[Federal Register Volume 64, Number 64 (Monday, April 5, 1999)]
[Notices]
[Pages 16486-16493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8226]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 99-15; Exemption Application No. D-
10574]
Grant of Individual Exemption To Amend Prohibited Transaction
Exemption (PTE) 94-50 Involving Salomon Smith Barney Inc. (Salomon
Smith Barney) Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Grant of individual exemption to modify PTE 94-50.
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SUMMARY: This document contains a final exemption before the Department
of Labor (the Department) which would amend PTE 94-50 (59 FR 32024,
June 21, 1994), an exemption granted to Smith Barney, Inc. (Smith
Barney), the predecessor of Salomon Smith Barney. PTE 94-50 relates to
the operation of the TRAK Personalized Investment Advisory Service
product (the TRAK Program) and the Trust for TRAK Investments
(subsequently renamed the Trust for Consulting Group Capital Markets
Funds) (the Trust). These transactions are described in a notice of
pendency that was published in the Federal Register on November 9, 1998
at 63 FR 60391.
EFFECTIVE DATE: This exemption is effective as of July 31, 1993 with
respect to the transactions described in Section I.A. and B.(1). of
this grant notice. It is also effective as of March 29, 1994 for
transactions involving a daily-traded collective investment fund (the
GIC Fund) that was added to the TRAK Program pursuant to PTE 94-50.
With respect to Section I.B(2) and Section II(f)(1)-(4) of the General
Conditions of this grant notice, which set forth the amendments to PTE
94-50, this exemption is effective as of November 9, 1998.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, telephone (202) 219-8881. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: On November 9, 1998, the Department
published, at 63 FR 60391, a notice of proposed exemption in the
Federal Register that would amend PTE 94-50. PTE 94-50 provides an
exemption from certain prohibited transaction restrictions of section
406 of the Employee Retirement Income Security Act of 1974 (the Act)
and from the sanctions resulting from the application of section 4975
of the Internal Revenue Code of 1986 (the Code), as amended, by reason
of section 4975(c)(1) of the Code. Specifically, PTE 94-50 provides
exemptive relief from the restrictions of section 406(a) of the Act and
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, for
the purchase or redemption of shares in the Trust by an employee
benefit plan, an individual retirement account, or a retirement plan
for a self-employed individual (collectively, the Plans). PTE 94-50
also provides exemptive relief from the restrictions of section 406(b)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the
Code, with respect to the provision, by the Consulting Group of Smith
Barney (the Consulting Group), of investment advisory services to
independent fiduciaries of participating Plans (the Independent Plan
Fiduciaries) that might result in such fiduciary's selection of an
investment portfolio under the TRAK Program for the investment of Plan
assets. 1
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\1\ On October 5, 1992, the Department granted PTE 92-77 at 55
FR 45833. PTE 92-77 permitted Shearson Lehman Brothers, Inc.
(Shearson Lehman) to make the TRAK Program available to Plans that
acquired shares in the Trust. In this regard, PTE 92-77 permitted
Plans to purchase or redeem shares in the Trust and allowed the
Consulting Group to provide investment advisory services to an
Independent Fiduciary of a Plan which might result in such
fiduciary's selection of a Portfolio in the TRAK Program for the
investment of Plan assets.
Subsequent to the granting of PTE 92-77, on July 31, 1993, Smith
Barney acquired certain assets of Shearson Lehman associated with
its retail business, including the TRAK Program, and applied for and
received a new exemption (PTE 94-50) for the ongoing operation of
the TRAK Program. Essentially, PTE 94-50 amended and replaced PTE
92-77. However, because of certain material factual changes to the
representations supporting PTE 92-77, the Department determined that
the exemption was no longer effective for use by Smith Barney and
its subsidiaries as of the date of the asset sale.
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Besides the transactions described above, PTE 94-50 permitted Smith
Barney to add a daily-traded collective investment fund (i.e., the GIC
Fund) to the existing Fund Portfolios and to describe the various
entities operating the GIC Fund. Further, PTE 94-50 replaced references
to Shearson Lehman with references to Smith Barney. PTE 94-50 is
effective as of July 31, 1993 for the transactions described in PTE 92-
77 and effective as of March 29, 1994 with respect to transactions
involving the GIC Fund.
Salomon Smith Barney has informed the Department of certain changes
to the facts underlying PTE 94-50. These modifications include (1)
Corporate mergers that have changed the names of the parties described
in PTE 94-50 and would permit broader distribution of TRAK-related
products, (2) the implementation of a recordkeeping reimbursement
offset system (the Recordkeeping Reimbursement Offset Procedure) under
the TRAK Program, and (3) the institution of an automated reallocation
option (the Automatic Reallocation Option) under the TRAK Program for
which Salomon Smith Barney has requested administrative exemptive
relief from the Department. The proposed exemption was requested in an
application filed on behalf of Salomon Smith Barney pursuant to section
408(a) of the Act and section 4975(c)(2) of the Code, and in accordance
with the procedures (the Procedures) set forth in 29 CFR Part 2570,
Subpart B (55 FR 32836, August 10, 1990). Effective December 31, 1978,
section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October
17, 1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor.
Accordingly, this exemption is being issued solely by the Department.
The proposed exemption gave interested persons an opportunity to
comment on the notice of pendency and to request a public hearing.
During the comment period, the Department received three written
comments and no requests for a hearing in response to the notice. Two
comments were submitted by Plan participants investing in the TRAK
Program. The third comment, which is intended to clarify and modify
[[Page 16487]]
the proposed exemption, was submitted by Salomon Smith Barney.
Following is a discussion of the comments received, the responses
provided by Salomon Smith Barney, and the Department's determinations
regarding the comments.
Participant Comments
The first commenter objects to the proposed exemption because he is
under the impression that the new services that will be offered to TRAK
Program investors by Salomon Smith Barney will result in increased fees
paid to consultants and investment advisers by the Funds. The commenter
also does not believe that there will be a corresponding increase in
the growth of the Funds.
Salomon Smith Barney represents that although it is not clear which
provisions in the proposed exemption have elicted the comment, it
points out that the comment relates more or less to the underlying Fund
portfolios rather than to the TRAK Program.
As to the commenter's first area of concern, Salomon Smith Barney
explains that the proposed Automatic Reallocation Option is a service
that is to be provided at no additional cost to the investor and it
does not affect the calculation of the investment advisory fee. In
addition, Salomon Smith Barney represents that it does not have a basis
to respond to the inclusion of ``consultants'' in this comment. With
respect to the commenter's concern about growth prospects, Salomon
Smith Barney states that no investment vehicle can assure investors
future performance.
The second commenter states that while he has no objection to
Salomon Smith Barney's implementation of the Automatic Reallocation
Option, he would like to see the requirement for clear explanations of
the choices and the implications of such choices. The commenter also
suggests that Salomon Smith Barney provide a clear path for revocation
of the Automatic Reallocation Option, whereby a Plan investor's choice
would have to be reaffirmed periodically.
In response to this comment, Salomon Smith Barney states that the
text of the announcement referred to in the preamble (the Preamble) at
60394 provides participants with the same information that the
commenter requests. However, as an alternative to the commenter's
suggestion of a reaffirmation mechanism, Salomon Smith Barney
represents that it will include a footnote in the ``Participant
Quarterly Review'' indicating that the participant is currently using
the Automatic Reallocation Option and stating that such participant can
cancel this service at any time. Salomon Smith Barney proposes to place
the footnote after the legend quoted in Footnote 5 of the Preamble. The
additional language would read as follows:
You have elected to have your TRAK Portfolio automatically
reallocated at such time as the Consulting Group recommends a change
to the Allocation Model you are following. If, at any time, you
choose to discontinue this service, please contact your Financial
Consultant for instructions.
Salomon Smith Barney believes the participant will then be consistently
reminded of his or her option to discontinue the Automatic Reallocation
Option.
Salomon Smith Barney's Comments
1. Corporate Mergers
Salomon Smith Barney wishes to clarify that on page 60392 of the
Preamble, in the first sentence of the paragraph captioned ``Corporate
Mergers,'' the phrase ``Salomon Inc., the ultimate parent of'' should
be inserted after the phrase ``acquired all the shares of.'' Also, in
this section, Salomon Smith Barney wishes to modify the first sentence
of the third paragraph to clarify that one of the purposes of the
merger, rather than the ``sole'' purpose of the merger, was to create
additional distribution channels for the TRAK Program.
In response to this comment, the Department concurs with the
requested modifications and has made the suggested changes.
2. Recordkeeping Reimbursement Offset Procedure
Salomon Smith Barney has informed the Department that although it
has not yet implemented the Recordkeeping Reimbursement Offset
Procedure in a manner that will reduce the net outside fee (the Net
Outside Fee), at the present time, it has in place a recordkeeping
reimbursement program that reduces recordkeeping expenses only, at an
annual rate of $8.50 per participant position. Salomon Smith Barney
states that this annualized rate has been approved by the Funds' Board
of Trustees and that, of the $8.50 amount, $0.50 per participant
position represents a sub-transfer agency fee for the costs associated
with the application of the reimbursement process (the Processing Fee).
Currently, Salomon Smith Barney states that its affiliate, Smith Barney
Corporate Trust Company, is retaining this Processing Fee.
Salomon Smith Barney has provided an example showing the manner in
which the recordkeeping reimbursement amount is determined by the Funds
at the $8.50 level using some of the numbers set forth in the example
given in the Preamble on pages 60392 and 60393. The example assumes
that all positions are eligible for reimbursement because positions in
the Government Money Investments Portfolio and the Stable Value (GIC)
Fund Portfolio are not eligible for recordkeeping reimbursement.
Assume that Plan A has $1 million in assets invested in the TRAK
Program and 100 participants. Assume further that Plan A pays its
recordkeeper $20 per participant per year in Annual Fees totaling
$2,000 per year or $500 per quarter and $12 per participant per year
in Other Fees, totaling $1,200 per year or $300 per quarter. Assume
also that the Plan pays the recordkeeper an annual Processing Fee of
$150.
At the end of each calendar quarter, Plan A's recordkeeper would
determine the actual number of Fund positions held by the Plan A
participants and calculate the resulting reimbursement amount that
would be paid by the Funds. If Plan A had 300 participant positions
at the end of the quarter, the Plan's total recordkeeping
reimbursement amount to be paid by the Funds would be300 x $2 (the
annual amount of $8 divided by 4) or $600.
The Processing Fee paid by the Plan to the recordkeeper for the
quarter would be 300 x $0.125 (the annual amount of $0.50 divided
by 4) or $37.50. This Processing Fee would, in turn, also be
credited back to the Plan by the Funds.
Application of Reimburesment to Recordkeeping Fees
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Quarterly Portion of Annual Fees........................... $500.00
Quarterly Portion of Other Fees \2\........................ 300.00
Processing Fee............................................. 37.50
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Total Quarterly Recordkeeping Fees......................... $837.50
Credit for Reimbursement................................... ($600.00)
Credit for Processing Fee.................................. ($ 37.50)
------------
Total Reimbursement.................................... ($637.50)
Net Amount of Recordkeeping Fees Payable by the Plan....... $200.00
Net Amount of Recordkeeping Fees Payable by the Funds...... 637.50
------------
Total Quarterly Recordkeeping Fees..................... $837.50
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\2\ Assumes ``Other Fees'' are paid by the Plan during the quarter.
Since the recordkeeping reimbursement program currently in place
applies only to the payment of expenses related to recordkeeping,
there would never be an ``excess reimbursement'' according to
Salomon Smith Barney. Therefore, the Total Reimbursement amount
would reflect the lesser of the amount calculated as in the example
above, or the actual costs billed. If
[[Page 16488]]
the Total Reimbursement calculation had exceeded the Total Quarterly
Recordkeeping Fees, Salomon Smith Barney states that the maximum
reimbursement amount would be limited to the Total Quarterly
Recordkeeping Fees.
On page 60392 of the Preamble, the second paragraph of the section
describing the Recordkeeping Reimbursement Offset Procedure states that
in May 1998, the Board of Trustees of the Funds approved a
recordkeeping reimbursement amount of $12.50 for each investment
position held by a participant. Salomon Smith Barney notes that the
recordkeeping reimbursement amount may be changed by the Board of
Trustees of the Funds from time to time. Therefore, it requests that
the description of the TRAK Program define the reimbursement amount as
``such annual dollar amount per eligible position as shall be set by
the Board of Trustees of the Funds from time to time.'' Salomon Smith
Barney has also informed the Department that, of the $12.50 annual
reimbursement amount approved by the Board of Trustees of the Funds,
$0.50 is being retained by Smith Barney Corporate Trust Company as a
Processing Fee.
The Department does not object to making the foregoing
clarifications to the description of the Recordkeeping Reimbursement
Offset Procedure in the Preamble. However, because Smith Barney
Corporate Trust Company is retaining $0.50 per participant position as
a Processing Fee, the Department requested that Salomon Smith Barney
revise the calculations in the example appearing on pages 60392 and
60393 of the Preamble. In addition to these changes, Salomon Smith
Barney suggested that the following disclaimer language preface the
example in order to avoid investor confusion:
Salomon Smith Barney has provided the following numbers solely
for ease of calculation and not as typical or representative of the
operation of the TRAK product in any particular client circumstance.
Moreover, Salomon Smith Barney notes that because a Plan
participating in the TRAK Program may be required to pay a recordkeeper
``Other Fees'' in addition to annual recordkeeping fees, both of which
may be billed on a quarterly basis, it wishes to clarify that ``Other
Fees'' may arise only at certain times of the year and that it does not
wish to imply by the example that ``Other Fees'' are regularly billed
quarterly in all instances.
In light of these changes, the revised example is set forth as
follows:
Salomon Smith Barney has provided the following numbers solely
for ease of calculation and not as typical or representative of the
operation of the TRAK product in any particular client circumstance.
Therefore, the Recordkeeping Reimbursement Offset Procedure would
work as follows:
Assume that Plan A has $1 million in assets invested in the TRAK
Program and 100 participants. Assume further that Plan A pays its
recordkeeper $20 per participant per year in Annual Fees totaling
$2,000 per year or $500 per quarter and $12 per participant per year
in Other Fees, totaling $1,200 per year or $300 per quarter. Assume
also that the Plan pays the recordkeeper an annual Processing Fee of
$150.
At the end of each calendar quarter, Plan A's recordkeeper would
determine the actual number of Fund positions held by the Plan A
participants and calculate the resulting reimbursement amount. If
Plan A had 300 participant positions at the end of the quarter, the
Plan's total recordkeeping reimbursement amount would be 300 x $3
(the annual amount of $12 divided by 4) or $900. In addition, the
Processing Fee paid to the recordkeeper for the quarter would be 300
x $0.125 (the annual amount of $0.50 divided by 4) or $37.50.
At the end of each calendar quarter, Plan A's recordkeeper would
determine the actual number of Fund positions held by the Plan A
participants and calculate the resulting reimbursement amounts to be
paid by the Funds. If Plan A had 300 participant positions at the
end of the quarter, the Plan's total recordkeeping reimbursement
amount would be 300 x $3 (the annual amount of $12 divided by 4)
or $900. To this amount would be added the $37.50 Processing Fee
paid to the recordkeeper during the quarter. Such amounts would be
credited as follows:
Application of Reimbursement to Recordkeeping Fees
------------------------------------------------------------------------
------------------------------------------------------------------------
Quarterly Portion of Annual Fees \3\....................... $500.00
Quarterly Portion of Other Fees............................ 300.00
Processing Fee............................................. 37.50
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Total Quarterly Recordkeeping Fees......................... $837.50
Credit for Reimbursement................................... ($900.00)
Credit for Processing Fee.................................. (37.50)
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Total Reimbursement.................................... ($937.50)
Excess Reimbursement....................................... ($100.00)
------------------------------------------------------------------------
\3\ Assumes ``Other Fees'' are paid by the Plan during the quarter.
Because the Total Reimbursement amount exceeds the Total
Quarterly Recordkeeping Fees, the Plan does not owe any
recordkeeping fees for that period. Therefore, the recordkeeper
would not bill the Plan. Instead, the Funds would pay the
recordkeeper the $837.50 amount due.
Application of Excess Reimbursement to the Net Outside Fee
------------------------------------------------------------------------
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Quarterly Net Outside Fee.................................. $2,125.00
Excess Reimbursement....................................... (100.00)
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Net Outside Fee Paid by the Plan........................... $2,025.00
Net Outside Fee Paid by the Funds.......................... 100.00
------------
Total Quarterly Net Outside Fee........................ $2,125.00
------------------------------------------------------------------------
In the program as proposed, the Funds have agreed that any
Excess Reimbursement amount remaining after the payment of the Total
Quarterly Recordkeeping Fees would be paid by the Funds to reduce
the Plan's investment advisory fee obligations. Therefore, the $100
Excess Reimbursement amount would be applied against the Plan's
Quarterly Net Outside Fee. Under such circumstances, the
recordkeeper would advise the Consulting Group that it is entitled
to bill the Plan for the $2,025.00 balance of the Consulting Group's
Net Outside Fee. In turn, the Funds would pay the $100 amount
attributable to the Excess Reimbursement to the Consulting
Group.4
\4\ It should be noted that the existence or the amount of the
excess will not alter the amount of the recordkeeping or advisory
fees. Instead, the reimbursement calculations will determine the
proportion of payment by the Funds of the Plan's fee obligations.
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Also, on page 60392 of the Preamble, in the second paragraph of the
section describing the Recordkeeping Reimbursement Offset Procedure, it
states that a participant holding positions in three different Funds
would be eligible to receive a total annual reimbursement of $37.50. In
light of the change to the allocation of the $12.50 reimbursement
amount (i.e., $12.00 per participant position and $0.50 payable to
Smith Barney Corporate Trust Company as a Processing Fee), Salomon
Smith Barney wishes to clarify that the participant would receive a
``total annual offset of $36.00'' rather than a ``total annual
reimbursement of $37.50.''
Finally, on page 60392 of the Preamble, in the last sentence of the
second paragraph describing the Recordkeeping Reimbursement Offset
Procedure, it states that an affected Plan will be required to pay only
the balance of the [Net Outside] fee, which is generally charged on a
quarterly basis, after the excess reimbursement amount has been
deducted. Salomon Smith Barney wishes to point out that because some
recordkeepers choose to bill the initial quarterly installment of the
recordkeeping fee in full and then apply the recordkeeping
reimbursement amount for each quarter to the next
[[Page 16489]]
quarter's fees, it suggests that the Department delete the clause
stating ``and the timing of the offset of the excess reimbursement
amount against the fees,'' appearing on page 60393 of the Preamble in
the second sentence of the first full paragraph following the example.
The Department concurs with the modifications to the Preamble.
3. Footnote 3
On page 60392 of the Preamble, Footnote 3 states that Salomon Smith
Barney is offsetting, quarterly, against the Outside Fee, such amount
as is necessary to assure that the Consulting Group retains not more
than 20 basis points (as an Inside Fee) from any Portfolio on
investment assets attributable to any Plan. For purposes of
clarification, Salomon Smith Barney requests that the Department add
the following parenthetical exception at the end of the footnote after
the word ``Plan'':
(except the Government Money Investments Portfolio and the Stable
Value (GIC) Fund Portfolio, as to which no investment management fee
is retained).
In response, the Department concurs with this clarification.
On page 60393 of the Preamble, the second sentence of the first
paragraph following the example states that 23 recordkeepers currently
provide services to TRAK Program investors. Salomon Smith Barney
explains that since a Plan designates its own recordkeeper, the number
``23'' is subject to change. Therefore, Salomon Smith Barney suggests
the deletion of this number and the Department concurs with this
clarification.
4. Investor Contact/Superfluous Language
On page 60393 of the Preamble, Footnote 5 distinguishes the
Automatic Reallocation Option from rebalancing of a participant's
account and it instructs a TRAK Program participant to contact his or
her Financial Consultant should a change in an investment allocation be
warranted. Footnote 5 also states that a Financial Consultant is
expected to initiate contact with Plan participants at least annually
to encourage a comparison of the holdings in the Plan participant's
portfolio against the Consulting Group's recommendation. Salomon Smith
Barney wishes to inform the Department that in the case of retirement
plans covering multiple participants, this contact typically may take
the form of regular written communications between the Financial
Consultant and the Plan investor.
Moreover, the Department has stricken the last two sentences of
Footnote 5, which due to a printing error, contain superfluous language
also appearing on page 60393 of the Preamble, in the second and third
sentences of the first paragraph under the description of the Automatic
Reallocation Option.
5. Footnote 6
On page 60394 of the Preamble, Footnote 6 states, in pertinent
part, that there are 12 standard asset allocation models (the
Allocation Models). Salomon Smith Barney explains that because it is
constantly in the process of refining the basis for its asset
allocation advice, the number of standard Allocation Models is expected
to change as a result of such product modifications. To avoid an
ongoing obligation to alter this number, Salomon Smith Barney suggests
that the reference to the number ``12'' be deleted. Therefore, the
Department has modified the Preamble, accordingly.
6. Condition (f)
On page 60395 of the Preamble and page 60396 of the operative
language of the proposed exemption, Section II(f)(3) of the General
Conditions contains a notice provision that requires an Independent
Plan Fiduciary to give Salomon Smith Barney at least 30 calendar days
prior written notice of its intention to ``opt out'' of a new asset
allocation model. Salomon Smith Barney wishes to clarify that an
Independent Plan Fiduciary has a period of at least 30 calendar days
during which to provide Salomon Smith Barney with written notice.
Therefore, Salomon Smith Barney proposes that the notice period be
described as ``at any time within the period of 30 calendar days''
prior to the Effective Date.
In response to this comment, the Department has made the change
suggested by Salomon Smith Barney.
7. Deletion of the Last Sentence of Paragraph (g)
On pages 60394 and 60395 of the Preamble, paragraph (g) states that
if the Independent Plan Fiduciary ``opts out,'' his or her Plan account
will not be changed on the Effective Date. Paragraph (g) also states
that, under such circumstances, the Allocation Model will remain at its
current level or at such other level as the Independent Plan Fiduciary
designates. However, the Automatic Reallocation Option will remain in
effect for future changes in such participant's Allocation Model.
Salomon Smith Barney explains that once a participant has opted out
of the Automatic Reallocation Option, the participant's account is left
at its current ``non-conforming'' allocation levels and it no longer
resembles a Consulting Group Allocation Model. Because the Automatic
Reallocation Option, in effect, terminates upon a participant's
``opting out,'' Salomon Smith Barney requests the deletion of the last
sentence of paragraph (g).
In response to this comment, the Department has made the requested
deletion to paragraph (g).
8. General Information
On page 60395 of the proposed exemption, in the section captioned
``General Information,'' paragraph (2) states that the proposed
exemption, if granted, will not extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code. The
Department wishes to point out that the exemption will extend to
transactions that are prohibited under section 406(b) of the Act and
section 4975(c)(1)(E) and (F) of the Code and it has modified the final
exemption, accordingly.
9. Scope of the Term ``Employee Benefit Plans''
Salomon Smith Barney requests that the exemption cover transactions
in the TRAK Program that are entered into not only by qualified plans
that meet the requirements of section 401(k) of the Code, but also by
any individual account pension plan that may be subject to Title I of
the Act and established under section 403(b) of the Code (the Section
403(b) Plan). To the extent that participants in Section 403(b) Plans
invest their contributions in shares of the Funds, Salomon Smith Barney
and its affiliates would like to make the TRAK Program available to
them.
The Department concurs with this comment and, on page 60396 of the
proposed exemption, it has revised Section I.A. of the operative
language by deleting the word ``or'' preceding the phrase ``a
retirement plan for self-employed individuals (the Keogh Plan)'' and
adding the phrase ``or an individual account pension plan that is
subject to the provisions of Title I of the Act and established under
section 403(b) of the Code (the Section 403(b) Plan).'' In addition,
the Department has revised Footnote 11 of the proposed exemption to
include a reference to the term ``Section 403(b) Plan'' after the term
``Keogh Plan.'' Further, on page 60398 of the proposed exemption, the
[[Page 16490]]
Department has revised Section III(c)(3) of the Definitions as follows:
(3) An individual covered under (i) a self-directed IRA or (ii)
a Section 403(b) Plan, which invests in Trust shares.
For further information regarding the comments or other matters
discussed herein, interested persons are encouraged to obtain copies of
the exemption application file (Exemption Application No. D-10574) the
Department is maintaining in this case. The complete application file,
as well as all supplemental submissions received by the Department are
made available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, Room N-5638, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210.
Accordingly, after giving full consideration to the entire record,
including the written comments received, the Department has decided to
grant the exemption subject to the modifications and clarifications
described above.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, a fiduciary to
discharge his or her duties respecting the plan solely in the interest
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) The exemption will extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, and the Procedures cited above, and based upon
the entire record, the Department finds that the exemption is
administratively feasible, in the interest of the plan and of its
participants and beneficiaries and protective of the rights of
participants and beneficiaries of the plan;
(4) The exemption will be supplemental to, and not in derogation
of, any other provisions of the Act and the Code, including statutory
or administrative exemptions. Furthermore, the fact that a transaction
is subject to an administrative or statutory exemption is not
dispositive of whether the transaction is in fact a prohibited
transaction; and
(5) This is subject to the express condition that the Summary of
Facts and Representations set forth in the notice of proposed exemption
relating to PTE 92-77, as amended by PTE 94-50 and this notice,
accurately describe, where relevant, the material terms of the
transactions to be consummated pursuant to this exemption.
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
above, the Department hereby amends PTE 94-50 as follows:
Section I. Covered Transactions
A. The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (D) of the Code, shall not apply, to
the purchase or redemption of shares by an employee benefit plan, an
individual retirement account (the IRA), a retirement plan for self-
employed individuals (the Keogh Plan), or an individual account pension
plan that is subject to the provisions of Title I of the Act and
established under section 403(b) of the Code (the Section 403(b) Plan)
\5\ in the Trust for Consulting Group Capital Market Funds (the Trust),
established by Salomon Smith Barney, in connection with such Plans'
participation in the TRAK Personalized Investment Advisory Service
product (the TRAK Program).
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\5\ The employee benefit plan, the IRA, the Keogh Plan and the
Section 403(b) Plan are collectively referred to herein as the
Plans.
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B. The restrictions of section 406(b) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (E) and (F) of the Code, shall not apply, to the
provision, by the Consulting Group, of (1) investment advisory services
or (2) an automatic reallocation option (the Automatic Reallocation
Option) to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary), which may result in such fiduciary's
selection of a portfolio (the Portfolio) in the TRAK Program for the
investment of Plan assets.
This exemption is subject to the following conditions that are set
forth below in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved
by an Independent Plan Fiduciary. For purposes of this requirement, an
employee, officer or director of Salomon Smith Barney and/or its
affiliates covered by an IRA not subject to Title I of the Act will be
considered an Independent Plan Fiduciary with respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the
acquisition or redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares shall
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations based
upon objective criteria.
(f) Any recommendation or evaluation made by the Consulting Group
to an Independent Plan Fiduciary will be implemented only at the
express direction of such Independent Plan Fiduciary, provided,
however, that--
(1) If such Independent Plan Fiduciary shall have elected in
writing (the Election), on a form designated by Salomon Smith Barney
from time to time for such purpose, to participate in the Automatic
Reallocation Option under the TRAK Program, the affected Plan or
participant account will be automatically reallocated whenever the
Consulting Group modifies the particular asset allocation
recommendation which the Independent Plan Fiduciary has chosen. Such
Election shall continue in effect until revoked or terminated by the
Independent Plan Fiduciary in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of
a change in the Consulting Group's asset allocation recommendation,
each account based upon the asset allocation model (the Allocation
Model) affected by such change would be adjusted on the business day of
the release of the new Allocation Model by the Consulting Group, except
to the extent that market conditions, and order purchase and redemption
procedures may delay such processing through a series of purchase
[[Page 16491]]
and redemption transactions to shift assets among the affected
Portfolios.
(3) If the change in the Consulting Group's asset allocation
recommendation exceeds an increase or decrease of more than 10 percent
in the absolute percentage allocated to any one investment medium
(e.g., a suggested increase in a 15 percent allocation to greater than
25 percent, or a decrease of such 15 percent allocation to less than 5
percent), Salomon Smith Barney will send out a written notice (the
Notice) to all Independent Plan Fiduciaries whose current investment
allocation would be affected, describing the proposed reallocation and
the date on which such allocation is to be instituted (the Effective
Date). If the Independent Plan Fiduciary notifies Salomon Smith Barney,
in writing, at any time within the period of 30 calendar days prior to
the proposed Effective Date that such fiduciary does not wish to follow
such revised asset allocation recommendation, the Allocation Model will
remain at the current level, or at such other level as the Independent
Plan Fiduciary then expressly designates, in writing. If the
Independent Plan Fiduciary does not affirmatively ``opt out'' of the
new Consulting Group recommendation, in writing, prior to the proposed
Effective Date, such new recommendation will be automatically effected
by a dollar-for-dollar liquidation and purchase of the required amounts
in the respective account.
(4) An Independent Plan Fiduciary will receive a trade confirmation
of each reallocation transaction. In this regard, for all Plan
investors other than Section 404(c) Plan accounts (i.e., 401(k) Plan
accounts), Salomon Smith Barney will mail trade confirmations on the
next business day after the reallocation trades are executed. In the
case of Section 404(c) Plan participants, notification will depend upon
the notification provisions agreed to by the Plan recordkeeper.
(g) The Consulting Group will generally give investment advice in
writing to an Independent Plan Fiduciary with respect to all available
Portfolios. However, in the case of a Plan providing for participant-
directed investments (the Section 404(c) Plan), the Consulting Group
will provide investment advice that is limited to the Portfolios made
available under the Plan.
(h) Any sub-adviser (the Sub-Adviser) that acts for the Trust to
exercise investment discretion over a Portfolio will be independent of
Salomon Smith Barney and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any
securities that are issued by Salomon Smith Barney and/or its
affiliates, the percentage of that Portfolio's net assets invested in
such securities will not exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to
the Consulting Group for investment advisory services rendered to such
Plan will be offset by such amount as is necessary to assure that the
Consulting Group retains no more than 20 basis points from any
Portfolio (with the exception of the Government Money Investments
Portfolio and the GIC Fund Portfolio for which the Consulting Group and
the Trust will retain no investment management fee) which contains
investments attributable to the Plan investor.
(k) With respect to its participation in the TRAK Program prior to
purchasing Trust shares,
(1) Each Plan will receive the following written or oral
disclosures from the Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, Salomon Smith Barney
and its subsidiaries and the compensation paid to such entities.\6\
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\6\ The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
Independent Plan Fiduciary from the general fiduciary responsibility
provisions of section 404 of the Act. In this regard, the Department
expects the Independent Plan Fiduciary to consider carefully the
totality of fees and expenses to be paid by the Plan, including the
fees paid directly to Salomon Smith Barney or to other third parties
and/or indirectly through the Trust to Smith Barney.
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(B) Upon written or oral request to Salomon Smith Barney, a
Statement of Additional Information supplementing the Prospectus which
describes the types of securities and other instruments in which the
Portfolios may invest, the investment policies and strategies that the
Portfolios may utilize and certain risks attendant to those
investments, policies and strategies.
(C) A copy of the investment advisory agreement between the
Consulting Group and such Plan relating to participation in the TRAK
Program and, if applicable, informing Plan investors of the Automatic
Reallocation Option.
(D) Upon written request of Salomon Smith Barney, a copy of the
respective investment advisory agreement between the Consulting Group
and the Sub-Advisers.
(E) In the case of a Section 404(c) Plan, if required by the
arrangement negotiated between the Consulting Group and the Plan, an
explanation by a Salomon Smith Barney Financial Consultant (the
Financial Consultant) to eligible participants in such Plan, of the
services offered under the TRAK Program and the operation and
objectives of the Portfolios.
(F) A copy of PTE 94-50 as well as the proposed exemption and the
final exemption pertaining to the exemptive relief described herein.
(2) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing, prior to purchasing Trust shares that such fiduciary has
received copies of the documents described above in subparagraph (k)(1)
of this Section.
(3) With respect to a Section 404(c) Plan, written acknowledgement
of the receipt of such documents will be provided by the Independent
Plan Fiduciary (i.e., the Plan administrator, trustee or named
fiduciary, as the recordholder of Trust shares). Such Independent Plan
Fiduciary will be required to represent in writing to Salomon Smith
Barney that such fiduciary is (a) independent of Salomon Smith Barney
and its affiliates and (b) knowledgeable with respect to the Plan in
administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the
Act, where investment decisions are made by a trustee, investment
manager or a named fiduciary, such Independent Plan Fiduciary is
required to acknowledge, in writing, receipt of such documents and
represent to Salomon Smith Barney that such fiduciary is (a)
independent of Salomon Smith Barney and its affiliates, (b) capable of
making an independent decision regarding the investment of Plan assets
and (c) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an
informed decision concerning participation in the TRAK Program.
(l) Subsequent to its participation in the TRAK Program, each Plan
receives the following written or oral disclosures with respect to its
ongoing participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include
financial statement for the Trust and investment management fees paid
by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis
and an
[[Page 16492]]
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required,
changes in Portfolio allocations.
(3) If required by the arrangement negotiated between the
Consulting Group and a Section 404(c) Plan, a quarterly, detailed
investment performance monitoring report, in writing, provided to an
Independent Plan Fiduciary of such Plan showing, Plan level asset
allocations, Plan cash flow analysis and annualized risk adjusted rates
of return for Plan investments. In addition, if required by such
arrangement, Financial Consultants will meet periodically with
Independent Plan Fiduciaries of Section 404(c) Plans to discuss the
report as well as with eligible participants to review their accounts'
performance.
(4) If required by the arrangement negotiated between the
Consulting Group and a Section 404(c) Plan, a quarterly participant
performance monitoring report provided to a Plan participant which
accompanies the participant's benefit statement and describes the
investment performance of the Portfolios, the investment performance of
the participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to
amend his or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all
Plans of the (a) percentage of each Portfolio's brokerage commissions
that are paid to Salomon Smith Barney and its affiliates and (b) the
average brokerage commission per share paid by each Portfolio to
Salomon Smith Barney and its affiliates, as compared to the average
brokerage commission per share paid by the Trust to brokers other than
Salomon Smith Barney and its affiliates, both expressed as cents per
share.
(m) Salomon Smith Barney shall maintain, for a period of six years,
the records necessary to enable the persons described in paragraph (n)
of this Section to determine whether the conditions of this exemption
have been met, except that (1) a prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the control
of Salomon Smith Barney and/or its affiliates, the records are lost or
destroyed prior to the end of the six year period, and (2) no party in
interest other than Salomon Smith Barney shall be subject to the civil
penalty that may be assessed under section 502(i) of the Act, or to the
taxes imposed by section 4975(a) and (b) of the Code, if the records
are not maintained, or are not available for examination as required by
paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (m) of this
Section II shall be unconditionally available at their customary
location during normal business hours by:
(A) Any duly authorized employee or representative of the
Department or the Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of
this paragraph (n) shall be authorized to examine the trade secrets of
Salomon Smith Barney or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this exemption,
(a) The term ``Salomon Smith Barney'' means Salomon Smith Barney
Inc. and any affiliate of Salomon Smith Barney, as defined in paragraph
(b) of this Section III.
(b) An ``affiliate'' of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Salomon Smith Barney. (For purposes of this subsection, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is
independent of Salomon Smith Barney and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as
the recordholder of Trust shares under a Section 404(c) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under (A) a self-directed IRA, or (B) a
Section 403(b) Plan which invests in Trust shares;
(4) A trustee, investment manager or named fiduciary responsible
for investment decisions in the case of a Title I Plan that does not
permit individual direction as contemplated by Section 404(c) of the
Act; or
(5) A participant in a Plan, such as a Section 404(c) Plan, who is
permitted under the terms of such Plan to direct, and who elects to
direct the investment of assets of his or her account in such Plan.
Section IV. Effective Dates
This exemption is effective as of July 31, 1993 with respect to the
transactions described in Section I.A. and B.(1). of this grant notice.
It is also effective as of March 29, 1994 for transactions involving a
daily-traded collective investment fund that was added to the TRAK
Program pursuant to PTE 94-50. With respect to Section I.B(2) and
Section II(f)(1)-(4) of the General Conditions of this grant notice,
which set forth the amendments to PTE 94-50, this exemption is
effective as of November 9, 1998.
The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application for exemption are true and complete and accurately describe
all material terms of the transactions. In the case of continuing
transactions, if any of the material facts or representations described
in the application change, the exemption will cease to apply as of the
date of such change. In the event of any such change, an application
for a new exemption must be made to the Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant the case of continuing
transactions, if any of the material facts or representations described
in the application change, the exemption will cease to apply as of the
date of such change. In the event of any such change, an application
for a new exemption must be made to the Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the proposed exemption and PTEs 92-77 and 94-50 which are cited above.
[[Page 16493]]
Signed at Washington, DC, this 30th day of March, 1999.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 99-8226 Filed 4-2-99; 8:45 am]
BILLING CODE 4510-29-P
