[Federal Register Volume 61, Number 44 (Tuesday, March 5, 1996)]
[Notices]
[Pages 8670-8687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5022]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09986, et al.]
Proposed Exemptions NBD Bancorp
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) the name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice To Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
NBD Bancorp; Located in Detroit, Michigan; Proposed Exemption
[Application No. D-09986]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(b)(2) of the Act shall not apply to the merger of the
INB Principal Stability Fund (the PS Fund) into the NBD Stable Asset
Income Fund (the SAI Fund).\1\
\1\ For purposes of this proposed exemption, the PS Fund and the
SAI Fund described herein are collectively referred to as the Funds.
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The proposed exemption is conditioned upon satisfaction of the
following requirements:
(1) On the date the merger is executed, the assets in the PS Fund
and the assets in the SAI Fund will be valued in the same manner, under
identical guidelines, by the same individuals;
(2) Upon completion of the merger of the PS Fund into the SAI Fund,
the aggregate fair market value of the interests of the employee
benefit plans (the Plans) participating in the SAI Fund immediately
following the merger, together with any cash received in lieu of
fractional units, equals the aggregate fair market value of each
participating Plans' interest in such Funds immediately before the
merger;
(3) The assets of each of the participating Plans are invested in
the same type of investments both before and after the proposed merger;
(4) Neither NBD Bancorp nor any of its affiliates receives fees or
commissions in connection with the merger;
[[Page 8671]]
(5) The Plans will pay no sales commissions or fees, as a result of
the transaction; and
(6) A fiduciary who is acting on behalf of each affected Plan and
who is independent of and unrelated to NBD Bancorp and any of its
affiliates receives advance written notice of the merger of the PS Fund
into the SAI Fund.
Summary of Facts and Representations
1. The Plans involved in this proposed exemption are certain
pension, profit sharing, or stock bonus plans which are exempt from
Federal income taxation under section 501(a) of the Code by reason of
qualifying under section 401(a) of the Code.
2. The proposed exemption is requested on behalf of National Bank
of Detroit (herein referred to as NBD Michigan) and on behalf of NBD
Bank, N.A. (herein referred to as NBD Indiana). NBD Michigan and NBD
Indiana are national banking associations and members of an
``affiliated group,'' as defined in section 1504 of the Code. NBD
Michigan is a wholly-owned subsidiary of NBD Bancorp, a bank holding
company with principal offices in Detroit, Michigan. NBD Indiana, with
principal offices in Indianapolis, Indiana, is a wholly-owned
subsidiary of NBD Indiana, Inc., another bank holding company. It is
represented that since 1992, NBD Indiana, Inc. has also been wholly-
owned by NBD Bancorp.
3. The SAI Fund and the PS Fund are common funds maintained for the
collective investment of monies contributed thereto by the Plans. NBD
Michigan and NBD Indiana, respectively, serve as trustees for the SAI
Fund and the PS Fund. The SAI Fund is one of twenty-five (25) separate
collective investment funds under a group trust now known as the
National Bank of Detroit Investment Fund for Employee Benefit Plans
(the NBD Pooled Fund) which was established on May 12, 1960, by the
National Bank of Detroit, a predecessor of NBD Michigan, and which, as
amended, is now maintained by NBD Michigan. The PS Fund is one of the
collective investment funds under a group trust known as the INB
National Bank Group Trust for Employee Pension and Profit-Sharing
Trusts B (the INB Group Trust) which was established on July 18, 1990,
by INB National Bank, a predecessor of NBD Indiana, and which, as
amended, is now maintained by NBD Indiana.
4. Both the SAI Fund and the PS Fund have substantially identical
investment objectives, and the assets of each are invested in similar
types of guaranteed insurance contracts. As of September 26, 1994,
approximately 405 Plans participated in the SAI Fund, and 83 Plans
participated in the PS Fund. As of January 23, 1996, it is represented
that there were 44 Plans participating in the PS Fund. The aggregate
fair market value of the SAI Fund, as of September 30, 1994, was
$189,876,000. As of November 30, 1994, the aggregate fair market value
of the PS Fund was approximately $12,829,000.
5. In order to improve the administration of the SAI Fund and the
PS Fund, thereby improving service to the Plans participating in those
Funds, NBD Michigan and NBD Indiana desire to merge the SAI Fund and
the PS Fund, with the SAI Fund being the surviving fund. It is
represented that the trustees of the Plans which participate in the PS
Fund were notified of the proposed merger of the PS Fund into the SAI
Fund on or about July 1994. Such notification advised the Plans
participating in the PS Fund of the right to withdraw from such fund
and the rules and procedures applicable to such withdrawal. Plans under
the terms of the guaranteed investment contracts held by the Funds are
permitted to withdraw any or all of their investment upon twelve (12)
months prior written notice. It is represented that from the time the
notification was sent in July 1994, none of the Plans participating in
the PS Fund expressed concern regarding the merger. It is represented
that, if it had been inclined to do so, a Plan participating in the PS
Fund could have submitted its withdrawal request at the time the
notification was given in July 1994, (or even several months later),
and could already have received a distribution of its interest in the
PS Fund. In this regard, it is represented that none of the Plans
participating in the PS Fund subsequently elected to withdraw as a
result of the proposed merger.
Because NBD Michigan exercises authority and control over the
assets of the SAI Fund, it is deemed to be a fiduciary with respect to
each of the Plans participating in the SAI Fund. Similarly, because NBD
Indiana exercises authority and control over the assets of the PS Fund,
it is deemed to be a fiduciary with respect to each of the Plans
participating in the PS Fund.
6. As fiduciaries, NBD Michigan and NBD Indiana believe that
because of their affiliation in executing the merger of the PS Fund
into the SAI Fund, they each may be acting on behalf of adverse parties
to the Plans each represents; and thus, a violation of section
406(b)(2) of the Act may occur. Accordingly, NBD Michigan and NBD
Indiana have requested an administrative exemption from the
prohibitions as set forth in section 406(b)(2) of the Act for the
proposed transaction.
7. It is represented that the proposed merger is administratively
feasible in that it constitutes a single transaction, the terms of
which can be reviewed and approved in advance by the Department.
Further, NBD Michigan and NBD Indiana will bear the cost of filing the
application for exemption, the cost of notifying interested persons,
and the expenses associated with the proposed transaction.
8. NBD Michigan and NBD Indiana have determined that the merger
would be in the best interest of the Plans participating in the SAI
Fund and the PS Fund. In this regard, the merger of the PS Fund and the
SAI Fund will create a larger pool of assets which will result in
better investment diversity and will increase the bargaining power of
the SAI Fund when purchasing new contracts. It is anticipated that the
increased size of the SAI Fund will create certain administrative
efficiencies, and will serve to avoid or postpone any future fee
increases. In addition, inasmuch as the SAI Fund has substantially
greater liquidity than the PS Fund, Plans wishing to withdraw from the
SAI Fund after the merger may be able to do so in as little as ninety
(90) days), rather than twelve (12) months.
9. NBD Michigan and NBD Indiana have determined that the rights of
the Plans participating in the Funds are protected in that the fair
market value of the investment of each of the Plans in the Funds
involved in the proposed transaction will not be changed as a result of
the merger. In this regard, it is represented that the valuation
methodology followed by both the PS Fund and the SAI Fund is identical,
in that both of the Funds are valued daily and processed under the same
guidelines by precisely the same individuals.
More specifically, it is represented that there are only two
classes of assets in each of the Funds. The first class consists of
cash held by each of the Funds in short-term money market funds. In
this regard, the applicants maintain that although the interest rate
earned in these money market fund varies, such money market funds are
valued as cash. The second class of assets consists of various fixed
rate and variable rate guaranteed investment contracts purchased by the
Funds from highly rated insurance companies and held to term. It is
represented that both the Funds hold fixed rate guaranteed investment
contracts, and that only the SAI Fund holds variable rate guaranteed
investment contracts. It is represented
[[Page 8672]]
that no default presently exists, nor has there previously been any
default, under any guaranteed investment contract held by the Funds.
It is represented that these guaranteed investment contracts held
by the Funds have been and will continue to be valued on the basis of
the principal value plus accrued interest to the date of valuation
calculated at the rate applicable to each contract through the date of
valuation. In this regard, with respect to the four (4) variable rate
guaranteed investment contracts held by the SAI Fund, it is represented
that the rate of interest applicable to such contracts is determined
and announced by the issuing insurance company on a monthly basis, and
that the rate so determined is fixed for the following thirty (30) day
period. For example, if the merger date were specified to be December
31, 1996, the applicable rate under each of these four (4) contracts as
of that date would be fixed and certain, such that the contracts could
be valued to that date using the established rate. Accordingly, the
applicants represent that there is no significant benefit to be derived
from an independent valuation of the assets held in the Funds, because
the straightforward method by which the value of both the fixed rate
and variable rate guaranteed investment contracts is determined can be
readily verified by the Department and by the investors in the Funds.
10. It is represented that the merger will not create any
additional fees for the Plans participating in the Funds. In this
regard, neither NBD Michigan, NBD Indiana, nor any affiliated party
will receive any fees or commissions with respect to the proposed
merger, nor will the Plans pay any sales commissions or fees, as a
result of the proposed transaction. Other than the incidental
administrative efficiencies which will result from the merger of the PS
Fund and the SAI Fund, it is represented that neither NBD Michigan and
NBD Indiana nor any affiliated party will derive any financial benefit
from the merger of the Funds.
It is represented that at the present time, NBD Michigan has
employee benefit trust customers, including the Plans, which have
assets invested in the SAI Fund, but NBD Michigan has no employee
benefit trust customers invested in the PS Fund. It is further
represented that at the present time, NBD Indiana has employee benefit
trust customers, including the Plans, which have assets invested in the
PS Fund, and some employee benefit trust customers which have already
invested assets in the SAI Fund. The annual investment fee charged by
NBD Indiana to participants in either the SAI Fund or the PS Fund
consists of an annual base fee of $400, plus a market value based fee
determined as follows: .85% on the first $1 million; .50% on the next
$2 million; .35% on the next $2 million; .25% on the next $5 million;
.15% on the next $10 million; and .10% on the excess over $20 million.
The annual investment fee charged by NBD Michigan to participants in
the SAI Fund is currently .75% of the market value of the SAI Fund.\2\
\2\ It is represented that NBD Michigan and NBD Indiana rely
upon the statutory exemption, as set forth in section 408(b)(2) of
the Act, for the receipt of fees for investment management services
provided with respect to the Funds. The Department, herein,
expresses no opinion as to whether the provision of services by NBD
Michigan and NBD Indiana to the Funds and the compensation received
therefore satisfy the terms and conditions, as set forth in section
408(b)(2) of the Act.
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Following the merger of the PS Fund into the SAI Fund, both NBD
Michigan and NBD Indiana will have employee benefit trust customers,
including the Plans, participating in the SAI Fund. In this regard, it
is represented that NBD Indiana and NBD Michigan will continue to
service their respective employee benefit trust customers, including
the Plans, and the investment fees charged to those Plans will be
determined by the NBD Bancorp subsidiary (i.e. NBD Indiana or NBD
Michigan) which originated that customer. Accordingly, it is
represented that the investment fees, as described above, charged to
the Plans by NBD Michigan and NBD Indiana, to the respective Plans that
each services will not change following the merger of the PS Fund and
the SAI Fund.
With respect to the amount of the investment fees charged to the
Plans by NBD Michigan and NBD Indiana, the applicants point out that,
although owned by a common parent corporation, NBD Michigan and NBD
Indiana are separate corporations (one state-chartered and one
federally-chartered) with separate fee schedules and separate customers
served by employees of their separate trust departments. The applicants
state that the fees charged by each bank include compensation for
services relating to the administration of each of the Funds, such as
acquiring the guaranteed investment contracts, performing valuations,
and satisfying reporting and recordkeeping requirements, as well as
compensation for the sales and consulting services provided by the
separate staff of each bank to its respective trust clients. It is
represented that the level of services, the personnel providing these
services, and the overhead costs (e.g. rent, compensation levels, etc.)
associated with the provision of such services is entirely different
for each bank. Further, it is represented that the separate fee
schedules of NBD Michigan and NBD Indiana, as described above, are
primarily a function of the different markets served by each bank, and
are intended to be responsive to and competitive with the fees charged
by other financial institutions in the area in which each bank
operates. In this regard, both NBD Michigan and NBD Indiana maintain
that their respective fee structures are reasonable and competitive
with the other institutions in the markets they each serve.\3\
\3\ ERISA's general standards of fiduciary conduct would apply
to the investment of plan assets in the SAI Fund. Accordingly, the
plan fiduciary must act prudently with respect to its decision to
enter into a new compensation arrangement, which under the
particular facts and circumstances, may result in the plan paying
additional amounts for similar investment services.
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11. To accomplish the merger of the SAI Fund and the PS Fund, the
assets of the Funds (including all accrued income) will be valued as of
the date the merger is executed (the Merger Date). The Merger Date will
be declared by NBD Michigan and NBD Indiana following the grant of this
proposed exemption. As of the Merger Date, NBD Indiana will transfer
all of the assets of the PS Fund to NBD Michigan, as trustee of the SAI
Fund. It is represented that all of the assets of the PS Fund meet the
investment criteria of the SAI Fund, and accordingly, the SAI Fund will
accept the transfer of all of the assets of the PS Fund, without
exception. As all of the assets of the PS Fund will be transferred to
the SAI Fund, the PS Fund will cease to exist immediately following the
merger.
The transferred assets will be commingled for investment following
the Merger Date, and all income will be deemed to have been earned in
the SAI Fund. The Plans which participated in the PS Fund immediately
preceding the merger will become participants in the SAI Fund, as of
the Merger Date. Each of the Plans participating in the PS Fund
immediately preceding the merger will have allocated to it, as of the
Merger Date, the proportion of the allocated units in the SAI Fund
equal to its proportion of units in the PS Fund immediately preceding
the merger. No fractional units of participation in the SAI Fund will
be issued in the merger. The SAI Fund will pay cash equal to the fair
market value of any such fractional unit to which each of the
participating Plans in the PS Fund would otherwise be entitled.
[[Page 8673]]
12. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) on the date the merger is executed, the assets in the PS Fund
and the assets in the SAI Fund will be valued in the same manner, under
identical guidelines, by the same individuals;
(b) the fair market value of the interests of the Plans
participating in the affected Funds will remain unchanged as a result
of the proposed merger;
(c) the assets of each participating Plan will be invested in the
same type of investment both before and after the execution of the
merger;
(d) the proposed merger will result in greater operational
efficiencies and economies of scale, as well as greater opportunities
for investment diversification;
(e) neither NBD Bancorp nor any of its affiliates will receive any
fees or commissions in connection with the proposed merger;
(f) the Plans will pay no sales commissions or fees, as a result of
the transaction; and
(g) A fiduciary who is acting on behalf of each affected Plan and
who is independent of and unrelated to NBD Bancorp and any of its
affiliates has received advance written notice of the merger of the PS
Fund into the SAI Fund.
Notice to Interested Persons
The applicant maintains that persons who may be interested in the
pendency of the requested exemption include the independent fiduciaries
of all of the Plans participating under the NBD Pooled Fund and the INB
Group Trust. It is represented within fifteen (15) days of the date of
publication of the Notice of Proposed Exemption (the Notice) in the
Federal Register, that notification in writing of the Notice will be
provided by mail to the independent fiduciaries of all of the Plans
participating under the NBD Pooled Fund and the INB Group Trust. Such
notification will include a copy of the Notice, as published in the
Federal Register, and a copy of the supplemental statement, as
required, pursuant to 29 CFR 2570.43(b)(2). The notification will
inform such interested persons of their right to comment or request a
hearing within a time period specified in the notification.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department (202) 219-8883. (This is not a toll-free number.)
Biscayne Bay Pilots, Inc. Money Purchase Pension Plan (M/P Plan) and
Biscayne Bay Pilots, Inc. 401(k) Profit Sharing Plan (P/S Plan;
Collectively, the Plans); Located in Miami, Florida; Proposed Exemption
[Application Nos. D-10036 and D-10037]
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 improved real
property (the Property) by a trust (the HK Trust) established on behalf
of Helge Krarup (Mr. Krarup) within the Plans to Mr. Krarup, a party in
interest with respect to the Plans; provided that the following
conditions are satisfied:
(a) the proposed sale will be a one-time cash transaction;
(b) the HK Trust will receive the current fair market value for the
Property established at the time of the sale by an independent
qualified appraiser;
(c) the HK Trust will pay no expenses associated with the sale;
(d) the sale will provide the HK Trust with liquidity; and
(e) only the assets in the HK Trust will be affected by the
transaction.
Summary of Facts and Representations
1. The Plans were established January 1, 1989. The M/P Plan and the
P/S Plan are defined contribution plans. As of March 31, 1995, the M/P
Plan had 25 participants and the P/S Plan had 26 participants. As of
March 31, 1995, the Plans had aggregate net assets of $944,804.67.
Biscayne Bay Pilots, Inc. (Biscayne Bay) is the sponsor of the Plans.
Biscayne Bay is a Florida corporation in the business of providing
support services to Biscayne Bay Pilots Association (the Association),
which furnishes harbor pilot support services to ships in the Port of
Miami. Once a pilot is licensed by the State of Florida, a pilot sets
up a corporation of which he is the sole officer, director, shareholder
and employee. Currently, there are fifteen separate pilot corporations
(the Pilot Corporations), which make up the partners of the
Association. Biscayne Bay and the Pilot Corporations constitute an
affiliated service group under section 414(m) of the Internal Revenue
Code of 1986.
Biscayne Bay and the Pilot Corporations have all adopted the Plans.
The Plans' trustees are Stephen E. Nadeau, William M. Breese and John
R. Fernandez, who respectively are the President, the Vice-President,
and the Secretary of Biscayne Bay. Each participant in the Plans can
elect to, among other things, establish their own trust within the
Plans using only their funds to fund the trust. This trust contains the
participant's funds within the two Plans, and the participants are
required to bear the expenses associated with investing in their own
trust. HK Trust is such a trust containing only the assets in Mr.
Krarup's accounts in the Plans.
2. Helge Krarup, Inc. (HK Inc.) is a Florida corporation that was
formed on August 26, 1981. Mr. Krarup is the sole officer, director and
shareholder of HK Inc. On June 9, 1989, HK Inc. established the HK
Trust as a trust within the Plans. HK Trust has one participant, Mr.
Krarup. Mr. Krarup's account balances in the Plans were deposited in
the HK Trust. The trustees of the HK Trust are Mr. Krarup and his wife
Bente Krarup. As of December 31, 1994, the HK Trust had net assets of
$565,444.
3. In December 1983, the Helge Krarup, Inc. Defined Benefit Pension
Plan (the HK Plan) \4\ purchased the Property from Kenneth and Eunice
Stein (the Steins), who were unrelated third parties, for $245,000 plus
appropriate closing costs. The Property contains a residence (the
Residence) which is located on two acres of land. The HK Plan made a
down payment in the amount of $40,000 and took a mortgage secured by
the Property for the remaining $205,000 from the Steins. The mortgage
had a duration of fifteen years (15) and an interest rate of 12% per
annum. The applicant represents that accelerated payments were made
under the mortgage and the mortgage was paid off by August 15, 1987.
Mr. Krarup as the trustee and the sole participant of the HK Plan, made
the decision to purchase the Property as a long-term investment for the
HK Plan. It is represented that the Property is not adjacent to any
real property owned by Mr. Krarup or any other party in interest, and
that the Property has never been used by a party in interest. As of
December 31, 1983, the Property
[[Page 8674]]
represented in excess of 90% of the HK Plan's total assets.\5\
\4\ Mr. Krarup was the only participant in the HK Plan.
\5\ The Department notes that the decisions to transfer and hold
the Property by the HK Trust, as well as the maintaining and renting
of the Property by the HK Trust are governed by the fiduciary
responsibility requirements of Part 4, Subtitle B, Title I of the
Act, and the Department herein is not providing relief for any
violations of Part 4 which may have arisen as a result of these
fiduciary decisions. Accordingly, this exemption extends relief only
for the proposed sale of the Property to Mr. Krarup.
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4. When the HK Plan was terminated, the two deeds evidencing the
Property were transferred to the HK Trust on February 28, 1990. The
applicant represents that there were two deeds because the Property was
described on the original deed in two parcels. Accordingly, one deed
was done for each parcel. The applicant states that at the time of the
transfer, the Property constituted approximately 65% of the HK Trust's
total assets. Currently, the Property is not encumbered by debt and is
owned outright by the HK Trust.
5. The Property, located at 1510 NE Dixie Highway, Jensen Beach,
Florida, was appraised on June 19, 1995 (the Appraisal). The Appraisal
was prepared by Mary Ann Haskell and by Daniel K. Deighan, MAI,
independent Florida state certified appraisers (the Appraisers), who
are with Deighan Appraisal Associates, Inc. The Appraisers indicated
that the Residence on the Property has not been adequately maintained,
and as of the date of inspection there was evidence of roof leaks in
both of the upstairs bedrooms and of extensive wood rot on the enclosed
porch. Because of deferred maintenance and other deficiencies, the
structure of the Residence is considered to be in ``tear down''
condition and contributes little to the overall value of the Property.
The Appraisers relied primarily on the Sales Comparison approach, as
supported by the Cost Approach, and determined that as of June 19,
1995, the ``as is'' market value of the Property was $210,000. The
Appraisers stated that the Income approach was considered inapplicable
due to insufficient rental data in this market.
6. Furthermore, the applicant also contacted Johnson & Johnson, a
local real estate firm (the J&J Firm), regarding prospects of
increasing rentals on the Property or selling the Property. In this
regard, Ms. Kim Johnson of the J&J Firm, made the following
observations: among other things, the Residence is very old and
rundown, and any prospective purchaser would buy the Property solely
for the land value and would not consider the Residence to be of any
value. Furthermore, the shape of the Property is very irregular and it
might be difficult to fit a large house on the Property, even though
the Property is over two acres in size. In the last year in the
immediate area of the Property, there has been only one purchase of a
large ocean front lot, which was on the market for a significant period
of time before it sold. Ms. Johnson believes that the Property could
take a year or more to sell for approximately $300,000, and the real
estate commission would be approximately 6% and the closing costs would
be approximately 1% to be paid by the seller.
6. The applicant represents that the Property has been leased since
April 1984 to unrelated third parties. The Property is currently leased
under a month-to-month agreement to Kim Johnson and Chris Tyler, who
are unrelated third parties, for a rental amount of $650 per month. The
applicant maintains that the fair rental value of the Property was
determined by establishing the rentals charged for houses of similar
size and with similar amenities in the area. Because the Property has
been rented, the applicant submitted a ``return on investment''
analysis for the Property, covering the period 1984 through 1994.
Return on investment value ratios were derived by the applicant by
dividing net income by the original acquisition price of the Property
for each year of ownership. An average of the ``return on investment''
figures was determined to be approximately one percent (1%). Also, in
this regard, the total expenses during the period 1984-94 sustained by
the HK Trust for the Property were approximately $51,303, and the total
income received by the HK Trust during this period was approximately
$67,116. Therefore, the net income received by the HK Trust for the
Property during 1984-94 was $15,813 ($67,116-$51,303).
7. Mr. Krarup now proposes to purchase the Property from the HK
Trust in a one-time cash transaction. The applicant represents that the
proposed transaction is in the best interest and protective of the HK
Trust because the HK Trust will pay no expenses or commissions
associated with the sale. Also, the fair market value of the Property
has been determined by the independent qualified Appraisers to be
$210,000. In this regard, Mr. Krarup will pay the HK Trust the current
fair market value for the Property established at the time of the sale
by the independent qualified Appraisers. The sale of the Property will
increase the liquidity of the HK Trust's portfolio. The sale will also
enable the HK Trust to sell an illiquid asset which currently
represents approximately 45% of the HK Trust's total assets and which
has depreciated in value over time. It is represented that because the
HK Trust is a one participant trust within the Plans, no other
participant in the Plans will be affected by the proposed transaction.
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:
(a) the proposed sale will be a one-time cash transaction;
(b) the HK Trust will receive the current fair market value for the
Property established at the time of the sale by the independent
qualified Appraisers;
(c) the HK Trust will pay no expenses associated with the sale;
(d) the sale will provide the HK Trust with liquidity; and
(e) only the assets in the HK Trust will be affected by the
transaction.
Notice To Interested Persons
Because Mr. Krarup is the sole participant of the HK Trust, 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 from the date of publication of this notice in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department
at (202) 219-8883. (This is not a toll-free number.)
Society National Bank; KeyTrust Company of Ohio; Society Asset
Management, Inc; and KeyCorp; Located in Cleveland, Ohio; Proposed
Exemption
[Application No. D-10063]
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 In-Kind Transfer of CIF Assets
If the exemption is granted, the restrictions of section 406(a) and
406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) (A) through
(F) of the Code, shall not apply as of December 1, 1993, to the in-kind
transfer of assets of plans for which Society National Bank, KeyTrust
Company of Ohio, N.A., Society Asset Management, Inc., and KeyCorp or
an affiliate (collectively, the Bank) serves as a fiduciary (the Client
Plans), other
[[Page 8675]]
than plans established and maintained by the Bank, that are held in
certain collective investment funds maintained by the Bank (the CIFs),
in exchange for shares of The Victory Portfolios (collectively, the
Funds), an open-end investment company registered under the Investment
Company Act of 1940 (the 1940 Act), for which the Bank acts as an
investment adviser as well as a custodian, sub-administrator, and/or
shareholder servicing agent, or provides some other ``secondary
service'' as defined in Section IV(h), in connection with the
termination of such CIFs, provided that the following conditions and
the general conditions of Section III below are met:
(a) No sales commissions or other fees are paid by the Client Plans
in connection with the purchase of Fund shares through the in-kind
transfer of CIF assets and no redemption fees are paid in connection
with the sale of such shares by the Client Plans to the Funds.
(b) All or a pro rata portion of the assets of a CIF are
transferred to a Fund in exchange for shares of such Fund.
(c) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Client Plan's pro
rata share of the assets of the CIF on the date of the transfer, based
on the current market value of the CIF's assets, as determined in a
single valuation performed in the same manner at the close of the same
business day, using independent sources in accordance with Rule 17a-
7(b) of the Securities and Exchange Commission (SEC) under the 1940 Act
and the procedures established by the Funds pursuant to Rule 17a-7 for
the valuation of such assets. Such procedures must require that all
securities for which a current market price cannot be obtained by
reference to the last sale price for transactions reported on a
recognized securities exchange or NASDAQ be valued based on an average
of the highest current independent bid and lowest current independent
offer, as of the close of business on the Friday preceding the weekend
of the CIF transfers, determined on the basis of reasonable inquiry
from at least three sources that are broker-dealers or pricing services
independent of the Bank.
(d) A second fiduciary who is independent of and unrelated to the
Bank (the Second Fiduciary) receives advance written notice of the in-
kind transfer of assets of the CIFs and full written disclosure of
information concerning the Funds, including:
(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 IV(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 considers investing in the Fund is an
appropriate investment decision 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 a Fund, 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.
(e) After consideration of the foregoing information, the Second
Fiduciary authorizes in writing the in-kind transfer of the Client
Plan's CIF assets to a corresponding Fund in exchange for shares of the
Fund.
(f) For all in-kind transfers of CIF assets to a Fund following the
publication of this proposed exemption in the Federal Register, the
Bank sends by regular mail to each affected Client Plan the following
information:
(1) Within 30 days after completion of the transaction, a written
confirmation containing:
(i) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(ii) The price of each such security involved in the transaction;
(iii) The identity of each pricing service or market-maker
consulted in determining the value of such securities; and
(2) Within 90 days after completion of each in-kind transfer, a
written confirmation containing:
(i) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(ii) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
(g) The conditions set forth in paragraphs (e), (f) and (n) of
Section II below are satisfied.
Section II--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 October 1, 1995 to: (1)
the receipt of fees by the Bank from the Funds for acting as an
investment adviser to the Funds in connection with the investment by
the Client Plans in shares of the Funds; and (2) the receipt and
retention of fees by the Bank from the Funds for acting as custodian,
sub-administrator and shareholder servicing agent to the Funds, as well
as for providing any other services to the Funds which are not
investment advisory services (i.e. ``secondary services''), in
connection with the investment by the Client Plans in shares of the
Funds, provided that the following conditions and the general
conditions of Section III are met:
(a) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds and no redemption fees
are paid in connection with the sale of shares by the Client Plans to
the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section IV(e), and is the same price which would have
been paid or received for the shares by any other investor at that
time.
(c) The Bank, including any officer or director of the Bank, does
not purchase or sell shares of the Funds to any Client Plan.
(d) Each Client Plan receives a credit, either through cash or the
purchase of additional shares of the Funds pursuant to an annual
election made by the Client Plan, of such Plan's proportionate share of
all fees charged to the Funds by the Bank for investment advisory
services, including any investment advisory fees paid by the Bank to
third party sub-advisors, within no more than one business day of the
receipt of such fees by the Bank.
(e) For each Client Plan, the combined total of all fees received
by the Bank for the provision of services to the Client Plan, and in
connection with the provision of services to the Funds in which the
Client Plan may invest, is not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.6
\6\ In 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.
[[Page 8676]]
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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) The Second Fiduciary receives, in advance of any initial
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 IV(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) After consideration of the information described above in
paragraph (h), the Second Fiduciary authorizes in writing the
investment of assets of the Client Plan in each particular Fund, the
fees to be paid by such Funds to the Bank, and the purchase of
additional shares of a Fund by the Client Plan with the fees credited
to the Client Plan by the Bank.
(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) 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; provided that
the Termination Form need not be supplied to the Second Fiduciary
pursuant to this paragraph sooner than six months after such
Termination Form is supplied pursuant to paragraph (l) below, except to
the extent required by such paragraph in order to disclose an
additional service or fee increase. 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) 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
(as defined in Section IV(h) below) at least 30 days prior to the
effective date of such increase, accompanied by a copy of the
Termination Form, and receives full written disclosure in a Fund
prospectus or otherwise of any increases in the rates of fees charged
by the Bank to the Funds for investment advisory services even though
such fees will be credited as required by paragraph (d) above.
(l) In the event that 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 IV(i) below.
(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;
(2) A copy of the annual financial disclosure report of the Funds
in which such Client Plan is invested which includes information about
the Fund portfolios as well as audit findings of an independent auditor
within 60 days of the preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(n) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings with other
shareholders of the Funds.
Section III--General Conditions
(a) The Bank maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of 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) 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;
[[Page 8677]]
(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 IV--Definitions
For purposes of this proposed exemption:
(a) The term ``Bank'' includes Society National Bank, KeyTrust
Company of Ohio, Society Asset Management, Inc., KeyCorp and any
affiliate thereof as defined below in paragraph (b)(1) of this section.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the Victory
Portfolios, or any other diversified open-end investment company or
companies registered under the 1940 Act for which the Bank serves as an
investment adviser and may also serve as a custodian, shareholder
servicing agent, transfer agent or provide some other ``secondary
service'' (as defined below in paragraph (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 or employee
of the Bank (or is a relative of such persons) or any affiliate
thereof;
(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, employee of the Bank (or relative
of such persons), or affiliate thereof, 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 this section shall
not apply.
(h) The term ``secondary service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by the Bank to the Funds. For purposes of this proposed
exemption, the term ``secondary service'' will include securities
lending services provided by the Bank to the Funds, but 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. Such Termination Form may be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify 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: This proposed exemption, if granted, will be effective
as of December 1, 1993, for the transactions described in Section I
above, and October 1, 1995, for the transactions described in Section
II above.
Summary of Facts and Representations
1. The applicants described herein are Society National Bank (SNB),
a national banking association, KeyTrust Company of Ohio, N.A.
(KeyTrust), Society Asset Management, Inc. (SAM), and KeyCorp and its
subsidiaries, including affiliates of SNB, KeyTrust, and SAM.
Specifically, the exemption request is being made on behalf of: (i) SNB
as former trustee of certain collective investment funds under the 1993
Amendment and Restatement of the Plan of the Retirement Trust of the
Ameritrust Company National Association (the SNB-Ameritrust Collective
Trust) and the 1993 Amendment and Restatement of Declaration of Trust
Establishing Society National Bank Multiple Investment Trust for
Employee Benefit Trusts (the SNB Collective Trust); (ii) KeyTrust, a
wholly-owned subsidiary of SNB and, effective January 1, 1995,
successor to SNB's trust operations and successor trustee of SNB-
Ameritrust Collective Trust and SNB Collective Trust (SNB, prior to
January 1, 1995 and KeyTrust, after January 1, 1995, are hereafter
referred to as either ``the Bank'' or ``the Trustee''); (iii) SAM, an
Ohio Corporation, a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of the Bank; and
(iv) KeyCorp, an Ohio Corporation of which the Bank is a wholly-owned
subsidiary. KeyCorp is a bank holding company that owns directly or
indirectly a number of subsidiaries, which together constitute a
controlled group of corporations within the meaning of section 414(b)
of the Code. Thus, KeyCorp and its various subsidiaries are included
herein within the definition of the term ``Bank'' (see Section IV(a)
above).
2. The Bank is a trustee and, primarily through SAM, is an
investment manager for a number of employee benefit plans subject to
Title I of the Act as well as Keogh plans and individual retirement
accounts (i.e. the Client Plans). The Bank is also trustee of two
employee benefit plans sponsored by the Bank (the Bank Plans). The Bank
has caused these plans to invest in certain collective investment funds
(i.e. the CIFs) which are maintained by the Bank as trustee of the SNB-
Ameritrust Collective Trust and the SNB Collective Trust. In December,
1993, the Bank liquidated certain of the CIFs and, to the extent
practicable, distributed the assets held in such CIFs to the Plans.
[[Page 8678]]
In the case of assets distributed by the CIFs to each Client Plan
with respect to which an independent fiduciary had consented to the
transaction, the Bank immediately used the distributed assets to
purchase shares of the Funds. Before the distribution of assets from
the CIFs and the closing of the purchase transactions (the Fund
Transactions), the applicant states that the Bank complied with the
requirements of Prohibited Transaction Exemption (PTE) 77-3, 42 FR
18734 (April 8, 1977), with respect to the Bank Plans, and PTE 77-4, 42
FR 18732 (April 8, 1977), with respect to the Client Plans.7
Before the Fund Transactions, the CIFs consisted of six separate
collective investment funds maintained by the Bank under the SNB
Collective Trust, and eleven separate collective investment funds
maintained by the Bank under the SNB-Ameritrust Collective Trust. The
assets used to purchase shares of the Funds in the Fund Transactions
consisted of assets distributed by four of the CIFs under the SNB
Collective Trust and eight of the CIFs under the SNB-Ameritrust
Collective Trust.
The Bank contemplates that in the future similar transactions
structured either identically to the Fund Transactions or in the form
of an in-kind transfer of assets from CIFs to the Funds, with no
intermediate distribution to the Client Plans, may be in the best
interests of the Client Plans. In this regard, the Bank proposes to
modify the manner in which it receives approval from independent
fiduciaries of the Client Plans for changes in its fees and any fees
received by other affiliates of the Bank from the Funds (as discussed
below).
3. The Funds are a Massachusetts business trust operating as an
open-end investment management company registered under the 1940 Act.
The Bank, through SAM, serves as the investment adviser to each of the
Funds that received assets from Plans in the Fund Transactions. The
Bank receives investment advisory fees from the Funds for its
investment advisory services under the terms of an investment advisory
agreement adopted in accordance Section 15 of the 1940 Act. The Bank
performs services for the Funds as shareholder servicing agent, sub-
administrator and custodian. Both the Funds and the service agreements
between the Fund and the Bank, including any fee arrangements, are
described in prospectuses for the Funds.
4. The Winsbury Company is the distributor, administrator and
principal underwriter of the Funds. The Winsbury Service Corporation,
an affiliate of The Winsbury Company, serves as transfer agent and
provides accounting services to the Funds. Neither The Winsbury Company
nor The Winsbury Service Corporation are affiliates of the Bank.
The Fund Transactions
5. In December 1993, the Bank, acting as trustee or investment
manager of the Plans, withdrew the assets held in the CIFs for the
benefit of the Plans. For each Client Plan for which the consent of an
independent fiduciary was given, the assets were then used to purchase
shares of a Fund with investment objectives similar to the CIF that had
distributed the assets. Each Client Plan received shares of each Fund
in consideration for, and in proportion to, its share of the assets
used to purchase shares of the Fund and with a value equal to the value
of those assets at the time of the Fund Transactions. The CIFs from
which assets were distributed, and the corresponding Fund, which has
similar investment objectives, are as follows:
------------------------------------------------------------------------
CIF Fund
------------------------------------------------------------------------
EB Balanced........................... Fund Balanced Fund.
EB Capital Appreciation Fund.......... Special Growth Stock Fund.
EB Equity Index Fund.................. Stock Index Fund.
EB Fixed Income Fund.................. Investment Quality Bond Fund.
EB Government Mortgage Fund........... U.S. Government Income Fund.
EB Growth Equity Fund................. Growth Stock Fund.
EB Intermediate Bond Fund............. Intermediate Income Fund.
EB Intermediate Fixed Bond Fund....... Intermediate Income Fund.
EB Small Capitalization Growth........ Special Growth Stock Fund.
EB Small Capitalization Value Fund.... Special Value Stock Fund.
EB Technology Fund.................... Special Value Stock Fund.
EB Value Fund......................... Value Stock Fund.
------------------------------------------------------------------------
All of the Funds, other than the U.S. Government Income Fund, were
established in connection with the Fund Transactions and held no assets
before the Fund Transactions.
\7\ PTE 77-3 permits the acquisition or sale of shares of a
registered, open-end investment company by an employee benefit plan
covering only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met.
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.
The Department is expressing no opinion in this proposed
exemption regarding whether any of the transactions with the Funds
by the Bank Plans or the Client Plans were covered by either PTE 77-
3 or PTE 77-4, respectively.
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6. The valuation of securities used to purchase shares of the Funds
was implemented pursuant to purchase agreements between the Funds and
the Bank (the Purchase Agreements). In accordance with the Purchase
Agreements, the securities used to purchase shares of the Funds
included only cash and securities that had a readily ascertainable
market value. The securities were valued at their current market value
in accordance with SEC Rule 17a-7(b). Under Rule 17a-7, the ``current
market price'' for specific types of CIF securities involved in the
transactions is determined as follows:
a. If the security is a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the
'34 Act), the last sale price with respect to such security reported in
the consolidated transaction reporting system (the Consolidated
System); or, if there are no reported transactions in the Consolidated
System that day, the average of the highest current independent bid and
the lowest current independent offer for such security (reported
pursuant to Rule 11Ac1-1 under the '34 Act), as of the close of
business on the CIF valuation date.
[[Page 8679]]
b. If the security is not a reported security, and the principal
market for such security is an exchange, then the last sale on such
exchange or, if there are no reported transactions on such exchange
that day, the average of the highest current independent bid and lowest
current independent offer on the exchange as of the close of business
on the CIF valuation date.
c. If the security is not a reported security and is quoted in the
NASDAQ system, then the average of the highest current independent bid
and lowest current independent offer reported on Level 1 of NASDAQ as
of the close of business on the CIF valuation date.
d. For all other securities, the average of the highest current
independent bid and lowest current independent offer determined on the
basis of reasonable inquiry from at least three independent sources as
of the close of business on the CIF valuation date.
The pricing information required for securities that were either a
``reported security'' (as defined in SEC Rule 11Aa3-1 under the
Securities Exchange Act of 1934) or traded on an exchange or quoted by
the NASDAQ system, was obtained from Interactive Data Corporation, a
recognized independent pricing service.8 Securities which were not
a ``reported security'', and were not traded on an exchange or quoted
by the NASDAQ system, were priced on the date of the transaction by
having the Bank's portfolio managers under the CIFs obtain bid and
offer prices from three independent brokers and using the average of
the highest independent bid and lowest independent offer price.9
\8\ The applicant states that securities held by the CIFs which
were priced by Interactive Data Corporation were the type of
securities described under SEC Rule 17a-7(b) (1)-(3).
\9\ The applicant states that securities held by the CIFs which
were priced by the average between the highest bid and lowest offer
prices quoted by three independent brokers were securities described
under SEC Rule 17a-7(b)(4).
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The Bank represents that these valuation procedures were applied
uniformly for all assets held by the CIFs. A single market value was
used for each unit of the same security distributed from the CIFs. For
the newly established Funds, the value determined for the assets used
to purchase shares of the Funds was also used to determine the net
asset value of the Funds and the pro-rated value of the shares issued
to the Client Plans purchased with the assets distributed from the
CIFs. Immediately following the consummation of the Fund Transactions,
the value of the shares of the Funds, as so determined, held by each
Client Plan was equal to the value of the assets received by the Client
Plans from the CIFs immediately prior to the consummation of the Fund
Transactions.
In connection with the Bank's proposal that assets be used to
purchase shares of the Funds, the Bank delivered to an independent
fiduciary for each Client Plan with assets invested in a CIF (i.e., a
Second Fiduciary) copies of the prospectuses and summaries of
supplemental information relating to the Funds. The Second Fiduciary
for each Client Plan received a schedule of the rates of all trustee,
investment management and other fees charged to the Client Plan by the
Bank. Participation in the Fund Transactions by a Plan was conditioned
upon receipt of a letter (the Consent Letter) executed by the Second
Fiduciary, acknowledging receipt and review of the informational
materials and approving the fees to be paid to the Bank by the Funds
and the Client Plan.
In the case of Client Plans from which the Bank did not receive
Consent Letters, any assets that would otherwise have been distributed
by a CIF to such Plans either were retained in the CIF, if the CIF was
continuing, or were liquidated and the proceeds invested in other CIFs
or in other investments permitted under the terms of the related trust
or investment management agreement with the Bank.
No sales commissions, loads or other fees were charged to, or paid
by, any Client Plan in connection with the Fund Transactions. In
addition, no redemption fees were charged to or paid by any Client Plan
for the redemption of any of its shares in the Funds.
7. In consideration of its management of the Funds, SAM received
investment advisory fees from the Funds that were computed daily and
paid monthly based on the average daily net assets of the Funds. The
portion of those fees attributable to a Client Plan were credited to
the Client Plan each month as an income item and shown separately on
the monthly financial statements prepared for the Client Plan by the
Bank. The fees were allocated among the Client Plans invested in the
Funds based on the value of the Plan's investment in each Fund,
determined daily. Fees for services by the Bank were billed to each
Client Plan monthly or quarterly, after the portion of SAM's investment
advisory fees allocable to the Client Plan for the month or quarter
were credited to the Client Plan. The Bank believes that this fee
structure was consistent with the conditions required by PTE 77-
4.10
\10\ Section II(c) of PTE 77-4, in pertinent part, permits the
payment of investment advisory fees by the investment company to a
plan fiduciary 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 to the plan fiduciary 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 to such plan fiduciary.
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The Bank represents that no fees or other compensation, directly or
indirectly, have been received from the Funds, or from The Winsbury
Company or its affiliates (Winsbury), other than: (i) The investment
advisory fees paid to SAM by the Funds that were credited to the Client
Plans as described above, (ii) fees for investment advisory services
paid to SAM by the Funds that were based on assets of the Funds that
were not attributable to the investment in the Funds by Client Plans,
and (iii) fees paid to the Bank for providing administrative services
as a shareholder servicing agent, custodian and sub-administrator. In
this regard, the Bank has not received any fees payable pursuant to
Rule 12b-1 under the 1940 Act in connection with transactions involving
any shares of the Funds.
Prior to the subject exemption request, the Bank states that the
rates of fees charged to or paid by a Client Plan or the Funds to the
Bank in connection with the Client Plan's investment in the Funds were
not changed unless an independent fiduciary of the Plan was notified of
the change in advance and approved, in writing, the continuation of the
Client Plan's investment in the Funds or additional purchases and sales
of shares of the Funds.
Future Conversion Transactions
8. The Bank anticipates that in the future it may engage in
transactions like the Fund Transactions. The Bank represents that such
transactions will be structured either (i) exactly as the Fund
Transactions, with assets being distributed from CIFs to Plans and then
used by the Client Plans to purchase shares of the Funds, or (ii)
without intermediate distribution to the Client Plans, with assets
being transferred in-kind from CIFs to the Funds in exchange for shares
of the Funds. In each instance, all or a pro rata portion of the assets
of a CIF will be transferred to a Fund in exchange for shares of such
Fund.
Prior to any conversion transaction involving a CIF, the Bank will
obtain the approval of an independent fiduciary of the Plan (i.e., a
Second Fiduciary), who will generally be the Client Plan's named
fiduciary, trustee, or sponsoring employer. The Bank will provide the
Second Fiduciary with a current
[[Page 8680]]
prospectus for each Fund and a written statement giving full disclosure
of the fee structure under which investment advisory fees received by
the Bank (i.e., SAM) will be credited back to the Plan. The disclosure
statement will explain why the Bank believes the investment of assets
of the Plan in the Funds is appropriate. The disclosure statement will
also describe, as applicable, any limitations on the Bank regarding
which plan assets may be invested in shares of the Funds and, if so,
the nature of such limitations.
After consideration of such information, the Second Fiduciary may
authorize the Bank to invest plan assets in the Funds, to receive fees
from the Funds, and to purchase additional shares of the Funds with the
fees credited back to the Client Plan by the Bank. The authorization
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.
A form expressly providing an election to terminate the
authorization (a ``Termination Form''), with instructions on the use of
the form, will be supplied to the Second Fiduciary no less than
annually. The Termination Form will instruct the Second Fiduciary that
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 that failure to return the form will
result in the continued authorization of the Bank to engage in the
subject transactions on behalf of the Client Plan and to receive fees
therefor.
The Termination Form may be used to notify the Bank in writing to
effect a termination by selling the shares held by the Client Plan
requesting such termination within one business day following receipt
by the Bank of the form. If, due to circumstances beyond the Bank's
control, the sale cannot be executed within one business day, the Bank
will complete the sale within the next business day.
For all in-kind transfers of CIF assets to a Fund following the
publication of this proposed exemption in the Federal Register, the
Bank will send by regular mail to each affected Client Plan, within 30
days after completion of the transaction, a written confirmation
containing:
(i) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(ii) The price of each such security involved in the transaction;
(iii) The identity of each pricing service or market-maker
consulted in determining the value of such securities.
In addition to the information described above, the Bank will send,
within 90 days after completion of each in-kind transfer, a written
confirmation containing:
(i) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(ii) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
The price paid or received by a Client Plan for shares in a Fund
will be the net asset value per share at the time of the transaction,
as defined in Section IV(e), and will be the same price which would
have been paid or received for the shares by any other investor at that
time.
Current Fee Arrangement
9. Effective as of October 1, 1995, the applicant represents that
the Bank has implemented a new fee structure (the Fee Structure) for
the Client Plans allowing for direct credits to each Client Plan, in
the form of cash or additional Fund shares, of such Plan's
proportionate share of all investment advisory fees received by the
Bank from the Funds. The Bank states that the Fee Structure is at least
as advantageous to the Client Plans as an arrangement, as described in
PTE 77-4, whereby investment advisory fees paid by the Funds to the
Bank are offset against fees paid directly to the Bank by the Client
Plans.
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.11 These fees are usually 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 investment 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 provided at no additional charge where the Bank
exercises investment discretion for the Client Plan's assets 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.12
11 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.
12 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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In addition, the Bank (i.e., SAM or some other affiliate as
described herein) charges the Funds investment advisory fees in
accordance with investment advisory agreements between SAM and the
Funds. These agreements have been approved by the independent members
of the Board of Directors of the Funds (the Directors) in accordance
with the applicable provisions of the 1940 Act, and any changes in the
fees will also be approved by the Directors. These fees are paid on a
monthly basis by the Funds.
At the beginning of each month, and essentially simultaneously with
the payment of the investment advisory fees by the Funds to the Bank
(in no event later than the same business day), the Bank credits to
each Client Plan its proportionate share of all investment advisory
fees charged by the Bank (i.e., SAM or an affiliate) to the Funds,
including any investment advisory fees paid by the Bank to third party
sub- advisors (referred to hereafter as ``the Alternative Credit
Program''). The credited fees are used to acquire additional shares of
the Funds on behalf of the Client Plan or are returned to the Client
Plan's trust account in the form of cash, as directed by the Second
Fiduciary.
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
[[Page 8681]]
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.13
13 The Department notes that although certain transactions and
fee arrangements are the subject of an administrative exemption, a
Client Plan fiduciary must still adhere to 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.
The Department also 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.
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The Bank represents that for each Client Plan, the combined total
of all fees received by the Bank for the provision of services to the
Client Plan, and in connection with the provision of services to the
Funds in which the Client Plan may invest, will not be in excess of
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.14
14 The Department is providing no opinion in this proposed
exemption as to whether the conditions required for exemptive relief
under section 408(b)(2) of the Act, and the regulations thereunder
(see 29 CFR 2550.408b(2), would be met for all fees received by the
Bank for the provision of services to the Client Plans.
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The Bank states that the Alternative Credit 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 Alternative Credit Program essentially has
the same effect in crediting the Bank's investment advisory fees
received from the Funds as an arrangement allowing for an offset of
such fees against investment management fees charged directly to the
Client Plans. The Bank prefers the Fee Structure with the Alternative
Credit 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.
10. The Bank is responsible for establishing and maintaining a
system of internal accounting controls for the crediting of fees under
the Alternative Credit Program. In addition, the Bank has retained the
services of Ernst & Young LLP (E&Y) in Cleveland, Ohio, an independent
accounting firm, to audit annually the crediting of fees to the Client
Plans under this program. In this regard, the Bank states that in the
future either E&Y or some other qualified independent auditor will be
retained by the Bank to perform annual audits of the Alternative Credit
Program (the Auditor). Such audits provide independent verification of
the proper crediting of such fees to the Client Plans. Information
obtained from the audits is used in the preparation of required
financial disclosure reports for the Client Plans. In its annual audit
of the Alternative Credit Program, the Auditor is required to: (i)
review and test compliance with the specific operational controls and
procedures established by the Bank for making the credits; (ii) verify
on a test basis the daily credit factors transmitted to the Bank by the
Funds; (iii) verify on a test basis the proper assignment of credit
identification fields to the Client Plans; (iv) verify on a test basis
the credits paid in total to the sum of all credits paid to each Client
Plan; and (v) recompute the amount of the credits determined for
selected Client Plans and certify that the credits were made to the
proper Client Plan.
The Bank will correct any error identified either by the internal
audit by the Bank or by the independent auditor. With respect to any
shortfall in credited fees to a Client Plan involving cash credits, the
Bank will make a cash payment to the Client Plan equal to the amount of
the error plus interest paid at money market rates offered by the Bank
for the period involved. With respect to any shortfall in credited fees
involving a Client Plan where the Second Fiduciary's election was to
have credited fees invested in shares of the Funds, the Bank will make
a cash payment equal to the amount of the error plus interest based on
the rate of return for shares of the Fund that would have been
acquired. Any excess credits made to a Client Plan will be corrected by
an appropriate deduction and reallocation of cash during the next
payment period to reflect accurately the amount of total credits due to
the Client Plan for the period involved.
11. As discussed above, the Bank currently acts as a custodian,
sub-administrator, and/or shareholder servicing agent for the Funds,
and anticipates providing additional ``secondary services'' to the
Funds in the future. In this regard, the Bank represents that certain
of the Funds may institute a securities lending program (the Program)
which will be administered by SAM or another affiliate of the Bank.
SAM, as the investment adviser for the Fund, would be responsible for
negotiating the terms of the loans, selecting borrowers, and investing
cash collateral. SAM would receive an additional fee for its services
to the Fund in connection with the Program, subject to the supervision
and approval of the Directors. The Bank, under a separate agreement or
an amendment to the current custody agreement with the Fund, would
agree to provide additional custodial and administrative tasks
associated with the Program. The Fund would pay the Bank a fee based on
the number and complexity of the tasks the Bank is required to perform
in connection with the Program, that would take into account the
responsibilities and expenses incurred by the Bank. As custodian for
the Fund under the Program, the Bank would perform the following tasks:
(i) deliver loaned securities from the Fund to borrowers; (ii) arrange
for the return of loaned securities to the Fund at the termination of
the loans; (iii) monitor daily the value of the loaned securities and
collateral; (iv) request that borrowers add to the collateral when
required by the loan agreement; and (v) provide recordkeeping and
accounting services necessary for the operation of the Program. The
Bank proposes to charge fees for its services to the Funds under the
Program no sooner than 30 days following the issuance of a notice and
Termination Form to the Second Fiduciary of each of the Client Plans
invested in the participating Funds.
[[Page 8682]]
The Bank represents that the terms of any securities loan under the
Program would comply with the conditions required for an exemption
under PTE 81-6, 46 FR 7527 (January 23, 1981) as amended (see 52 FR
18754, May 19, 1987), as though the participating Fund were an employee
benefit plan subject to such conditions.15
\15\ PTE 81-6, as amended, permits the lending of securities
that are assets of an employee benefit plan to a broker-dealer
registered under the Securities Exchange Act of 1934 (the 1934 Act)
or exempted from registration under section 15(a)(1) of the 1934 Act
as a dealer in exempted Government securities (as defined in section
3(a)(12) of the 1934 Act) or to a bank. The conditions of PTE 81-6
require, among other things, that the plan receive from the borrower
(either by physical delivery or by book entry in a securities
depository) by the close of the lending fiduciary's business on the
day in which the securities lent are delivered to the borrower,
collateral consisting of cash, securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, or
irrevocable bank letters of credit issued by a person other than the
borrower or an affiliate thereof, or any combination thereof,
having, as of the close of business on the preceding business day, a
market value or in the case of letters of credit a stated amount,
equal to not less than 100 percent of the then market value of the
securities lent.
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Therefore, the Bank believes that the interests of the Client
Plans, as Fund investors, will be protected under the Program. The Bank
notes that the SEC issued on May 25, 1995, a ``no-action'' letter in
connection with the Program.
12. 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.16 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
II(d) above.
\16\ 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 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 credited 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.17
\17\ See 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
[[Page 8683]]
Auditor's findings as to the proper crediting 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.
13. 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. The applicant states that the Bank does not,
and will not in the future, 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.
14. 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 crediting 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; (g)
the in-kind transfers of CIF assets into the Funds are done with the
prior written approval of independent fiduciaries (i.e. the Second
Fiduciary) following full and detailed written disclosure concerning
the Funds; (h) each Client Plan receives shares of a Fund which have a
total net asset value that is equal to the value of the Client Plan's
pro rata share of the assets of the CIF on the date of the in-kind
transfer, based on the current market value of the CIF's assets as
determined in a single valuation performed in the same manner at the
close of the same business day in accordance with independent sources
and the procedures established by the Funds for the valuation of such
assets; and (i) 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 described herein that had investments in a
terminating CIF and from whom approval was sought, or will be sought
prior to the granting of this proposed exemption, for a transfer of a
Client Plan's CIF assets to a Fund. In addition, interested persons
shall include the Second Fiduciaries of all Client Plans which 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 received 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.)
Zausner Foods Corp. Savings Plus Plan (the Plan); Located in New
Holland, Pennsylvania; Proposed Exemption
[Application No. D-10064]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 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 past sale by the Plan of certain units of
limited partnership interests (the Units) to Zausner Foods Corp.
(Zausner Foods), a party in interest with respect to the Plan, provided
that the following conditions were satisfied: (1) the sale was a one-
time transaction for cash; (2) the Plan paid no commissions nor other
expenses relating to the sale; and (3) the purchase price was the
greater of: (a) the fair market value of the Units as determined by a
qualified, independent appraiser, or (b) the original acquisition cost
of the Units plus attributable opportunity costs.
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of December 29, 1995.
Summary of Facts and Representations
1. The Plan is a profit sharing plan sponsored by Zausner Foods.
Zausner Foods is a member of a controlled group of corporations that
manufactures and sells various food products, including milk-related
products. As of December 31, 1994, the Plan had 1,021 participants and
total assets of approximately $12,256,538. Prior to January 1, 1996,
Charles Schwab Trust Co. served as the Plan trustee. Effective January
1, 1996, Dreyfus Trust Co. became the Plan trustee.
2. Among the assets of the Plan were the Units, which were 64
shares of the MLH Income Realty Partnership V (the Partnership). The
Partnership was formed as of December 31, 1983 for purposes of
investing in commercial, industrial, and residential real estate. The
Plan acquired the Units in 1991 when the AltaDena Certified Dairy
(AltaDena) Savings & Investment Plan (the AltaDena Plan) was merged
into, and survived by, the Plan. The AltaDena Plan, on the
recommendation of an investment counselor at Merrill Lynch, acquired at
various public offerings in 1985 a total of 70 Units at a cost of
$1,000 per Unit. When the Plan and the
[[Page 8684]]
AltaDena Plan were merged in 1991, the two owners of AltaDena, who were
also AltaDena Plan participants, received a total of six of the Units
as an in-kind distribution upon the termination of their employment. At
the time of the merger, the Plan's trustees froze the investment in the
Partnership by not permitting participants to invest in it. The
applicant represents that neither Zausner Foods, AltaDena, nor any of
their respective officers or directors separately invested in the
Partnership and that the other investors in the Units are unrelated
third parties. The Partnership had made cash distributions with respect
to the 64 Units in the cumulative amount of $43,042.56 ($672.54 per
Unit), through November 13, 1995.
The Partnership originally intended to lease the properties for a
period of six to ten years from the date of the Partnership's
formation, then sell off the appreciated properties at a gain.
Investors were to receive yearly cash distributions derived from the
rental properties and from the sale proceeds of the properties as they
were liquidated. However, due to subsequent adverse conditions in the
real estate market and the economy in general, the Partnership has been
unable to sell a number of the properties for a profit. The Partnership
has therefore altered its plans and continues to hold these properties.
3. The applicant represents that the Units are a highly illiquid
investment for which there is a very limited secondary market.18
Merrill Lynch provides a service to assist clients wishing to buy and
sell Partnership Units. The applicant represents that at the time the
Plan and the AltaDena Plan were merged in 1991, the Plan's trustees
contacted Merrill Lynch in order to discuss a possible sale of the
remaining 64 Units but were told that there was no interest in the
investments. Recently, Joseph E. Lundy, Vice President at Merrill
Lynch's Lancaster, Pennsylvania office, advised the applicant that
there was no market for the Units, that no market was likely to develop
in the foreseeable future, and that if a purchaser for the Units were
to be found, the price obtained would be approximately $350-$390 per
Unit, less than one-half the original cost of the investment.
18 The Department expresses no opinion herein on whether
the acquisition and holding of the Units by the Plan violated any of
the provisions of Part 4 of Title I in the Act.
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The applicant also obtained an independent appraisal of the Units
from Jack L. Hess, CPA, of Hess & Hess, Certified Public Accountants,
located in Lancaster, Pennsylvania. After reviewing the pertinent data,
Mr. Hess estimated that the Units' fair market value as of May 9, 1995
was $450 per Unit. Mr. Hess also noted that, as of December 31, 1994,
the Units had a net asset value of $535 per Unit, a figure which is
provided to Merrill Lynch by an independent valuation service on an
annual basis. The appraisal states that the Partnership, which has been
liquidating its holdings, expects to sell its remaining properties over
the next two years. Provided that the Partnership sells its remaining
properties during that period, investors may expect to receive
approximately $500 per Unit in final cash distributions over the next
two years. The value of the Units on the secondary market, estimated at
$450 per Unit, reflects the present value of this expected benefit, as
well as a trading discount.
4. On December 29, 1995, Zausner Foods purchased the Units from the
Plan for $55,118.72, which was allocated on a pro rata basis among the
participants' accounts that had invested in the Units. This amount
represents the greater of: (a) the fair market value of the Units as
determined by a qualified, independent appraiser, or (b) the Units'
original acquisition cost to the AltaDena Plan plus opportunity costs
attributable to the Units. Because the fair market value of the Units
was less than their acquisition cost, Zausner Foods purchased the Units
from the Plan for the latter amount. Taking into account the purchase
price ($55,118.72) and all cash distributions ($43,042.56), the Plan
received a rate of return on the Units' acquisition cost ($64,000)
slightly in excess of five percent for each of the ten years that the
Plan (and its predecessor) had held the Units. The sale was a one-time
transaction for cash, and the Plan paid no commissions nor other
expenses relating to the sale.
The applicant represents that the subject transaction was in the
interests of the Plan because if the Plan had attempted a sale of the
Units on the open market, the Plan would have received substantially
less than the amount the applicant was willing to pay. In addition, the
sale converted the Units into liquid assets that are now available for
any required distributions, as well as being subject to professional
management.
5. In summary, the applicant represents that the subject
transaction satisfied the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) the sale was a
one-time transaction for cash; (2) the Plan paid no commissions nor
other expenses relating to the sale; (3) the sale enhanced the
liquidity of the assets of the Plan; and (4) the purchase price was the
greater of: (a) the fair market value of the Units as determined by a
qualified, independent appraiser, or (b) the original acquisition cost
of the Units plus attributable opportunity costs.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and therefore
must be examined under applicable provisions of the Code, including
sections 401(a)(4), 404 and 415.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by personal delivery and by first-class mail within 10 days of
the date of publication of the notice of pendency 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/or to request a
hearing with respect to the proposed exemption. Comments and requests
for a hearing are due within 40 days of the date of publication of this
notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
IRA Rollover FBO John W. Meisenbach (the IRA); Located in Seattle,
Washington; Proposed Exemption
[Application No. D-10114]
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 the IRA of certain stock (the Stock) to John W.
Meisenbach, a disqualified person with respect to the IRA, provided
that the following conditions are satisfied: (a) the sale is a one-time
transaction for cash; (b) the IRA pays no commissions nor other
expenses relating to the sale; and (c) the purchase price is the fair
[[Page 8685]]
market value of the Stock as determined by a qualified, independent
appraiser as as of the date of the sale.19
\19\ Pursuant to 29 CFR 2510.3-2(d), the IRA is 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. The IRA is an individual retirement account, as described under
section 408(a) of the Code. The IRA was established by John W.
Meisenbach, who is the sole participant. As of July 28, 1995, the IRA
had total assets of approximately $7,691,680.45. The trustee of the IRA
is the Delaware Charter Guarantee & Trust Company.
2. Among the assets of the IRA are 422,265 shares of closely-held
Stock in Garden Botanika, Inc. (Garden Botanika), which markets
cosmetic and personal care products featuring natural and herbal
ingredients via a chain of company-owned specialty retail stores. The
applicant represents that the IRA acquired most of the Stock from the
issuer, as well as 40,000 shares from a private individual, at various
times and at various prices during the period from September 9, 1993 to
January 1, 1995. An IRA account statement dated July 28, 1995 lists the
Stock as having an aggregate fair market value of $677,262.50.20
The applicant represents that the total acquisition cost of the Stock
was less than or equal to that amount.
20 The Department notes the applicant's representation
that due to the limited marketability of non-publicly traded stocks,
the value of the Stock is difficult to establish, and, therefore,
the Stock's value appearing on the IRA account statement dated July
28, 1995 represents an approximation of its fair market value.
---------------------------------------------------------------------------
3. The applicant has obtained an independent appraisal of the Stock
from Dennis H. Locke, CFA, ASA, of Management Advisory Service, located
in Seattle, Washington. Relying on the discounted cash flow method of
valuing a business enterprise, Mr. Locke estimated that the Stock's
fair market value as of August 31, 1995 was $2.10 per share (or a total
of $886,756.50), based on 33,822,315 diluted shares outstanding. Mr.
Locke stated that his appraisal takes into account future expectations
for the performance of Garden Botanika and for business and market
conditions in general, as well as a 10% discount to reflect the Stock's
limited marketability.
4. Mr. Meisenbach proposes to purchase the Stock from his own IRA
for the fair market value of the Stock as of the date of the sale,
based on an updated independent appraisal. In light of the extreme
volatility of non-publicly traded stocks, Mr. Meisenbach desires to
divest the IRA of the Stock so as to protect the IRA's current asset
value, create liquidity, and provide for his long-term security. The
applicant, who is now 59 years of age, intends to receive distributions
from the IRA soon after attaining age 59\1/2\. The sale will be a one-
time transaction for cash, and the IRA will pay no commissions nor
other expenses relating to the sale.
The applicant represents that the likelihood of selling such a
large block of the Stock at its appraised value to an unrelated third
party is questionable, due to the limited marketability of the Stock.
In addition, the applicant represents that the proposed transaction is
in the interests of the IRA because the sale will reduce the risk of
large losses in the IRA, as well as the administrative burdens involved
in valuing the IRA assets.
5. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 4975(c)(2) of the Code for the following reasons: (a) the sale
will be a one-time transaction for cash; (b) the IRA will pay no
commissions nor other expenses relating to the sale; (c) the sale will
enhance the liquidity and protect the current value of the IRA assets;
(d) the purchase price will be the fair market value of the Stock as
determined by a qualified, independent appraiser as as of the date of
the sale; and (e) Mr. Meisenbach is the only participant who will be
affected by the proposed transaction.
Notice to Interested Persons
Because Mr. Meisenbach is the sole participant in his 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 with respect to the proposed exemption are due within 30 days
of the date of publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Floral Glass and Mirror, Inc. Profit Sharing Plan and Trust (the Plan);
Located in Hauppage, New York; Proposed Exemption
[Application No. D-10144]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the proposed sale of 20 shares of stock of
Floral Glass Industries, Inc. (FGI) by the Plan to Mr. Charles
Kaplanek, Jr. (Kaplanek), a party in interest with respect to the Plan,
provided the following conditions are satisfied: (a) the sale is a one-
time transaction for cash; (b) the Plan pays no commissions or other
expenses in connection with the transaction; (c) the Plan will receive
the fair market value of the shares as determined by a qualified,
independent appraiser; and (d) all terms and conditions of the sale
will be at least as favorable to the Plan as those obtainable in an
arm's-length transaction with an unrelated party at the time of the
sale.
Summary of Facts and Representations
1. The Plan is sponsored by Floral Glass and Mirror, Inc. (the
Employer), a New York corporation. The Plan is a profit sharing plan
that permits participants to direct the investment of the assets in
their accounts. Participants who do not wish to direct the investments
of their own accounts may, instead, have their accounts invested by the
Plan trustees. The Plan has 29 participants and beneficiaries, and had
assets of $3,203,599 as of March 31, 1995.
2. Kaplanek is an 80% shareholder of the Employer and is also a
trustee of the Plan and a participant in the Plan. On January 1, 1981,
Kaplanek's individual account (the Account) in the Plan purchased, at
Kaplanek's direction, 20 shares of stock in FGI, a Connecticut
corporation with its principal place of business in Cheshire,
Connecticut. The 20 shares represented 100% of the outstanding shares
of FGI. The purchase price of the Stock was $20,000, and the Stock was
acquired from FGI.
3. The Account still owns the 20 shares, or 100% of the shares of
FGI.21 In addition, Kaplanek is 100% owner of two related
corporations, Shapes and Services Limited of Bohemia, New York, and
Floral Glass Industries, Inc. of East Rutherford, New Jersey, as well
as 80%
[[Page 8686]]
owner of the Employer (collectively, the Corporations).
\21\ The Department notes that under section 2510.3-101(h)(3) of
the plan asset regulations, it appears that the Plan's assets
include the stock of FGI and all of the underlying assets of FGI. In
this regard, the applicant has not asked for relief concerning the
operation of FGI, nor is the Department proposing any such relief
herein.
---------------------------------------------------------------------------
4. The Corporations intend to undergo a reorganization pursuant to
which they will be consolidated and/or reorganized into a single
corporation. As part of this reorganization, the 20 shares of FGI would
be exchanged for shares in the surviving or reorganized corporation.
Rather than leaving the 20 shares of FGI in the Plan, Kaplanek instead
proposes to purchase the shares from the Account prior to the
reorganization.22
\22\ The applicant represents that FGI is not a Plan sponsor or
a contributing employer to the Plan, and that the stock of FGI does
not constitute ``qualifying employer securities'' within the meaning
of section 407(d)(5) of the Act.
---------------------------------------------------------------------------
5. FGI is a manufacturer of insulated glass. In addition, it cuts
to size other glass and mirror products and distributes them to the New
England region. FGI's products include several items which are
registered or bear trademarks. Mr. Martin P. Randisi, President of Rand
Consulting Group, Inc., an independent business evaluation and
appraisal firm located in Smithtown, New York, has appraised the shares
of FGI. Mr. Randisi is a member of the American Society of Appraisers
and the American Institute of Certified Public Accountants. Mr. Randisi
has represented that he has performed over 1,000 valuations of closely
held companies since 1982. Mr. Randisi represents that both he and his
firm are independent of, and unrelated to, the Employer and FGI. Mr.
Randisi has concluded that as of March 31, 1995, the 20 shares of FGI
stock had a value of $953,000.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 408(a) of the
Act because: (a) the sale will be a one-time transaction for cash; (b)
the Plan will not be required to pay any commissions, fees or other
expenses in connection with the sale; (c) the Plan will receive as
sales price for the shares the fair market value of the shares as
determined by a qualified, independent appraiser; (d) all terms and
conditions of the sale will be at least as favorable to the Plan as
those obtainable in an arm's-length transaction with an unrelated
party; and (e) Kaplanek's Account in the Plan is the only account to be
affected by the transaction, and Kaplanek has determined that the
transaction is appropriate for his Account and has determined that the
transaction should be consummated.
Notice to Interested Persons: Since Kaplanek is the only Plan
participant to be affected by the proposed transaction, the Department
has determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments and requests for a
hearing are due within 30 days from the date of publication of this
notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Coin Acceptors, Inc. Savings and Protection Plan (the Plan); Located in
St. Louis, Missouri; Proposed Exemption
[Application No. D-10183]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 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 past sale by the Plan of certain publicly
traded securities (the Securities) to Coin Acceptors, Inc. (Coin
Acceptors), a party in interest with respect to the Plan, provided that
the following conditions were satisfied: (1) the sale was a one-time
transaction for cash; (2) the Plan paid no commissions nor other
expenses relating to the sale; (3) the purchase price was the aggregate
fair market value of the Securities as of the date of the sale, as
determined by the Plan's independent investment manager by reference to
the closing prices for the Securities on the New York Stock Exchange
(NYSE); and (4) the terms of the sale were at least as favorable to the
Plan as those obtainable in an arm's length transaction with an
unrelated party.
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of September 29, 1995.
Summary of Facts and Representations
1. The Plan is a profit sharing plan with a 401(k) feature
sponsored by Coin Acceptors. Coin Acceptors is engaged in the business
of manufacturing coin and currency handling devices for use in vending
machines. As of September 29, 1995 the Plan had approximately 1,000
participants and total assets of approximately $10,000,000. Effective
September 29, 1995, the Mercantile Bank of St. Louis, N.A. became the
Plan trustee.
2. Among the assets of the Plan were the Securities, which were 14
publicly traded securities originally purchased by the Plan on the open
market. These 14 Securities were: Actava Group, Bristol Myers Squibb
Co., Citicorp, Exide Corp., Grace WR & Co., MBIA, Inc., MGIC Investment
Corp., Mercantile Bancorp, Inc., Merry Land & Investment Co., Pep Boys
Manny Moe & Jack, Sun Microsystems, Inc., Sysco Corp., United
HealthCare Corp., and Verifone, Inc. On September 29, 1995, Coin
Acceptors purchased the Securities from the Plan for a total of
$998,519. The Plan realized, in the aggregate, a gain of approximately
$243,737 as a result of the sale.
The applicant represents that all the Plan's assets were being
liquidated at that time in connection with a modification to the Plan.
Effective October 1, 1995, the Plan permitted participants to direct
the investment of their respective individual accounts among six mutual
funds. Coin Acceptors, which maintains its own investment portfolio,
was interested in purchasing 14 of the Plan's securities which were to
be liquidated. The applicant represents that the purchase price of
$998,519 was the aggregate fair market value of the Securities as of
the date of the sale. The fair market value of the Securities was
determined by Pin Oak Capital, Ltd., one of the Plan's independent
investment managers, by reference to the closing prices of the
Securities on the NYSE on September 28, 1995 quoted in the Wall Street
Journal on September 29, 1995, the date of the sale. The applicant
maintains, therefore, that the terms of the sale were at least as
favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party. The sale was a one-time
transaction for cash, and the Plan paid no commissions nor other
expenses relating to the sale. Further, the costs of this exemption
application will be borne by the applicant.
The applicant represents that selling the Securities to Coin
Acceptors, in lieu of selling them on the open market, was in the
interests of the Plan because it saved the Plan brokerage commissions
totalling at least $1,458 (based on a commission of $0.06 per share).
In addition, the Plan had the use of the sale proceeds two business
days earlier than if the Plan had sold the Securities on the open
market through a broker.
The applicant represents they were not aware that the sale would
constitute a violation of the prohibited transaction provisions of the
Act until October 24, 1995, when the applicant's accountants conducted
the annual audit of the Plan.
[[Page 8687]]
Outside legal counsel was then consulted, and it was recommended that
Coin Acceptors file an application for a retroactive exemption.
5. In summary, the applicant represents that the subject
transaction satisfied the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) the sale was a
one-time transaction for cash; (2) the Plan paid no commissions nor
other expenses relating to the sale; (3) the purchase price was the
aggregate fair market value of the Securities as of the date of the
sale, as determined by the Plan's independent investment manager by
reference to the closing prices for the Securities on the NYSE; and (4)
the terms of the sale were at least as favorable to the Plan as those
obtainable in an arm's length transaction with an unrelated party.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by personal delivery and by first-class mail within 15 days of
the date of publication of the notice of pendency 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/or to request a
hearing with respect to the proposed exemption. Comments and requests
for a hearing are due within 45 days of the date of publication of this
notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng 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 accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 28th day of February, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 96-5022 Filed 3-4-96; 8:45 am]
BILLING CODE 4510-29-P
