholder of Trust shares). Such Independent Plan
Fiduciary will be required to represent in writing to SBS that such
fiduciary is (a) independent of SBS and its affiliates and (b)
knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the
Act, where investment decisions are made by a trustee, investment
manager or a named fiduciary, such Independent Plan Fiduciary is
required to acknowledge, in writing, receipt of such documents and
represent to SBS that such fiduciary is (a) independent of SBS and its
affiliates, (b) capable of making an independent decision regarding the
investment of Plan assets and (c) knowledgeable with respect to the
Plan in administrative matters and funding matters related thereto, and
able to make an informed decision concerning participation in the TRAK
Program.
(l) Subsequent to its participation in the TRAK Program, each Plan
receives the following written or oral disclosures with respect to its
ongoing participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include
financial statement for the Trust and investment management fees paid
by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis
and an evaluation of a Plan investor's account to ascertain whether the
Plan's investment objectives have been met and recommending, if
required, changes in Portfolio allocations.
(3) If required by the arrangement negotiated between the
Consulting Group and a section 404(c) Plan, a quarterly, detailed
investment performance monitoring report, in writing, provided to an
Independent Plan Fiduciary of such Plan showing, Plan level asset
allocations, Plan cash flow analysis and annualized risk adjusted rates
of return for Plan investments. In addition, if required by such
arrangement, Financial Consultants will meet periodically with
Independent Plan Fiduciaries of section 404(c) Plans to discuss the
report as well as with eligible participants to review their accounts'
performance.
(4) If required by the arrangement negotiated between the
Consulting Group and a section 404(c) Plan, a quarterly participant
performance monitoring report provided to a Plan participant which
accompanies the participant's benefit statement and describes the
investment performance of the Portfolios, the investment performance of
the participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to
amend his or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all
Plans of the (a) percentage of each Portfolio's brokerage commissions
that are paid to SBS and its affiliates and (b) the average brokerage
commission per share paid by each Portfolio to SBS and its affiliates,
as compared to the average brokerage commission per share paid by the
Trust to brokers other than SBS and its affiliates, both expressed as
cents per share.
(m) SBS shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (n) of this
section to determine whether the conditions of this exemption have been
met, except that (1) a prohibited transaction will not be considered to
have occurred if, due to circumstances beyond the control of SBS and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period, and (2) no party in interest other than SBS 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 (n) below.
(n)(1) Except as provided in section (2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (m) of this
section shall be unconditionally available at their customary location
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department or the Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of
this paragraph (n) shall be authorized to examine the trade secrets of
SBS or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this exemption:
(a) An ``affiliate'' of SBS includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with SBS. (For purposes of this subsection, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(b) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is
independent of SBS and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as
the recordholder of Trust shares of a Section 404(c) Plan,
(2) A participant in a Keogh Plan,
(3) An individual covered under a self-directed IRA which invests
in Trust shares, or
(4) A trustee, investment manager or named fiduciary responsible
for investment decisions in the case of a Title I Plan that does not
permit individual direction as contemplated by Section 404(c) of the
Act.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for
transactions involving the GIC Fund. The exemption will be effective
upon its grant with respect to the inclusion of the GIC Fund in the
TRAK Program.
The availability of this proposed exemption is subject to the
express condition that the material facts and representations contained
in the applications for exemption are true and complete and accurately
describe all material terms of the transactions. In the case of
continuing transactions, if any of the material facts or
representations described in the applications change, the exemption
will cease to apply as of the date of such change. In the event of any
such change, an application for a new exemption must be made to the
Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant PTE 92-77, refer to the
proposed exemption and grant notice which are cited above.
Signed at Washington, DC, this 23rd day of March, 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-7271 Filed 3-28-94; 8:45 am]
BILLING CODE 4510-29-P
