[Federal Register Volume 60, Number 67 (Friday, April 7, 1995)]
[Notices]
[Pages 17809-17824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8395]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9511, et al.]
Proposed Exemptions; Bank of America Illinois, et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three [[Page 17810]] copies) should be sent to the Pension and Welfare
Benefits Administration, Office of Exemption Determinations, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue NW.,
Washington, DC 20210. Attention: Application No. stated in each Notice
of Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue NW.,
Washington, DC 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.
Bank of America Illinois, Located in Chicago, IL
[Exemption Application Nos. D-9511, D-9512 and D-9513]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August 10, 1990).
Section I--Exemption for Purchases and Sales
If the exemption is granted, effective September 1, 1993, the
restrictions of section 406(a)(1)(A) through (D) and 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)(A) through (F) of the
Code, shall not apply to the purchase and sale by employee benefit
plans (the Plans), to which the Bank serves as fiduciary, of shares in
the Prime Fund, the Government Securities Fund, and the Treasury Fund,
three open-end money market mutual fund portfolios (collectively
referred to as the Funds), to which the Bank of America Illinois, and
its affiliates (the Bank) provide investment advisory and other
services, in connection with the Supplemental Sweep Service (as defined
in paragraph (a) of section IV below), provided that the conditions of
Section III are met.
Section II--Exemption for Receipt of Fees
If the exemption is granted, effective September 1, 1993, the
restrictions of section 406(a)(1)(A) through (D) and 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)(A) through (F) of the
Code, shall not apply to the receipt of fees by the Bank from the Funds
for providing investment advisory and other services to the Funds, in
connection with the investment of the assets of the Plans in the Funds,
for which the Bank provides investment advisory and other services,
provided that the conditions of Section III are met.
Section III--Conditions
(a) The Bank does not have investment discretion or render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to the Plan assets invested in the Funds pursuant to this
proposed exemption.
(b) No sales commissions or redemption fees are paid by the Plans
in connection with the purchase or sale of shares in the Funds.
(c) The Bank does not receive any fees payable pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the 12b-1 Fees) in
connection with the transactions.
(d) The price paid or received by a Plan for shares in a Fund is
the net asset value per share on the date of the transaction, as
defined in section IV(a), and is the same price which would have been
paid or received for the shares by any other investor on that date.
(e) Prior to the Bank's receipt of fees paid by each Fund with
respect to Plan assets invested therein, each Plan receives a credit of
such Plan's proportionate share of all fees charged to the Fund by the
Bank.
(f) The Plans are not employee benefit plans sponsored or
maintained by the Bank.
(g) A second fiduciary who is independent of and unrelated to the
Bank or any of its affiliates (the Second Fiduciary), receives full
written disclosure of information concerning the Fund(s), including but
not limited to:
(1) A current prospectus for each fund in which a Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, and all other fees to be charged to or paid by the
Plan or the Funds, including the nature and extent of any differential
between the rates of such fees;
(3) The reason why the Bank may consider such investment to be
appropriate for the Plan; and
(4) 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 become available.
(h) On the basis of the information described above in paragraph
(g) of section III, the Second Fiduciary authorizes in writing the
investment of assets of the Plan in each particular Fund, the fees to
be paid by the Fund and the Plan to the Bank, and the credit to the
Plan of fees received by the Bank from the Funds for investment
advisory and other services, consistent with the responsibilities,
obligations, and duties imposed on fiduciaries by part 4 of Title I of
the Act.
(i) The Second Fiduciary referred to in paragraph (g) of section
III, or any successor thereto, is notified of any change in the rates
of the fees referred to in paragraph (g) of section III and approves in
writing the continued holding of any Fund shares acquired by the Plan
prior to such change and still held by the Plan.
(j) The Bank provides annually, written disclosures to the Second
Fiduciary which are provided to all shareholders of the Fund(s), which
establish the rate of return of the Fund(s) absent the credit paid to
the Plans for fees paid by the Funds to the Bank.
(k) The combined total of all fees received by the Bank for the
provision of services to the Plans, and in connection with the
provision of services to any of the Funds in which the Plans may
invest, are not in excess [[Page 17811]] of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(l) All dealings between the Plans and the Funds are on a basis no
less favorable to the Plans than dealings between the Funds and other
shareholders of the Funds.
(m) The Bank shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (n) below 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(l) of the Act,
or the taxes imposed by section 4975(a) and (b) or the code, if the
records are not available for examination as required by section (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 (l) above 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 Internal Revenue Service;
(B) Any fiduciary of a Plan who has the authority to acquire or
dispose of the interests of the Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any Plan that has an interest in
any of the Funds or any duly authorized employee or representative of
such employer; and
(D) Any participant or beneficiary of any Plan that has an interest
in the Funds or any duly authorized representative of such participant
or beneficiary.
(2) None of the persons described in paragraphs (k)(1)(B) through
(D) shall be authorized to examine the trade secrets of the Bank's
commercial or financial information which is privileged or
confidential.
Section IV--Definitions
For purposes of this proposed exemption:
(a) Supplemental Sweep Service means the transfer of shares in the
Funds between the Bank and the Plans by means of the Banks's internal
accounting procedures at the end of the Supplemental Sweep Period, in
connection with Plan orders to purchase shares in the Funds that the
Bank is otherwise unable to settle prior to the Supplemental Sweep
Period, and Plan orders to purchase or redeem shares in the Funds that
are received by the Bank during the Supplemental Sweep Period. A Plan
order to purchase or redeem shares in the Fund(s) pursuant to the
Supplemental Sweep Service occurs solely as a result of investment
decisions, deposits or withdrawals, directed by an independent Second
Fiduciary.
(b) Supplemental Sweep Period means the period of time on each
business day after the Funds stop accepting orders for the purchase or
redemption of shares in the Funds and before the Bank's close of
business.
(c) The term ``net asset value'' means the amount for purposes of
pricing all purchase and sale of shares in the Funds 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.
(d) An ``affiliate'' of a person includes:
(1) Any persons directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control,
with the person;
(2) Any officer, director, employee, relative of, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(e) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(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 sister.
(g) A fiduciary will not be deemed to be an independent fiduciary
with respect to the Bank and its affiliates if:
(1) The fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Bank or any affiliate:
(2) The fiduciary, or any officer, director, partner, employee or
relative of such fiduciary, is an officer, director partner, or
employee of the Bank or any affiliate (or is a relative of such
persons); or
(3) The fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this proposed exemption.
If an officer, director, partner, or employee of the Bank (or a
relative of such persons), is a director of such Second Fiduciary, and
if he or she abstains from participation in (i) the choice of the
Plan's investment manager/adviser, (ii) the approval of any purchase or
sale by the Plan of shares of the Funds, and (iii) the approval of any
change of fees charged to or paid by the Plan, in connection with any
of the transactions described in sections I and II above, then
paragraph (g)(2) of section III above, shall not apply.
The availability of this proposed exemption would be subject to the
express condition that the material facts and representations contained
in the application are true and complete, and that the application
accurately describes all material facts which are the subject of this
exemption.
Summary of Facts and Representations
1. The Bank, which is comprised of Bank of America Illinois, and
its wholly owned subsidiary, Continental Trust Company, provides a full
range of fiduciary services to qualified employee benefit plans,
welfare plans, and governmental retirement plans. Such services include
trustee and custodial services, discretionary and directed investment
of plan assets, and all related securities processing activities,
domestic and foreign. As of December 31, 1994, the Bank provided
investment management and custodial services with respect to total
assets of approximately $179 billion.
The Plans are comprised of retirement plans qualified under section
401(a) of the Code, pension plans that meet the definition of pension
plan set forth in section 3(2) of the Act and section 4975(e)(1) of the
Code, with respect to which the Bank serves as a trustee, or investment
fiduciary. In addition, the Bank states that it may offer the Funds,
under the arrangement described herein, to welfare plans.
2. The Bank provides the Plans with the opportunity to purchase
shares in the Funds, to which the Bank provides investment advisory and
other services, in connection with existing and expanded cash
management sweep services. The Bank states that it currently invests
certain assets of the Plans in a short term collective investment fund
(the Collective Fund) maintained by the Bank in connection with the
provision of sweep services. In this regard, the Bank represents that
the addition of the Funds as short term [[Page 17812]] investment
alternatives will result in greater investment choice, greater
diversification and reduced risk for the Plans.\1\
\1\The Bank represents that it invests the assets of plans
covering its employees in the Funds on terms that are identical to
the terms of the proposed exemption set forth herein. In this
regard, the Bank states that this arrangement meets the terms and
conditions of Prohibited Transaction Exemption (PTE) 77-3 (42 FR
18734, April 8, 1977). The Department expresses no opinion as to
whether PTE 77-3 provides relief for the purchase or sale of shares
in the Funds by plans covering employees of the Bank pursuant to the
arrangement described herein.
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3. The Funds are comprised of the Prime Fund, the Government
Securities Fund and the Treasury Fund, each of which is a money market
mutual fund portfolio of the 231 Funds, an open-end management
investment company organized as a Massachusetts business trust (the
Trust). The Trust is organized under the Investment Company Act of
1940, as amended. Fund shares offered by the Trust are registered under
the Securities Act of 1933.
The assets of the Prime Fund are invested in a diversified
portfolio of U.S. Dollar denominated money market instruments,
including: Obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, bank obligations, including certificates
of deposits, time deposits, bankers' acceptances and debt securities
issued or supported by domestic banks or domestic branches of foreign
banks; short-term corporate obligations including commercial loan
participations, commercial paper, corporate bonds, privately placed
commercial paper, and participation interests in trusts or special
purpose vehicles backed by consumer or commercial credit receivables;
and municipal securities including taxable and tax-exempt general
obligations, revenue obligations, private activity and industrial
development bonds.
The assets of the Government Securities Fund are invested
exclusively in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities; receipts evidencing separately
traded interest and principal components of U.S. Government obligations
(including TIGRs and CATS); and repurchase agreements collateralized by
government obligations.
The Treasury Fund invests its assets exclusively in obligations
issued by the U.S. Treasury, and repurchase agreements relating to such
Treasury obligations.
4. The Bank states that the Plans pay a short term cash management
fee (Cash Management Fee) of .12 percent of average daily assets to the
Bank in connection with Plan investments in the short term collective
investment fund maintained by the Bank. In addition, each Plan pays a
trustee fee to the Bank of between .01 percent and .15 percent of all
Plan assets under the Bank's custody. The Bank negotiates its trustee
fees with each Plan individually. The Bank represents that Plan assets
are invested in the Funds as an alternative to the short term
collective investment fund.\2\ In order to avoid charging double fees
with respect to Plan assets invested in the Funds, the Bank credits all
fees attributable to Plan assets invested therein, payable to the Bank
by the Funds, to the Plans. In this regard, the Bank states that its
crediting to the Plans of all fees to be paid by the Funds to the Bank
results in no additional cost to any of the Plans with respect to Plan
assets invested in shares in the Funds.
\2\The Bank represents that it invests cash collateral provided
to the Plans by borrowers of securities in connection with
securities lending transactions (the Collateral), in the Funds. The
Bank states that it receives a securities lending fee which is part
of the Plans' net return from the investment of the Collateral. In
this regard, The Bank represents that the securities lending service
is separate from the cash management service. According to the Bank,
no Cash Management Fee, or investment management fee, is paid by the
Plans to the Bank with respect to the management of the Collateral.
The Bank states that it is relying on the relief provided by
PTEs 81-6 (46 FR 7527, January 23, 1981) and 82-63 (47 FR 14804,
April 6, 1982) for the securities lending transactions and its
receipt of fees in connection therewith. In addition, The Bank
represents that it is relying on PTE 77-4 (42 FR 18732, April 8,
1977) for relief for the investment of the Collateral in the Funds.
The Bank is not requesting, and the Department is not providing,
any relief with regard to the investment of the Collateral in the
Funds. In this regard, the Department expresses no opinion as to the
availability of the relief provided by PTE's 81-6 and 82-63 for the
Plan's securities lending activities and securities lending fees
paid by the Plan in connection therewith, nor the availability of
PTE 77-4 for the investment of the Collateral in shares of the
Funds.
Nevertheless, the Department notes that the relief provided by
PTE 77-4 is predicated on, among other things, avoiding the payment
of double investment management, investment advisory or similar fees
by a plan to a fiduciary of the plan, or any affiliate, which also
serves as investment advisor to the mutual fund company. In this
regard, it is the Department's view that whether a particular
service constitutes the provision of investment advisory services or
similar services depends on the particular facts and circumstances
of each case. The Department emphasizes that, regardless of whether
an administrative exemption may be applicable, it expects the plan
fiduciary with investment management responsibility to consider the
totality of fees to be paid by the plan directly, and/or indirectly,
prior to entering into the arrangement in order to determine that
the fees to be paid by the plan do not exceed reasonable
compensation for the particular advisory service offered.
The fees payable to the Bank by the Funds are accrued daily and
paid to the Bank on the first day of the following month, in arrears.
On the same day, the Bank credits to the Plans their proportionate
shares of all fees to be paid by the Funds to the Bank with respect to
Plan assets invested therein.
The Bank states that it discloses annually in writing to the Plans:
The total rate of return earned on their shares in the Fund(s) which
includes the amounts received by the Plan from the Bank as a credit of
the fees paid by the Fund(s) to the Bank in connection with Plan assets
invested therein; and the portion of the rate of return which is
attributable to the amounts credited by the Bank to the Plans. In
addition, the Bank represents that it discloses to the Second Fiduciary
annually in writing the rate of return earned on shares in the Fund(s)
held by investors other than the Plans.
5. The Bank states that it does not have investment discretion with
respect to Plan assets involved in the purchase or sale of shares in
the Funds for which relief is requested.\3\ Purchases and redemptions
of shares in the Funds are solely the result of investment directions
from a Second Fiduciary. The Bank represents that only liquid Plan
assets awaiting distribution, or investment, are used to purchase
shares in the Funds. The Bank states that it has no discretion with
respect to the amount of liquid assets available for investment in the
funds. The liquid assets of the Plans are always the proceeds of other
assets which have been liquidated, or new assets transferred to the
Bank, at the direction of a Second Fiduciary.
\3\The Bank represents that it invests plan assets with respect
to which it has investment discretion in the Funds. In this regard,
the Bank represents that such transactions meet the terms and
conditions of PTE 77-4. The Department expresses no opinion as to
the availability of the relief provided by PTE 77-4 for such
transactions.
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The Bank states that it has no discretion with respect to how
liquid assets of the Plans are invested. The Bank represents that the
investment of the liquid assets of a Plan in the Funds is either
specifically directed by a Second Fiduciary, or pursuant to standing
orders by a Second Fiduciary to invest any daily cash balances in the
Fund absent the Bank's receipt of any other investment directions.
6. The Bank states that share purchases and redemption requests
communicated by the Bank to the Funds are transmitted each business day
prior to the time established by the Fund (currently expected to be
2:00 P.M. Central Standard Time) (the Cutoff Time) for same-day
processing and payment of transaction requests. If a transaction
triggering a purchase or redemption of Fund shares is processed by the
Bank prior to the Cutoff Time, the [[Page 17813]] Bank, in turn,
transmits the purchase or redemption request to the Fund, which
executes the request that same day.
The Bank states that additions to customer accounts (including
additions made to cover Fund purchase requests placed prior to the
Cutoff Time) and withdrawals from customer accounts may occur
subsequent to the Cutoff Time but prior to the close of business for
the Bank (the Posting Time). The Bank represents that in order to
provide additional opportunities for same-day processing of Plan
purchase and redemption requests with respect to shares in the Funds,
it offers a Supplemental Sweep Service. The Supplemental Sweep Service
provides for the settlement of deposits and withdrawals late each
business day subsequent to the Cutoff Time but prior to the Posting
Time (the Supplemental Sweep Period).
The Bank represents that the Supplemental Sweep Service assures the
overnight investment of any Plan assets to which it applies in order to
maximize the return to the Plans by providing an additional period
during which the Plan's otherwise idle assets would be invested. In
addition, the Bank represents that the Supplemental Sweep Service helps
to meet the liquidity needs of the Plans by providing an opportunity
for the Plans to, in effect, redeem shares in the Funds and withdraw
assets during the Supplemental Sweep Period.
The Bank states that the Supplemental Sweep Service is for selected
institutional customers, primarily Plans, and is effective for purchase
orders which cannot be settled prior to the Supplemental Sweep Period
and for purchase and withdrawal orders received during the Supplemental
Sweep Period each business day.
7. The Bank represents that shares acquired by the Plans through
the Supplemental Sweep Service are, in some cases, first acquired by
the Bank and subsequently allocated to customers which have assets
available to be swept as of the Posting Time on that same day. In
addition, in order to facilitate prompt redemption of customer shares
on the same day that the customer wishes to redeem them, the Bank
processes the customer redemption requests received during the
Supplemental Sweep Period internally by providing immediate credit to
the customer for the Fund Shares.
The Bank represents that the price paid, or received by, a Plan for
shares in a Fund purchased, or redeemed, pursuant to the Supplemental
Sweep Service is the net asset value per share for all other purchases
and redemptions of shares in the Fund on that date.
8. The Bank represents that its acquisition of shares from the
Funds through the Supplemental Sweep Service is based on estimates of
the prospective purchase and sale of shares in the Funds by the Plans
during the Supplemental Sweep Period.
Immediately prior to the Supplemental Sweep Period on each business
day, the Bank estimates the approximate number of shares of each fund
which its customers will require as of the Posting Time later that same
day (in addition to the number of shares needed to cover net customer
purchase and sale orders placed prior to the Cutoff Time). The Bank
then purchases that number of shares of each Fund prior to the Cutoff
time as trustee, nominee or in some other capacity for its customers.
The books of the Fund's transfer agent carry only one account for all
purchases and redemptions of Fund shares by the Bank, and reflect the
Bank as the owner of all Fund shares purchased. The Bank's books,
however, reflect its purchase of shares in the Funds as trustee,
nominee, or other capacity for its customer accounts, or as principal,
on a provisional basis.
Later in the day, at the end of the Supplemental Sweep Period, the
Bank determines the precise number of each Fund's shares needed by its
customers. Based on its determination, the Bank adjusts the provisional
purchase entries previously made on its books to reflect the net
purchase or redemption of Fund shares by each customer account (or by
the Bank in its own name) in the amount necessary to satisfy the net
purchase needs of its customers at the end of the Supplemental Sweep
Period. Appropriate final entries are made in the Bank's trust and
corporate accounting systems to reflect the previous day's transaction
activity and the respective ownership positions of the Bank and its
customers as of the previous day's Cutoff Time. The books of the
transfer agent of the respective Fund, however reflect no net change
(i.e., change in number of shares outstanding) in the record ownership
position of the Bank as a result of the Bank's adjustments; all
adjustments of Fund shares among the Bank and its various customers
would be internal bookkeeping adjustments made by the Bank.
In the event that the Bank, on a given business day, underestimated
the number of any Fund's shares which were required by its customers,
the Bank allocates any shares the Bank had previously purchased to
customer accounts which purchased Fund shares between the Posting Time
and the Cutoff Time on a pro rata basis by reflecting on the Bank's
books the redemption of Fund shares owned or purchased by the Bank and
the simultaneous purchase by its customers, from the Fund, of the
corresponding number of fund shares. The balance of each customer's
funds that was intended to be invested in the Funds during the
Supplemental Sweep Period which remain uninvested after this adjustment
process are temporarily invested in the Bank's deposits paying a rate
of interest equivalent to the net return on Fund shares for that day
(subject to certain regulatory requirements) and subsequently are
invested in Fund shares the next business day.\4\ The Bank represents
that each customer including the Plans realizes an equivalent return on
its invested funds for the day.
\4\The Bank represents that it intends to rely on section
408(b)(4) of the Act with regard to the investment of Plan assets in
deposits of the Bank. The Department expresses no opinion as to
whether the relief provided by section 408(b)(4) of the Act is
available for the investment of Plan assets in deposits of the Bank
pursuant to the arrangement described herein.
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However, if the Bank overestimated the number of Fund shares
required by its customers on a given business day, any excess Fund
shares are placed in the Bank's investment portfolio or trading
account.
The Bank represents that, in any event, customers who redeem Fund
Shares during the Supplemental Sweep Period pursuant to the
Supplemental Sweep Service are provided with immediate provisional
credit for the value of Fund shares. Such redemptions ultimately are
reflected on the Bank's books as having occurred as of the Cutoff Time
in the manner described above. Accordingly, such shares are allocated
to other customer accounts or to the Bank's own investment or trading
account, through the netting procedures. The Bank states that all such
entries are made on its own internal accounting systems effective as of
the previous day's Cutoff Time, and result in no net change in the
transfer agent's records reflecting the Bank's record ownership of Fund
shares. The Bank represents that in effect, the Bank is acting
functionally as a sub-transfer agent to effect post-Cutoff redemptions
by the Fund.
9. In summary, the Bank represents that the proposed transactions
satisfy the statutory criteria of section 408(a) of the Act and
4975(c)(2) of the Code because: (a) The Funds provide the Plans with a
more effective investment vehicle than the Collective Fund
[[Page 17814]] currently maintained by the Banks without any increase
in fees paid to the Bank; (b) a Second Fiduciary must authorize in
writing the investment of Plan assets in the Funds and the payment of
any fees to the Bank by the Plans and the Funds, after receiving full
written disclosure, including a prospectus for the Funds and a
statement describing the fee structure; (c) no sales fees or redemption
fees are paid by the Plans in connection with the acquisition or sale
of shares of the Funds; and (d) all dealings between the Plans and the
Funds, the Bank, or any affiliated person, are on a basis no less
favorable to the Plans than such dealings are with the other
shareholders.
FOR FURTHER INFORMATION CONTACT: Eric Berger of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Mellon Bank, N.A. (Mellon) and Its Affiliates Located in Pittsburgh,
Pennsylvania
[Application No. D-9724]
Proposed Exemption
Section I--Exemption for Cross-Trading Between Certain Accounts
The restrictions of sections 406(a)(1)(A) and 406(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) of the Code, shall not apply
to (1) the purchase and sale of securities (including the stock of
Mellon Bank Corporation (MBC)) between Indexed Accounts, as defined in
Section IV(a); and (2) the purchase and sale of securities, including
the common stock of MBC, between Indexed Accounts and various large
accounts (the Large Accounts) pursuant to portfolio restructuring
programs of the Large Accounts; provided that the following conditions
and the General Conditions of Section III are met:
(a) The Indexed Account is based on an index which represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries. The organization creating and maintaining the index must be
(1) engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients, (2) a publisher of financial news or information, or (3) a
public stock exchange or association of securities dealers. The index
must be created and maintained by an organization independent of Mellon
and its affiliates. The index must be a generally accepted standardized
index of securities which is not specifically tailored for the use of
Mellon or its affiliates.
(b) The price for the securities is set at the current market value
for the securities on the date of the transactions. For equity
securities, the price shall be the closing price for the security on
the day of trading; unless the security was added to or deleted from an
index underlying an Indexed Account after the close of trading, in
which case the price shall be the opening price for that security on
the next business day after the announcement of the addition or
deletion. For debt securities, the price shall be the fair market value
determined as of the close of the day of trading pursuant to Rule 17a-
7(b) issued by the Securities and Exchange Commission under the
Investment Company Act of 1940.
(c) The transaction takes place within three business days of the
``triggering event'' giving rise to the cross-trade opportunity. A
triggering event is defined as:
(1) A change in the composition or weighting of the index
underlying an Indexed Account by the organization creating and
maintaining the index;
(2) A change in the overall level of investment in an Indexed
Account as a result of investments and withdrawals made on the
Account's regularly scheduled opening date; provided, however, that
Mellon does not change the level of investment in the Indexed Account
through investments or withdrawals of assets of any employee benefit
plan maintained by Mellon or its affiliates (the Mellon Plans) for
which Mellon has investment discretion; or
(3) A declaration by Mellon (recorded on Mellon's records) that a
``triggering event'' has occurred, which will be made upon an
accumulation of cash in an Indexed Account attributable to interest or
dividends on, and/or tender offers for, portfolio securities equal to
not more than .5 percent of the Indexed Account's total value.
(d) With respect to any Indexed Account that is model-driven, no
cross-trades are engaged in by the Account for 10 business days
subsequent to any change made by Mellon to the model underlying the
Account.
(e) In the event that the amount of a particular security which all
of the Indexed Accounts or Large Accounts propose to sell on a given
day is less than the amount of such security which all of the Indexed
Accounts or Large Accounts propose to buy, or vice versa, the direct
cross-trade opportunity must be allocated by Mellon among potential
buyers or sellers of the security on a pro rata basis.
(f) An Indexed Account does not participate in a cross-trade if
more than 10 percent of the assets of the Indexed Account at the time
of the proposed cross-trade are comprised of assets of Mellon Plans for
which Mellon exercises investment discretion.
(g) Prior to any proposed cross-trading by an Indexed Account or a
Large Account, Mellon provides to each employee benefit plan invested
in the Account information which describes the existence of the cross-
trading program, the ``triggering events'' which will create cross-
trade opportunities, the pricing mechanism that will be utilized for
securities purchased or sold by the Accounts, and the allocation
methods and other procedures which will be implemented by Mellon for
its cross-trading practices. Any employee benefit plan which
subsequently invests in the Indexed Account or Large Account shall be
provided the same information prior to or immediately after the plan's
initial investment in the Account.
(h) With respect to cross-trade transactions involving a Large
Account:
(1) Total assets of the Large Account are in excess of $50 million.
(2) Fiduciaries or other appropriate decisionmakers of the Large
Account who are independent of Mellon are, prior to any cross-trade
transactions, fully informed of the cross-trade technique and provide
advance written approval of the cross-trade transactions.
Such authorization shall be terminable at will by the Large Account
upon receipt by Mellon of written notice of termination. A form
expressly providing an election to terminate the authorization, with
instructions on the use of the form, must be supplied to the
authorizing Large Account fiduciary concurrent with the receipt of the
written information describing the cross-trading program. The
instructions for such form must include the following information:
(i) The authorization is terminable at will by the Large Account,
without penalty to the Large Account, upon receipt by Mellon of written
notice from the authorizing Large Account fiduciary; and
(ii) Failure to return the termination form will result in the
continued authorization of Mellon to engage in cross-trade transactions
on behalf of the Large Account.
(3) Within 45 days of the completion of the Large Account's
portfolio restructuring program, the Large Account's fiduciaries shall
be fully appraised in writing of the transaction
[[Page 17815]] results. However, if the program takes longer than three
months to complete, interim reports of the transaction results will be
made within 30 days of the end of each three month period.
(4) The Large Account transactions occur only in situations where
Mellon has been authorized to restructure all or a portion of the Large
Account's portfolio into an Indexed Account (including a separate
account based on an index or computer model) or to act as a ``trading
adviser'' in carrying out a Large Account-initiated liquidation or
restructuring of its portfolio.
(i) Mellon receives no additional direct or indirect compensation
as a result of any cross-trade transactions.
(j) Mellon does not purchase or sell any debt securities issued by
Mellon or an affiliate for the Indexed Accounts.
Section II--Exemption for the Acquisition, Holding and Disposition of
MBC Stock
The restrictions of sections 406(a)(1)(D), 406(b)(1) and (b)(2) of
the Act, and the sanctions resulting from the application of section
4975 of the Code by reason of section 4975(c)(1)(D) and (E) of the
Code, shall not apply to the acquisition, holding or disposition of the
common stock of MBC (the MBC Stock) by Indexed Accounts, if the
following conditions and the General Conditions of Section III are met:
(a) The acquisition or disposition of the MBC stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Indexed Account is based.
(b) In the event that MBC Stock is added to an index on which an
Indexed Account is based or is added to the portfolio of the Indexed
Account which tracks an index that includes MBC Stock, all acquisitions
necessary to bring the Indexed Account's holdings of MBC Stock to its
capitalization weighting in the index, other than cross-trade
transactions meeting the conditions of Section I, shall comply with
Rule 10b-18 of the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934, including the limitations regarding
the price paid for such stock.
(c) Subsequent to acquisitions necessary to bring the Indexed
Account's holdings of MBC Stock to its capitalization weighting in the
index pursuant to the restrictions of SEC Rule 10b-18, all aggregate
daily purchases of MBC stock, other than cross-trade purchases meeting
the conditions of Section I, shall not constitute more than the greater
of: (1) 15 percent of the stock's average daily trading volume for the
previous five days; or (2) 15 percent of the stock's trading volume on
the date of the transaction.
(d) If the necessary number of shares of MBC stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Indexed Account to require MBC stock, Mellon
shall appoint a fiduciary which is independent of Mellon and its
affiliates to design acquisition procedures and monitor Mellon's
compliance with such procedures.
(e) All purchases and sales of MBC stock, other than cross-trades
meeting the conditions of Section I, shall be executed on the national
exchange on which MBC stock is primarily traded.
(f) No transactions shall involve purchases from, or sales to,
Mellon or any affiliate, officer, director or employee of Mellon or any
party in interest with respect to a plan which has invested in an
Indexed Account. This requirement does not preclude purchases and sales
of MBC stock in cross-trade transactions meeting the conditions of
Section I, provided that the Indexed Accounts are not maintained by
Mellon primarily for the investment of assets of Mellon or any
affiliate, including officers, directors or employees of Mellon other
than in connection with a Mellon Plan.
(g) No more than five (5) percent of the total amount of MBC stock
issued and outstanding at any time shall be held in the aggregate by
the Indexed Accounts which hold plan assets.
(h) MBC stock shall constitute no more than two (2) percent of the
value of any independent third-party index on which the investments of
an Indexed Account are based.
(i) A plan fiduciary independent of Mellon authorizes the
investment of such plan's assets in an Indexed Account which purchases
and/or holds MBC stock.
(j) A fiduciary independent of Mellon and its affiliates shall
direct the voting of the MBC stock held by an Indexed Account on any
matter in which shareholders of MBC stock are required or permitted to
vote.
Section III--General Conditions
(a) Mellon maintains or causes to be maintained for a period of six
years from the date of the transaction the records necessary to enable
the persons described in paragraph (b) of this Section to determine
whether the conditions of the 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 Mellon, the records are lost
or destroyed prior to the end of the six-year period, and (2) no party
in interest other than Mellon shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act or to the taxes
imposed by section 4975(a) and (b) of the Code if the records are not
maintained or are not available for examination as required by
paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are available at their
customary location for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an Indexed Account who
has authority to acquire or dispose of the interests of the plan, or
any duly authorized employee or representative of such fiduciary,
(C) Any contributing employer with respect to any plan
participating in an Indexed Account or any duly authorized employee or
representative of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Indexed Account, or any duly authorized employee or representative of
such participant or beneficiary.
(2) None of the persons described in paragraph (b)(1)(B) through
(D) shall be authorized to examine trade secrets of Mellon, any of its
affiliates, or commercial or financial information which is privileged
or confidential.
Section IV--Definitions
(a) Indexed Account--Any Index Fund or Model-Driven Fund.
(b) Index Fund--Any investment fund, account or portfolio
sponsored, maintained, trusteed, or managed by Mellon or an affiliate
in which one or more investors invest that is designed to replicate the
capitalization-weighted composition of an independently maintained
securities index which satisfies the conditions of Section I(a) and
Section II(h).
(c) Model-Driven Fund--Any investment fund, account or portfolio
sponsored, maintained, trusteed, or managed by Mellon or an affiliate,
in which one or more investors invest which is based on computer models
using prescribed objective criteria to transform an independently
maintained securities index which satisfies the conditions of Section
I(a) and Section II(h).
(d) Opening date--The regularly-scheduled date on which investments
in [[Page 17816]] or withdrawals from an Indexed Account may be made.
(e) Large Account--An account of an investor that is either: (1) An
employee benefit plan within the meaning of section 3(3) of the Act
that has $50 million or more in total assets; or (2) an institutional
investor, other than an investment company registered under the
Investment Company Act of 1940 (i.e. a mutual fund), such as an
insurance company separate account or general account, a governmental
plan, a university endowment fund, a charitable foundation fund, or a
trust or other fund which is exempt from taxation under section 501(a)
of the Code, that has total assets in excess of $50 million. As noted
in Section I(g)(4), a ``Large Account'' shall only be an account to
which Mellon has been authorized to restructure all or a portion of the
portfolio for such account into an Indexed Account or to which Mellon
has been authorized to act as a ``trading adviser'' (as defined below)
in connection with a specific liquidation or restructuring program for
the account.
(f) Trading adviser--A person whose role is limited to arranging a
Large Account-initiated liquidation or restructuring of an equity or
debt portfolio within a stated period of time so as to minimize
transaction costs. The person must not be a fiduciary with investment
discretion for any underlying asset allocation, restructuring or
liquidation decisions for the account in connection with such
transactions.
(g) Affiliate--Any person, directly or indirectly through one or
more intermediaries, controlling, controlled by, or is under common
control with Mellon (except Mellon/McMahon Real Estate Advisors, Inc.).
Summary of Facts and Representations
1. Mellon is a national bank and a subsidiary of MBC, which is the
twenty-third largest bank holding company in the U.S. with assets of
approximately $37 billion. Mellon is licensed to operate a trust
department, which is regulated by the Office of the Comptroller of the
Currency. Within the trust department, Mellon provides a variety of
fiduciary services, including acting as trustee of employee benefit
plans subject to the Act. Currently, Mellon acts as fiduciary of
institutional accounts, including employee benefit plans, with assets
totaling approximately $481 billion. Additionally, certain affiliates
of Mellon provide trust or investment management services to various
employee benefit plans. Mellon and its affiliates are, to the extent of
the provision of such services, fiduciaries of these plans. For
purposes of this proposed exemption, Mellon does not include Mellon/
McMahon Real Estate Advisors, Inc., as an ``affiliate'' because that
entity is being sold.
2. In its capacity as fiduciary of an employee benefit plan, Mellon
may be either directed by an independent plan fiduciary or a plan
participant that has the ability to direct investments for his/her plan
account under the plan document. Alternatively, in those cases in which
Mellon manages the investments, Mellon represents that it does not
exercise any discretionary authority over whether an employee benefit
plan invests in particular Funds, such as the Mellon S&P 500 Index
Funds, except for a relatively small number of plans which subscribe to
Mellon's Portfolio Management in Funds (PMF) services (as discussed
below in Paragraph 13).
Mellon manages the different collective investment funds in various
ways to enable plan assets to be diversified to reduce risk and to be
invested in the types of investments that a particular manager for a
plan may determine is appropriate at a particular time. Index Funds and
Model-Driven Funds (the Funds) are two examples of the Bank's
collective investment funds which include plan investors.
Index and Model-Driven Funds
3. An Index Fund may be an individual or collective investment
fund, the objective of which is the replication of the performance of
an independently-maintained stock or bond index representing the
performance of a specific segment of the public market for equity or
debt securities. The Index Funds are passively managed, in that the
choice of stocks or bonds purchased and sold, and the volume purchased
and sold, are made according to predetermined third party indices
rather than according to active evaluation of the investments.
4. A Model-Driven Fund may be an individual or collective
investment fund, the performance of which is based on computer models
using prescribed objective criteria to transform an independently-
maintained stock or bond index representing the performance of a
specific segment of the public market for equity or debt securities.
The portfolio of a Model-Driven Fund is determined by the details of
the computer model, which examines structural aspects of the stock or
bond market rather than the underlying values of such securities. An
example of a Model-Driven Fund would include a fund which
``transforms'' an index, making investments according to a computer
model which uses such data as the following: (a) Earnings, dividends
and price-earning ratios for common stocks included in the index; (b)
current yields on corporate bonds and money market instruments; (c) the
duration, maturity structure, yield and sector/quality weights for
bonds included in the index; and (d) historical standard deviations and
correlations between asset classes.
Mellon represents that the process for the establishment and
operation of all Indexed Accounts which are model-driven is very
disciplined. Clear-cut rules are established for each model. Since the
Model-Driven Funds operate pursuant to pre-specified computer programs,
the rules and programs are changed only infrequently. However, to the
extent that there is any change made by Mellon to a model underlying an
Indexed Account, no cross-trades will be engaged in by the Account for
10 business days subsequent to such change. Thereafter, an Indexed
Account that is model-driven will engage in cross-trade transactions if
the cross-trade opportunity results from any ``triggering event''
described herein (see Paragraph 5 below).
Mellon currently offers more than 60 collective investment funds
that are invested according to the criteria of various third-party
indexes or are model-driven based on such indexes. For example, some
Funds track the Russell 2000 Index,\5\ while other Funds track the
Standard & Poors 500 Composite Stock Price Index (the S&P 500
Index).\6\ Most of the Funds track stock indexes, although some Funds
[[Page 17817]] track indexes of debt securities, such as the Lehman
Brothers Bond Indices.\7\
\5\The Russell 2000 Index was established and is maintained by
the Frank Russell Company, which is not an affiliate of Mellon. The
Russell 2000 Index is a subset of the larger Russell 3000 Index. The
Russell 3000 Index consists of the largest 3,000 publicly traded
stocks of U.S. domiciled corporations, as identified by the Frank
Russell Company, and includes large, medium and small stocks. The
Russell 3000 Index represents approximately 98% of the total market
capitalization of all U.S. stocks that trade on the New York and
American Stock Exchanges and in the NASDAQ over-the-counter market.
The Russell 2000 Index consists of approximately 2,000 of the
smallest stocks within the Russell 3000 Index, and is therefore a
broadly diversified index of small capitalization stocks,
representing less than 10 percent of the U.S. equity market in total
capitalization.
\6\The S&P 500 Index is composed of 500 stocks that are traded
on the New York Stock Exchange, American Stock Exchange, and the
NASDAQ National Market System. The S&P 500 is a market value-
weighted index (i.e. shares outstanding times stock price) in which
each company's influence on the Index's performance is directly
proportional to its market value.
\7\The indexes of debt securities used by Mellon for the Funds,
such as the Lehman Brothers Bond Indices, consist primarily of high-
quality fixed-income securities representing the U.S. government,
corporate, and mortgage-backed securities sectors of the bond market
in the U.S. Mellon currently has approximately 14 debt Index Funds.
---------------------------------------------------------------------------
In addition to Funds that are collective investment funds, Mellon
has investment responsibility for individual investment funds which are
separate portfolios for various client accounts, including employee
benefit plans, where the portfolio is invested in accordance with a
third-party index. Such individual investment funds and collective
investment funds are referred to herein as Indexed Accounts (see
Paragraph 6 below). Mellon states that the ability of all Indexed
Accounts to cross-trade securities with each other, or to invest in MBC
Stock when the stock is included in an index, would improve Mellon's
tracking of such indexes.
Cross Trades
5. Mellon represents that cross-trades will be made within three
business days of the ``triggering event'' giving rise to the cross-
trade opportunity. A ``triggering event'' is limited to: (i) A change
in the composition or weighting of the index underlying an Indexed
Account by the organization creating and maintaining the index; (ii) a
change in the overall investments in an Indexed Account as a result of
a net investment or withdrawal on the Account's regularly-scheduled
opening date (provided that Mellon does not change the level of
investment in the Indexed Account through investments or withdrawals of
assets of any Mellon Plans for which Mellon has investment discretion);
and (iii) a declaration by Mellon that a ``triggering event'' has
occurred upon an accumulation in the Indexed Account of cash
attributable to interest or dividends on, and/or tender offers for,
portfolio securities equal to not more than .5 percent of the value of
the Indexed Account.
Mellon states that frequent purchases and sales of securities by
the Indexed Accounts are required to accomplish portfolio balances that
conform with the particular indexes. In addition, some securities
transactions may be prompted by a client plan's request to add funds
to, or withdraw funds from, an Indexed Account. Under any of these
circumstances, Mellon's disposition of a particular security for one
Indexed Account may involve a security which may be needed by another
Account, thus presenting an opportunity to save substantial commissions
for both the liquidating Account and the acquiring Account. This saving
is enabled by a cross-trade transaction, which involves matching
Mellon's sell orders for a particular day with its buy orders for the
same day, and the execution of trades between the Accounts in off-
market transactions. Under current procedures, all securities
transactions, including cross-trades between Indexed Accounts
maintained by Mellon, are executed by a broker on behalf of a
purchasing or selling Account at the direction of Mellon, dealing with
a second broker acting on behalf of the other purchasing or selling
party.
6. Mellon proposes to take advantage of opportunities to direct the
cross-trading of securities directly between various Indexed Accounts.
Such Indexed Accounts will include: (i) Collective investment funds for
employee benefit plans, (ii) separate employee benefit plan trust
accounts that are not commingled in a collective fund, (iii) other
large fiduciary accounts such as governmental plans, university
endowment funds, charitable foundation funds and personal trusts, (iv)
common or collective trust funds containing assets of governmental
plans, university endowments, charitable foundations or personal
trusts, and (v) mutual funds and other institutional accounts for which
Mellon or an affiliate serves as an investment manager or investment
advisor.
Mellon represents that by participating in its cross-trading
program, the Accounts will benefit by not incurring the transaction
costs involved in dealing with a broker-dealer or ``market maker'' for
the particular securities to effect the transactions. Such transaction
costs include brokerage commissions and/or the market-maker's bid/offer
spread on prices for such securities. Mellon maintains that
transactions involving equity securities on the open market between
unrelated parties require brokerage commissions equal to at least two
cents per share for each sale or purchase transaction. However, the
brokerage commissions that would be paid for each proposed cross trade
of equity securities would be equal to approximately .05 cents per
share, reflecting only the necessary record-keeping costs for the
brokers. For debt securities, Mellon states that cross-trades would
produce transactions cost savings by eliminating the bid/offer spread
that normally would be paid to a broker-dealer to acquire or sell such
securities. Mellon also represents that participation in the cross-
trading program may enable the Accounts to obtain earlier opportunities
to acquire or sell certain securities. The applicant represents that
all brokers used in cross trade transactions would be unrelated to and
independent of Mellon and its affiliates.
Mellon states that the price for the securities involved in any
cross-trade will be set at the current market value for the securities
on the date of the transactions.
For equity securities, the price will be the closing price for the
security on the day of trading; unless the security was added to or
deleted from an index underlying an Indexed Account after the close of
trading, in which case the price shall be the opening price for that
security on the next business day after the announcement of the
addition or deletion.
Mellon will use independent pricing services to value all equity
securities which are cross-traded by the Indexed Accounts. The primary
service currently used by Mellon for pricing domestic equity securities
is Interactive Data Corporation, a subsidiary of Dunn & Bradstreet
Corporation. For pricing foreign equity securities, Mellon uses Morgan
Stanley & Co. or Vestek Systems. The applicable independent pricing
service provides the price in local currency rates and, if that
currency is other than U.S. dollars, also provides the U.S. Dollar
exchange rate. The equity securities are valued at the close of the
day, and thus equity security cross-trades would in all cases be
executed at the closing price received by Mellon from the relevant
independent pricing service. In addition, the same independent pricing
service will be employed to value any given equity security for both
the buy and sell sides of all cross-trades involving that equity
security. The identity of the applicable independent pricing service
for each equity security will be recorded on Mellon's records and will
be made available to any participant in the cross-trading program upon
request. If the independent pricing service for any particular equity
security is changed, a single new independent pricing service will be
selected for future pricings of that equity security.
For debt securities, the price will be the fair market value
determined as of the close of the day of trading pursuant to SEC Rule
17a-7(b) under the Investment Company Act of 1940. SEC Rule 17a-7(b)
contains four possible means of determining ``current market'' value
for either debt or equity securities depending on such factors as
whether the security is a reported security and whether its principal
market is an exchange. Mellon states that all debt securities that are
not a reported [[Page 17818]] security or traded on an exchange would
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 day of the cross-trade. Such prices would be determined in
accordance with Rule 17a-7(b)(4) on the basis of reasonable inquiry
from at least three sources that are broker-dealers or market-makers
independent of Mellon, except in those circumstances where fewer than
three independent sources exist to price a certain debt security (in
which event closing price quotations will be obtained from all
available sources).
Mellon intends that the requested exemption for cross-trade
transactions would apply, in addition to existing Indexed Accounts
currently maintained, to all Indexed Accounts which it may create in
the future which satisfy the conditions of the exemption, if granted.
7. Mellon proposes to engage in cross-trade transactions between
the Indexed Accounts and various Large Accounts that have total assets
in excess of $50 million. Mellon states that a Large Account could be
either: (i) An employee benefit plan within the meaning of section 3(3)
of the Act; or (ii) a portfolio of an institutional investor, other
than an investment company registered under the Investment Company Act
of 1940 (i.e. a mutual fund), such as an insurance company separate
account or general account, a governmental plan, a university endowment
fund, a charitable foundation fund, or a trust or other fund which is
exempt from taxation under section 501(a) of the Code.
Cross-trades between an Indexed Account and a Large Account would
occur only when the fiduciary or other appropriate decision-maker for
the Large Account, which is independent of Mellon and its affiliates,
is fully informed of the cross-trade technique, provides advance
written approval of such transactions, and is fully apprised of the
transaction results. Further, cross trades involving a Large Account
will be limited to those situations where Mellon has been authorized to
restructure all or a portion of the Large Account's assets into an
Indexed Account, or where Mellon is otherwise acting as a trading
adviser for a Large Account portfolio restructuring. Such
restructurings generally occur in connection with a Large Account
decision to invest in one of Mellon's Index or Model-Driven Funds, but
they may also involve requests for Mellon to carry out a restructuring
program independent of future investments in any of the Funds. In the
latter instance, Mellon's only role is that of a trading adviser,
carrying out a Large Account-initiated liquidation or restructuring.
When a Large Account engages Mellon to invest in a collective
investment fund that is index or model-driven or to arrange its own
passively-managed individual portfolio, the Large Account's assets must
be transformed into a portfolio that tracks a third-party index. In
implementing the transformation, Mellon is limited to recreating the
required portfolio and is not involved in any active investment
management decisions. The impetus for the investment comes from the
independent fiduciaries or other independent decision-makers for these
Large Accounts. By performing cross-trades with existing Index Accounts
where possible, Mellon would reduce the overall transactions costs by
both parties to the cross-trade. Mellon would have a similar lack of
discretion in the case of Large Accounts which request Mellon or an
affiliate to restructure a specific portfolio by liquidation. Mellon
would act as the trading advisor to the Large Account, arranging for
the securities transactions within a stated time so as to minimize
transaction costs. The opportunity to engage in cross-trades with Index
Accounts occurs only when those Accounts are required to purchase the
same securities which the Large Account is selling.
8. Mellon represents that its cross-trading program will be
effected pursuant to a proportional allocation system which will ensure
that no Indexed Account or Large Account will be favored over any other
such Account. In the event that the amount of a particular security
which all of the Indexed Accounts or Large Accounts propose to sell on
a given day is less than the amount of such security which all such
Accounts propose to buy, or vice versa, the direct cross-trade
opportunity would be allocated among all potential buyers or sellers of
the security on a pro rata basis. Thus, all of the Indexed Accounts or
Large Accounts participating in its cross-trade program will have
opportunities to participate on a proportional basis in any cross-trade
transactions during the operation of the program. This aspect of the
proposed cross-trading program would be part of the information
disclosed in writing to the fiduciaries or other decisionmakers of the
Large Accounts and to all employee benefit plans which invest in the
Index or Model-Driven Funds that are collective investment funds
maintained by Mellon or to all such plans that invest in any other
Indexed Account. In this regard, Mellon states that prior to any cross-
trading by an Indexed Account or a Large Account, each employee benefit
plan invested in the Account will be provided information which
describes the existence of the cross-trading program, the ``triggering
events'' which will create cross-trade opportunities, the pricing
mechanism that will be utilized for securities purchased or sold by the
Accounts, and the allocation methods and other procedures which will be
implemented by Mellon for its cross-trading practices. Any employee
benefit plan which subsequently invests in the Indexed Account or Large
Account will also be provided the same information prior to or
immediately after the plan's initial investment in the Account.
Acquisition, Holding and Disposition of MBC Stock
9. Mellon is also proposing that each Indexed Account be permitted
to invest in the MBC Stock if such stock is included among the
securities listed in the index utilized by the Indexed Account.\8\ For
example, MBC Stock is one of the stocks included in the S&P 500.
Because of the prohibitions of section 406 and 407 of the Act, the
Mellon S&P 500 Index Funds and other Indexed Accounts holding plan
assets which track the S&P 500 Index currently are not permitted to
invest in MBC stock. Mellon states that the exclusion of MBC Stock from
such Index Funds or other Indexed Accounts creates tracking error. To
correct the tracking error, Mellon proposes to purchase on the open
market, and hold, on behalf of all Indexed Accounts which hold plan
assets, the number of shares of MBC Stock necessary to replicate
correctly the weighting of MBC Stock in the portfolio relative to the
S&P 500 Index.\9\
\8\While certain of the debt indexes used by Mellon for the
Indexed Accounts may include debt securities issued by Mellon or an
affiliate (Mellon Debt), Mellon states that it does not acquire
Mellon Debt for any of its Indexed Accounts. Therefore, Mellon is
not requesting relief for any transactions involving Mellon Debt.
\9\In this regard, Mellon is not requesting any relief from
section 407(a) of the Act in connection with the acquisition and
holding of MBC Stock by the Mellon Plans which invest in the Mellon
S&P 500 Index Funds.
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Mellon represents that when MBC Stock is added to an index on which
an Indexed Account is based or is added to the portfolio of an Indexed
Account which tracks an index that includes MBC Stock, all acquisitions
necessary to bring the Indexed Account's holdings of MBC Stock to its
capitalization weighting in the index, other than through cross-trade
transactions meeting the conditions of Section I, will comply with the
SEC Rule 10b-18, including the limitations regarding the price paid for
such stock. Such acquisitions of [[Page 17819]] MBC Stock would occur
when an Indexed Account is first able to hold MBC Stock, such as
purchases that will occur for all Indexed Accounts that track the S&P
500 Index, or when MBC Stock is added to an Indexed Account's portfolio
as a result of the stock being added to another underlying index used
by the Account. SEC Rule 10b-18 provides a ``safe harbor'' for issuers
of securities from section 9(a)(2) of the Securities Exchange Act of
1934 and SEC Rule 10b-5 (which generally prohibits persons from
manipulating the price of a security and engaging in fraud in
connection with the purchase or sale of a security).
Mellon states that the conditions imposed by SEC Rule 10b-18 for
purchases of MBC Stock would be as follows: (a) All purchases would be
made from or through only one broker on any single day; (b) no
purchases would constitute the opening transaction in MBC Stock; (c)
purchases would not occur within one-half hour before the scheduled
close of trading on the NYSE; (d) the price would not be higher than
the current independent bid quotation or the last independent sale
price on the exchange, whichever is higher; and (e) if the purchases of
MBC Stock are not block purchases as defined by SEC Rule 10b-18(b)(4),
the total amount of purchases on any one day would not exceed the
higher of one round lot or the number of round lots closest to 25
percent of the trading volume for MBC Stock on that day.
In addition, subsequent to the initial acquisitions necessary to
bring an Indexed Account's holdings of MBC Stock to its capitalization
weighting in the index pursuant to the restrictions of SEC Rule 10b-18,
Mellon states that all aggregate daily purchases of MBC Stock will not
constitute more than the greater of either: (i) 15 percent of the
stock's average daily trading volume for the previous five days, or
(ii) 15 percent of the stock's trading volume on the date of the
transaction.
All additional purchases or subsequent sales of MBC Stock by the
Indexed Accounts that are made on a daily basis merely to track the S&P
500 Index or other appropriate index would be accomplished either
through cross-trade transactions, subject to the conditions of Section
I of the proposed exemption, or on the open market, subject to the
conditions of Section II the proposed exemption. However, daily
purchases of MBC Stock, which occur after all acquisitions of such
stock have been made in order to bring the Indexed Account's holdings
to the capitalization weighting of MBC Stock in the index, would not be
subject to the restrictions of Rule 10b-18, but would be subject to the
other conditions of Section II of this proposed exemption. In this
regard, Mellon believes that the restrictions of Rule 10b-18 are not
necessary for the volume of transactions which will be required by the
Indexed Accounts for daily tracking of an index in order to respond to
changes in the composition or weighting of MBC Stock in the index.
Mellon represents that no more than 5 percent of the total
outstanding shares of MBC Stock will be held in the aggregate by the
Indexed Accounts which hold plan assets. In addition, Mellon states
that the MBC Stock will not constitute more than 2 percent of the value
of any independent third-party index on which investments of an Indexed
Account are based.
10. Mellon will appoint an independent fiduciary for the purposes
of developing trading procedures for the initial acquisition of MBC
Stock on the open market by the Indexed Accounts that track the S&P 500
Index. The independent fiduciary will allow the Indexed Accounts to
acquire MBC Stock in the amounts necessary to track the S&P 500 Index
while minimizing the impact of the acquisitions on the market for MBC
Stock during the acquisition period. The independent fiduciary will
also monitor Mellon's compliance with the trading procedures for
accomplishing this goal.
The independent fiduciary and its principals will be completely
independent from Mellon and its affiliates. The independent fiduciary
will also be experienced in developing and operating investment
strategies for individual and collective investment funds that track
third-party indexes, such as the S&P 500 Index. In addition, Mellon
will require the independent fiduciary to represent that neither it nor
its principals, employees, or affiliates holds or controls any shares
of MBC Stock. During the exercise of the trading program by Mellon, no
principal employee of the independent fiduciary nor the fiduciary
itself will engage in any trading of any kind in MBC Stock.
Furthermore, the independent fiduciary will not act as the broker for
any purchases or sales of MBC Stock and will not receive any
commissions as a result of the trading program.
11. The independent fiduciary will have as its primary goal the
development of a trading program that minimizes the market impact of
purchases made pursuant to the initial acquisition program by the
Indexed Accounts. Thus, price increases that would be detrimental to
the interests of any employee benefit plan investors will be minimized.
The trading activities will be conducted in a low-profile, mechanical,
non-discretionary manner. In this regard, the independent fiduciary
will be required to utilize a computerized trading program that will
engage in a number of small purchases over the course of each day,
randomly timed. Such a program will allow Mellon to acquire the
necessary shares of MBC Stock for the Indexed Accounts that track the
S&P 500 Index with minimum impact on the market and in a manner that
will be in the best interests of any employee benefit plans that
maintain or participate in such Accounts.
12. The independent fiduciary will also be required to monitor
Mellon's compliance with the trading program and procedures developed
for the initial acquisition of MBC Stock. The independent fiduciary
will receive duplicate confirmation slips of all trades as well as the
``time and tape'' of all NYSE transactions in MBC Stock completed
immediately before and after each transaction and a time/price/quantity
record of all completed or attempted trades. The independent fiduciary
will be required to review the activities weekly to determine
compliance with the trading procedures and notify Mellon and the
Department should any non-compliance be detected. Should the trading
strategy need modifications due to unforeseen events or consequences,
the independent fiduciary will be required to consult with Mellon and
must approve in advance any alteration of the trading procedures. All
purchases of MBC Stock by the Indexed Accounts pursuant to the
independent fiduciary's trading program will comply with SEC Rule 10b-
18 and the conditions of the proposed exemption.
13. If Mellon provides Portfolio Management in Funds (i.e. PMF)
services to a plan, Mellon exercises some discretion in allocating and
reallocating the plan's assets among various collective investment
funds, including Mellon's S&P 500 Index Funds and other Index or Model-
Driven Funds. These allocations are based on a plan's investment
objectives, risk profile and market conditions. However, Mellon makes
the following representations with respect to the purchase, directly or
indirectly, of MBC Stock by plans utilizing PMF (PMF Plans):
(a) Mellon represents that any prohibited transactions (other
than cross-trade transactions described herein) which might occur as
a result of the discretionary allocation and reallocation of plan
assets among collective investment funds will be
[[Page 17820]] exempt from the prohibitions of section 406 of the
Act by reason of section 408(b)(8).\10\
\10\In the absence of regulations, the Department is not
prepared at this time to indicate whether section 408(b)(8) applies
to transactions described in section 406(b) of the Act. Accordingly,
the Department expresses no opinion as to whether Mellon's
discretionary allocation and reallocation services for any
collective investment funds maintained by Mellon satisfy the
requirements of section 408(b)(8) of the Act and is not proposing
any exemptive relief beyond that offered by section 408(b)(8).
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(b) Before MBC Stock is purchased by an Index or Model-Driven
Fund, the appropriate independent fiduciary for each PMF Plan which
is currently invested or could be invested in such Funds will be
furnished an explanation and a simple form to return on which
approval or disapproval of investments in the Fund including MBC
Stock could be indicated, together with a postage-paid return
envelope. If the form is not received by Mellon within 30 days,
Mellon may obtain a verbal response by telephone. If a verbal
response is obtained by telephone, Mellon will confirm the
fiduciary's decision in writing within five business days. In the
event no response is obtained from a PMF Plan fiduciary, the assets
of the plan will not be invested in any Index or Model-Driven Fund
which invests in MBC Stock and any plan assets currently invested in
such Funds at that time would be withdrawn.
(c) Each new management agreement with a PMF Plan will contain
language specifically approving or disapproving the investment in
any Index or Model-Driven Fund which might hold MBC Stock. The
fiduciary for each current PMF Plan will be informed that the
existing management agreement could be modified in the same way.
However, if the PMF Plan fiduciary does not specifically approve
language in the agreement allowing the investment of plan assets in
Funds which might hold MBC Stock, then no such investment will be
made by Mellon.
(d) Each PMF Plan will be informed on a quarterly basis of any
investment in or withdrawal from any Index or Model-Driven Fund
holding MBC Stock. The PMF Plan would be granted the election to
override Mellon's discretionary decision to invest in or withdraw
from such Funds. If the PMF Plan overrides Mellon's decision to
invest in or withdraw from the Funds, then Mellon will carry out the
plan's election as soon as possible after being notified of such
election.
14. In the event a third-party index utilized by Mellon for any
Indexed Account (in addition to the S&P 500 Index) adds MBC Stock or if
Mellon is otherwise unable to satisfy an Indexed Accounts' needs for
MBC Stock through cross-trades with other Indexed Accounts, Mellon will
acquire the necessary shares of MBC Stock on the open market. If Mellon
is required to purchase MBC Stock in the open market on behalf of any
Indexed Account in those circumstances, Mellon will determine whether
the stock can be acquired within 10 business days. If the MBC Stock
cannot be acquired within 10 business days, Mellon will appoint an
independent fiduciary to establish the procedures to be used to acquire
the MBC Stock and monitor Mellon's compliance with those procedures.
The fiduciary will be unrelated to and independent of Mellon and will
have expertise in the operation of index funds.
15. Mellon will appoint an independent fiduciary which will direct
the voting of the MBC Stock held by the Mellon S&P 500 Index Funds or
other Indexed Accounts. The independent fiduciary will be a consulting
firm specializing in corporate governance issues and proxy voting on
behalf of public and private pension funds, banks, trust companies,
money managers, insurance companies and other institutional investors
with large equity portfolios. The fiduciary will be required to
develop, and supply to Mellon, a corporate ownership manual which will
act as a guideline to the voting of proxies by institutional
fiduciaries, and their current voting guidelines. Mellon will provide
the independent fiduciary with all necessary information regarding the
Indexed Accounts that hold MBC Stock, the amount of MBC Stock held by
the Indexed Accounts on the record date for shareholder meetings of
MBC, and all proxy and consent materials with respect to MBC Stock. The
independent fiduciary will maintain records with respect to its
activities as an independent fiduciary on behalf of the Indexed
Accounts, including the number of MBC Stock shares voted, the manner in
which they were voted, and the rationale for the vote if the vote was
not consistent with the independent fiduciary's corporate ownership
manual and the current voting guidelines in effect at the time of the
vote. The independent fiduciary will supply Mellon with the information
after each shareholder meeting. The independent fiduciary will be
required to acknowledge that it will be acting as a fiduciary with
respect to the plans which invest in the Mellon S&P 500 Index Funds or
other Indexed Accounts which own MBC Stock, when voting such stock.
16. In summary, the applicant represents that the proposed cross-
trading transactions will satisfy the criteria of section 408(a) of the
Act for the following reasons: (a) An Indexed Account will buy or sell
securities only in response to various ``triggering events'' which are
not within Mellon's control or discretion; (b) a Large Account will
engage in cross trades only in situations where the investment
decisions relating to a particular portfolio restructuring program for
the Large Account are made by a fiduciary or other appropriate
decision-maker which is independent of Mellon; (c) all cross trade
transactions, including cross-trades involving MBC Stock, will occur
within three business days of the ``triggering event'' necessitating
the purchase or sale; (d) no cross-trades will be engaged in by an
Indexed Account that is model-driven for 10 business days subsequent to
any change made by Mellon to the model underlying the Account; (e) the
price for all securities will be the current market value for the
securities on the date of the transaction, which for equity securities
will be set at the closing (or opening, where appropriate) price for
the securities on the day of trading as determined by independent
pricing services, and for debt securities will be determined based on
quotations received from independent broker-dealers or market-makers as
of the close of the day pursuant to the procedures described in SEC
Rule 17a-7(b); (f) the Indexed Accounts and the Large Accounts will
save significant amounts of money on brokerage commissions; and (g)
Mellon will receive no additional compensation as a result of the
proposed cross trades nor with respect to the acquisition, holding and
disposition of MBC Stock.
The applicant further represents that the proposed MBC Stock
transactions will satisfy the criteria of section 408(a) of the Act for
the following reasons: (a) The acquisition, holding and disposition of
MBC Stock by an Indexed Account will occur solely to maintain strict
quantitative conformity with the underlying index; (b) all purchases of
MBC Stock by the Mellon S&P 500 Index Funds or other Indexed Accounts
which occur as a result of such stock being added to an index on which
an Indexed Account is based or being added to the portfolio of the
Indexed Account which tracks an index that includes MBC Stock, will be
made on the open market and will comply with the restrictions of SEC
Rule 10b-18; (c) subsequent to the initial acquisitions necessary to
bring an Indexed Account's holdings of MBC Stock to its capitalization
weighting in the index pursuant to the restrictions of SEC Rule 10b-18,
all aggregate daily purchases of MBC Stock will not constitute more
than the greater of either (i) 15 percent of the stock's average daily
trading volume for the previous five days, or (ii) 15 percent of the
stock's trading volume on the date of the transaction; (d) no more than
5 percent of the total outstanding shares of MBC Stock will be
[[Page 17821]] held in the aggregate by the Indexed Accounts which hold
plan assets; (e) the MBC Stock will not constitute more than 2 percent
of the value of any independent third-party index on which investments
of an Indexed Account are based; (f) the initial acquisitions of MBC
Stock by the Mellon S&P 500 Index Funds will be monitored by a
fiduciary independent of Mellon in an attempt to minimize market
disturbances; and (g) a fiduciary independent of Mellon will direct the
voting of any MBC Stock held by the Indexed Accounts.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Analex Corporation (Analex), Analex Corporation Retirement Plan (the
Plan) Located in Brook Park, OH
[Application No. D-9786]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code shall not apply retroactively to the past loan (the Past Loan)
made by the Plan to Analex (the Employer) in accordance with the
following conditions:
(1) The terms and conditions of the Past Loan were at least as
favorable to the Plan as those obtainable by the Plan under similar
circumstances in arm's-length transactions with unrelated parties;
(2) The amount of the Plan's assets involved in the Past Loan
did not exceed 15% of the Plan's total assets at any time during the
transaction;
(3) The Past Loan was at all times secured by collateral which
was valued at not less than 200% of the value of the Past Loan;
(4) Prior to the disbursement under the Loan agreement, an
independent, qualified fiduciary determined on behalf of the Plan
that the Past Loan was in the best interests of the Plan as an
investment for the Plan's portfolio, and protective of the Plan and
its participants and beneficiaries;
(5) The independent, qualified fiduciary reviewed the terms and
conditions of the exemption and the Past Loan, including the
applicable interest rate, the sufficiency of the collateral, the
financial condition of the Employer and compliance with the 15% of
Plan assets maximum loan amount, prior to approving the disbursement
under the Loan agreement;
(6) The fiduciary is monitoring the Past Loan to ensure
compliance with the terms and conditions of the exemption and the
Loan agreement;
(7) The Plan suffers no loss as a result of the Past Loan; and
(8) The Past Loan will be fully repaid by May 31, 1995.
Temporary Nature of Exemption
If granted, this proposed exemption would be effective for the
period from July 12, 1994 through May 31, 1995, the date by which the
Past Loan will be repaid.
Summary of Facts and Representations
1. The Plan is a profit sharing plan with a salary reduction
feature. There were 394 Plan participants and total assets of
$9,222,172 as of December 31, 1993. The Plan provides for participant
direction with respect to employee contributions to the Plan, and
provides that an Administrative Committee will direct the investment of
Employer contributions. Donald M. Zucker of Sorin, Zucker & Warfield,
Inc., the independent, qualified fiduciary (the Independent Fiduciary),
acted on behalf of the Plan with respect to the Past Loan.
2. The Employer is a Nevada corporation maintaining its principle
place of business in Brook Park, Ohio and operating in Florida,
Colorado, Texas, California, Virginia and New Mexico. The Employer
provides engineering services to commercial and government entities.
3. On July 20, 1993, the Department published a notice of proposed
exemption for prospective exemptive relief for a series of loans to the
Employer by the Plan (58 FR 38792). The final exemption (PTE 93-65) was
published in the Federal Register on September 22, 1993 at 58 FR 49325.
The exemption was expressly conditioned on compliance with the
limitations set forth therein. Among other conditions, PTE 93-65 was
subject to the condition that the Independent Fiduciary would monitor
the Loans to ensure compliance with the terms and conditions of the
exemption and the Loans. Under the terms of PTE 93-65, the Independent
Fiduciary was also responsible for reviewing, among other things, the
financial condition of the Employer prior to approving each
disbursement under the Loan agreement.
Section 6.4 of the written Loan agreement between the Plan and the
Employer provides that the Employer must maintain at all times certain
net worth requirements. In addition, section 6.5 of the Loan agreement
requires that the Employer maintain at all times a certain ratio of
current assets to current liabilities. (The net worth test and the
current ratio test are hereinafter referred to as the Covenants.)
The Employer represents that only one loan was made to the Employer
pursuant to PTE 93-65. It is represented that a $1.3 million loan was
made on September 29, 1993 and that the outstanding balance on that
loan as of December 13, 1994 was $991,525.41. On July 12, 1994, the
Employer entered into a settlement agreement regarding certain claims
with respect to activities of Xanalex Corporation, a predecessor
corporation to the Employer, which resulted in the Employer's failure
to satisfy the Covenants.
4. The Employer now seeks a retroactive exemption for the Past Loan
by the Plan to the Employer from the point in time when the Employer
failed to satisfy the Covenants. In support of its request for
retroactive relief, the Employer and the Independent Fiduciary maintain
that the interests of the Plan and its participants and beneficiaries
were fully protected throughout the duration of the Past Loan. In this
regard, the Independent Fiduciary was engaged to act on behalf of the
Plan with respect to the Past Loan. Any disbursement under the Loan
agreement required prior approval by the Independent Fiduciary and
could not be made unless the Independent Fiduciary found that such
disbursement was appropriate and in the interests of the Plan and its
participants and beneficiaries.
As further protection for the Plan and its participants and
beneficiaries, the Past Loan was collateralized by recorded perfected
security interests in accounts receivable (the Accounts Receivable) of
the Employer. Upon entering into the Past Loan, the Independent
Fiduciary received from the Employer any and all documentation needed
to evidence the Plan's security interest in the collateral securing the
Past Loan and the Independent Fiduciary ensured that appropriate
documentation was recorded to perfect the Plan's security interest. The
Independent Fiduciary was also responsible for ensuring that, at no
time while the Past Loan was outstanding, was the fair market value of
the Accounts Receivable securing such Loan less than 200% of the
outstanding face amount of such Past Loan.
5. The Independent Fiduciary maintains that, once apprised of the
pending breach of the Covenants, it took appropriate steps to protect
the interests of the Plan and its participants and beneficiaries. In
this regard, the Independent Fiduciary represents that,
[[Page 17822]] pursuant to its request, the default interest rate was
applied to calculate interest payments due after the Covenants were
breached.\11\ In addition, the Independent Fiduciary retained
independent counsel in June, 1994 to represent the interests of the
Plan in connection with the anticipated breach of the Covenants.
\11\The interest rate applicable upon breach of the Covenants is
the greater of 9% or the Advance Rate plus 2%. The Advance Rate is
defined as the greater of 7% or the prime rate as published in the
Wall Street Journal.
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6. The Independent Fiduciary represents that the Plan suffered no
loss as a result of the loan program and no term or condition of the
Past Loan was inconsistent with the terms and conditions described in
PTE 93-65, except for the failure to satisfy the Covenants. In
addition, the Independent Fiduciary represents that payments under the
Past Loan have remained current. Finally, the Employer will pay off the
remaining balance under the Past Loan no later than May 31, 1995.
7. In summary, the applicant represents that the past transaction
meets the statutory criteria for an exemption under section 408(a) of
the Act because: (a) The terms and conditions of the Past Loan were at
least as favorable to the Plan as those obtainable by the Plan under
similar circumstances in arm's length transactions with unrelated third
parties; (b) the Plan's independent fiduciary reviewed the terms and
conditions of the proposed exemption and the Past Loan and determined
that the Loan was in the best interest of the Plan's participants and
beneficiaries; (c) the independent fiduciary reviewed and approved the
Past Loan prior to making the disbursement; (d) the Past Loan was at
all times secured by collateral which was valued at not less that 200%
of the balance of the Loan; (e) the amount of the Past Loan did not
exceed 15% of the fair market value of the Plan's assets; (f) the
Employer will pay off the balance on the Past Loan by May 31, 1995; and
(g) except for the failure to satisfy the Covenants, the Past Loan
satisfied all other conditions of PTE 93-65.
FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Washington Mortgage Corporation, Inc. (WMC) Located in Seattle,
Washington
[Application No. D-9814]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) as follows:
I. If the exemption is granted, 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: 1) the sale, exchange or transfer between WMC
and its affiliates and certain employee benefit plans (the Plans) of
certain construction loans or participation interests therein to non-
party in interest entities; and 2) the sale, exchange or transfer
between WMC and its affiliates and the Plans of any construction or
permanent loan made by a Plan to a party in interest, and the resulting
extension of credit therefrom, provided that:
(a) The terms of the transactions are not less favorable to the
Plans than the terms generally available in arm's-length transactions
between unrelated parties;
(b) Such sales, exchanges or transfers are expressly approved by a
Plan fiduciary independent of WMC and its affiliates who has authority
to manage or control those Plan assets being invested in mortgages or
participation interests therein;
(c) No investment management, advisory, underwriting fee or sales
commission or similar compensation is paid to WMC or any of its
affiliates with regard to such sale, exchange or transfer;
(d) The decision to invest in a loan or a participation interest
therein is not part of an arrangement under which a fiduciary of a
Plan, acting with the knowledge of WMC or its affiliate, causes a
transaction to be made with or for the benefit of a party in interest
(as defined in section 3(14) of the Act) with respect to the Plan;
(e) At the time of its acquisition of a loan or participation
interest therein, no Plan will have more than 25% of its assets
invested in construction and permanent mortgages;
(f) WMC and its affiliates do not and will not act as fiduciaries
with regard to any Plan investing in permanent and construction loans
and interests therein as described in this proposed exemption; and
(g) WMC shall maintain or will cause to be maintained, for the
duration of any loan or participation interest therein sold to a Plan
pursuant to this exemption, such records as are necessary to determine
whether the conditions of this exemption have been met. The records
mentioned above must be unconditionally available at their customary
location for examination for purposes reasonably related to protecting
rights under the Plans, during normal business hours, by: Any trustee,
investment manager, employer of Plan participants, employee
organization whose members are covered by a Plan, participant or
beneficiary of a Plan.
II. If the exemption is granted, 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 any transactions to which such restrictions
would otherwise apply merely because WMC or any of its affiliates is
deemed to be a party in interest with respect to a Plan by virtue of
providing services to the Plan in connection with the subject loan
transactions (or because it has a relationship to such service provider
described in section 3(14)(F), (G), (H), or (I) of the Act), solely
because of the ownership of a loan or participation interest therein as
described in this exemption by such Plan.
III. Definitions. For purposes of this exemption,
(a) An ``affiliate'' of WMC includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with WMC,
(2) Any officer, director, employee, relative of, or partner in any
such person, and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Temporary Nature of Exemption: If the proposed exemption is
granted, it will be effective only for those transactions entered into
within eight years of the date on which the Final Grant of this
proposed exemption is published in the Federal Register.
Summary of Facts and Representations
1. WMC has originated income property (commercial and multifamily)
loans since 1949 for major institutional buyers, including pension
funds, life insurance companies and thrift institutions. In 1988, WMC
was acquired by Puget Sound Bancorp as a wholly owned subsidiary.
2. Through the decade of the 1980's and until 1993, WMC and its
affiliates engaged in permanent and construction loan origination and
servicing activities involving Plans as lenders. These activities were
conducted pursuant to the descriptions contained in proposed
[[Page 17823]] and final prohibited transaction exemptions granted by
the Department. These exemptions were PTE 85-1 (50 FR 1004, January 8,
1985), and PTE 89-78 (54 FR 35951, August 30, 1989). These exemptions
were obtained to allow WMC and its bank and non-bank affiliates to
engage in loan origination, sale and service activity and other
(unrelated) banking and non-banking commercial activity with Plans,
which would otherwise be prohibited under section 406(a) of the Act and
section 4975 of the Code.\12\ PTE 85-1 does not provide for any
expiration date, and PTE 89-78 expired on August 30, 1994.
\12\PTE 85-1 exempted transactions involving permanent loans
made to non-party in interest entities. PTE 89-78 provided relief
for transactions involving construction loans made to non-party in
interest entities, and construction and permanent loans made to
parties in interest.
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3. In 1993, through a series of acquisitions involving national
financial institutions, WMC became a subsidiary of KeyCorp, one of the
largest bank holding companies in the U.S. KeyCorp owns 21 banks and
trust companies and several related financial services companies, with
more than 1,300 branch and affiliate offices in 23 states. As of
December 31, 1994, KeyCorp had assets of $64.6 billion.
4. At present, WMC maintains offices in Seattle and Tacoma,
Washington, but does not do any loan originations. Following the
expiration of PTE 89-78 on August 30, 1994, WMC did not originate any
new loans to Plans. Prior loans are now serviced elsewhere except for a
loan made by the Carpenters Retirement Trust of Western Washington,
which is being serviced by KeyCorp Mortgage, Inc., an affiliate of WMC.
The applicant represents that seven other loans were placed with Plans
by WMC or its affiliates pursuant to PTE 89-78. The applicant
represents that no Plan has suffered any loss or default with respect
to any of these loans. To allow WMC and its affiliates to resume loan
origination and servicing activities with Plans, as a subsidiary of
KeyCorp or on its own following possible acquisition by outsiders,
KeyCorp has applied for renewal of PTE 89-78 to augment the relief
afforded under PTE 85-1.
5. The proposed activities of WMC and its affiliates may be
summarized as follows:
(1) WMC works on behalf of the borrower/developer in putting
together construction and permanent financing for commercial and
multifamily residential real estate projects. The role of WMC is to
provide or arrange for all of the construction financing and to arrange
a negotiated permanent commitment, so that construction financing is
paid off when the building is completed. In some cases, WMC or its
affiliates also participate in funding the construction or permanent
loans. WMC works on behalf of the borrower/developer to secure
permanent financing alternatively by: (a) Committing directly to the
borrower for permanent financing, with the intention of later securing
a permanent lender; (b) committing to the borrower based on a
commitment for permanent financing provided by another lending
institution to WMC; or (c) securing for the borrower, directly, a
commitment from another lending institution for the permanent
financing, with such a commitment going directly from the lender to the
borrower, but assigned to WMC during the construction phase as
additional collateral and security for the construction loan.
(2) Loan servicing might be done by WMC or an affiliate. Fees paid
to the servicer would run 1/8% to 1% per annum on the outstanding
principal balance of permanent loans. Servicing fees for construction
loans are determined as a percentage of the outstanding balance of the
loans. The applicant represents that all fees and charges are set in
advance in accordance with prevailing market conditions.\13\
\13\The Department is not proposing any relief herein for the
receipt of fees beyond that which is provided by the statutory
exemption contained in section 408(b)(2) of the Act.
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(3) In conducting these permanent and construction loan
origination, sales and servicing activities, WMC and its affiliates
would not act as a fiduciary to any lending Plan. Rather, all decisions
to invest in a loan would be made by Plan fiduciaries independent of
WMC and its affiliates. In the case of loans made to parties in
interest, these fiduciaries will also be independent of the party
receiving the loan proceeds.\14\ If construction is to be performed by
a contributing employer or other party in interest, WMC would require a
written statement executed by the independent fiduciary that its
decision to invest was not influenced or controlled by the borrower or
any other party in interest.\15\
\14\The applicant represents that no loan acquired by a Plan
which is made to a party in interest will be a loan to a fiduciary
or an affiliate thereof. In this regard, the Department notes that
any such loan would involve violations of section 406(b) of the Act
for which no relief is being proposed herein.
The applicant represents that, with respect to the subject
loans, construction and other services related to the project may,
or may not, be performed by a party in interest. The Department
notes, as it did in the proposal to both PTE 85-1 and 89-78, that
where the construction on the property which secures the loan is by
a contributing employer to the Plan and a principal of such employer
exercises fiduciary authority in approving the Plan's investment in
the loan, a separate prohibited transaction under section 406(b) of
the Act may occur, which transaction would not be covered by this
proposed exemption. See also condition (d) of Part I of this
proposed exemption which has the effect of precluding relief under
section 408(a) of the Act for certain transactions undertaken for
the benefit of parties in interest.
\15\The Department is not proposing exemptive relief herein for
any violation of section 406(b) of the Act resulting from the
provision of such construction services. See footnote above.
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(4) WMC's responsibilities in the administration or servicing of
loans sold to Plans will vary depending on the loan type. For example,
construction loans will involve: (a) Releasing construction loan draws
and hold backs as various conditions of the construction loan are
satisfied; (b) adjustment of hard-line cost items in the construction
loan budget to reflect actual costs; (c) making certain the borrower
corrects any non-monetary defaults; (d) implementing borrower-requested
change orders approved by WMC staff or independent inspectors; (e)
clearing mechanics' liens placed on the property during the course of
construction; and (f) insuring general compliance by all parties with a
construction loan agreement and related agreements.
(5) Any loan in default will involve decisions by the independent
Plan fiduciary, or by WMC in accordance with pre- approved guidelines
set forth in the loan documents. The loan documents, including default
guidelines, would be approved by the independent fiduciary. A Plan,
acting through its independent fiduciary, would also retain the ability
(with WMC's consent) to transfer, assign or otherwise dispose of its
interest in any construction loan, without payment of any fee or
penalty.
(6) As to purchase of either permanent or construction loans, or
interests therein, Plans would not pay WMC an investment management,
investment advisory, sales commission or similar fee. In addition,
Plans would not pay more for any loan interest than would be paid by an
unrelated party in an arm's-length transaction.
6. WMC represents that as a result of being a party in interest
with respect to Plans by virtue of servicing by it or affiliates of the
subject loans or participations purchased thereby, WMC and its
affiliates would be prohibited from engaging in other commercial
transactions with these Plans, such as the making of loans, which
transactions have nothing to do with the mortgages or participation
interests held by the Plans. The Department has considered WMC's
request for relief for such transactions and has decided that
[[Page 17824]] because the servicing relationship is established as a
necessary result of the purchase of a mortgage or participation
interest by a Plan, subsequent transactions between the parties
otherwise prohibited by section 406(a) are not likely to present an
inherent abuse potential. Accordingly, the Department has determined
that it would be appropriate to propose the relief from section 406(a)
contained in Part II of the proposed exemption.
7. In summary, the applicant represents that the proposed
transactions satisfy the criteria contained in section 408(a) of the
Act because: (a) The Plans will pay no more for the mortgages and
participation interests therein than would be paid by an unrelated
party in an arm's-length transaction; (b) all Plan decisions to invest
in mortgages and participation interests will be made by a Plan
fiduciary independent of WMC and its affiliates; (c) at the time of its
acquisition of a loan or a participation therein, no Plan will have
more than 25% of its assets invested in construction or permanent
mortgages; (d) the terms of the construction or permanent loans will
not be less favorable to the Plans than the terms generally available
in arm's-length transactions with unrelated parties; and (e) no
investment management, advisory, underwriting fee or sales commission
will be paid to WMC or any of its affiliates with regard to such sale,
exchange or transfer.
Notice to Interested Persons: The applicant represents that notice
will be provided to all trustees of Plans currently holding loan
investments originated and/or serviced by WMC and/or its affiliates. In
addition, WMC agrees to provide a copy of the notice of proposed
exemption and any subsequent grant of such exemption to all employee
benefit plans with whom WMC may contract in the future to provide
services as described herein. Such notification will be provided prior
to WMC entering into a contract to provide such services.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 31st day of March, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-8395 Filed 4-6-95; 8:45 am]
BILLING CODE 4510-29-P
