[Federal Register Volume 59, Number 118 (Tuesday, June 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15005]
[[Page Unknown]]
[Federal Register: June 21, 1994]
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DEPARTMENT OF LABOR
[Prohibited Transaction Exemption 94-47; Exemption Application No. D-
9516]
Grant of individual exemptions; Bank of America National Trust
and Savings Association
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of Individual Exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, DC. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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 proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Bank of America National Trust and Savings Association (Bank of
America), Located in San Francisco, California
[Prohibited Transaction Exemption 94-47; Exemption Application No.
D-9516].
Exemption
Part I--Exemption for Cross-Trading Between Certain Funds
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 stock (including the stock of
BankAmerica Corporation (BAC)) between Index Funds and/or Model Driven
funds (collectively, the Funds); and (2) the purchase and sale of
stocks (including the common stock of BAC) between Index or Model-
Driven Funds and various large pension plans (the Large Plans) pursuant
to portfolio restructuring programs of the Large Plans; provided that
the following conditions and the General Conditions of Part III are
met:
(a) The Index or Model-Driven Fund is based on an index which
represents the investment performance of a specific segment of the
public market for equity 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 Bank
of America and its affiliates. The index must be a generally accepted
standardized index of securities which is not specifically tailored for
the use of Bank of America or its affiliates.
(b) The price for the stock is set at the closing price for that
stock on the day of trading; unless the stock was added to or deleted
from an index underlying a Fund (or Funds) after the close of trading,
in which case the price will be the opening price for that stock on the
next business day after the announcement of the addition or deletion.
(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 and/or
model underlying a Fund;
(2) A change in the overall level of investment in a Fund as a
result of investments and withdrawals made on the Fund's regularly-
scheduled opening date; or
(3) A declaration by Bank of America (recorded on Bank of America's
records) that a ``triggering event'' has occurred, which will be made
upon an accumulation of cash in a Fund attributable to dividends and/or
tender offers for portfolio securities equal to not less than .05
percent and not more than .5 percent of the Fund's total value;
(d) In the event that a number of shares of a particular stock
which all of the Funds or Large Plans propose to sell on a given day is
less than the number of shares of such stock which all of the Funds or
the Large Plans propose to buy, or vice versa, the direct cross-trade
opportunity must be allocated among potential buyers or sellers on a
pro rata basis.
(e) With respect to transactions involving a Large Plan:
(1) It has assets in excess of $50 million;
(2) Fiduciaries of the Large Plan who are independent of Bank of
America are, prior to any cross-trade transactions, fully informed of
the cross-trade technique and provide advance written approval of such
transactions. Within 45 days of the completion of the Large Plan's
portfolio restructuring program, such fiduciaries shall be fully
appraised in writing of the transaction results. However, if such
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.
(3) Such Large Plan transactions occur only in situations where
Bank of America has been authorized to restructure all or a portion of
the Large Plan's portfolio into an Index or Model-Driven Fund
(including a separate account based on an index or computer model) or
to act as a ``trading adviser'' in carrying out a Large Plan-initiated
liquidation or restructuring of its equity portfolio; and
(f) Bank of America receives no additional direct or indirect
compensation as a result of the cross-trade transaction.
(g) Prior to any proposed cross-trading by a Fund, Bank of America
provides to each employee benefit plan which invests in a Fund
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 stocks purchased or
sold by the Funds, and the allocation methods and other procedures
which will be implemented by Bank of America for its cross-trading
practices. Any such employee benefit plan which subsequently invests in
a Fund shall be provided the same information prior to or immediately
after the plan's initial investment in a Fund.
Part II--Exemption for the Acquisition, Holding and Disposition of
BAC 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 BAC by Index or Model-Driven Funds, if the following
conditions and the General Conditions of Part III are met:
(a) The acquisition or disposition of the BAC stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Index or Model-Driven Fund is based;
(b) All acquisitions and dispositions, other than through cross-
trade transactions meeting the conditions of Part I, will comply with
Rule 10b-18 of the Securities and Exchange Commission, including the
limitations regarding the price paid or received for such stock;
(c) Aggregate daily purchases of BAC stock, other than cross-trade
purchases meeting the conditions of Part I, will constitute no more
than the greater of: (1) 10 percent of the stock's average daily
trading volume for the previous five days; or (2) 10 percent of the
stock's trading volume on the date of the transaction;
(d) If the necessary number of shares of BAC stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Index or Model-Driven Fund(s) to require BAC
stock, Bank of America will appoint a fiduciary which is independent of
Bank of America and its affiliates to design acquisition procedures and
monitor Bank of America's compliance with such procedures;
(e) All purchases and sales of BAC stock, other than cross-trades
meeting the conditions of Part I, will be executed on the national
exchange on which BAC stock is primarily traded;
(f) No transactions will involve purchases from, or sales to, Bank
of America or any affiliate, officer, director or employee of Bank of
America or any party in interest with respect to a plan which has
invested in an Index or Model-Driven Fund. This requirement does not
preclude purchases and sales of BAC stock in cross-trade transactions
meeting the conditions of Part I;
(g) No more than five (5) percent of the total amount of BAC stock
issued and outstanding at any time shall be held in the aggregate by
the Index and Model-Driven Funds;
(h) BAC stock shall constitute no more than two percent of the
value of any independent third-party index on which the investments of
an Index or Model-Driven Fund are based;
(i) A plan fiduciary independent of Bank of America authorizes the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds BAC stock; and
(j) A fiduciary independent of Bank of America and its affiliates
will direct the voting of the BAC stock held by an Index or Model-
Driven Fund on any matter in which shareholders of BAC stock are
required or permitted to vote.
Part III--General Conditions
(a) Bank of America 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 Part
to determine whether the conditions of the exemption have been met,
except that a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Bank of America
or its affiliates, the records are lost or destroyed prior to the end
of the six-year period.
(b)(1) Except as provided in paragraph (2) of this subsection (b)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in subsection (a) of
this Part 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 Index or Model-
Driven Fund 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 Index or Model-Driven Fund or any duly authorized
employee or representative of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Index or Model-Driven Fund, or any duly authorized employee or
representative of such participant or beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this subsection (b) shall be authorized to examine trade secrets of
Bank of America, any of its affiliates, or commercial or financial
information which is privileged or confidential.
Part IV--Definitions
(1) Index Fund--Any investment fund, account or portfolio
sponsored, maintained and/or trusteed by Bank of America, or an
affiliate of Bank of America, in which one or more investors invest
which is designed to replicate the capitalization-weighted composition
of a stock index which satisfies the conditions of Part I(a) and Part
II(h).
(2) Model-Driven Fund--Any investment fund, account or portfolio
sponsored, maintained and/or trusteed by Bank of America, or an
affiliate of the Bank of America, in which one or more investors invest
which is based on computer models using prescribed objective criteria
to transform an independent third-party stock index which satisfies the
conditions of Part I(a) and Part II(h).
(3) Opening date--The regularly-scheduled date on which investments
in or withdrawals from an Index or Model-Driven Fund may be made.
(4) Trading adviser--A person whose role is limited to arranging a
Large Plan-initiated liquidation or equity restructuring within a
stated time so as to minimize transaction costs.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on April 22, 1994 at 59 FR
19255.
WRITTEN COMMENTS: The Department received one written comment and no
requests for a hearing. The written comment was submitted on behalf of
the Bank of America National Trust and Savings Association (the
Applicant), and it addresses two points which are summarized as
follows:
1. Section 6 in the summary of facts and representations in the
notice of proposed exemption (the Summary) commences with the following
statement: ``The Bank proposes to take advantage of opportunities to
direct the cross-trading of securities directly between the Funds, or
directly with other client accounts for which the Bank is the
investment manager, or with mutual funds or institutional accounts for
which the Bank is the investment advisor.'' However, the Applicant
points out that the proposed exemption does not provide exemptive
relief as broad as that reflected in the statement.
The Department notes that the appearance of the aforementioned
statement in the Summary is an error. The Applicant did not request,
and the Department did not propose, exemptive relief for the Funds'
cross-trade transactions with ``other client accounts for which the
Bank is the investment manager, or with mutual funds or institutional
accounts for which the Bank is the investment advisor.'' Despite the
erroneous appearance of the aforementioned statement in the Summary,
the Department notes that the operative language of the proposed
exemption included only transactions between Index Funds and/or Model
Driven Funds (the Funds), and between the Funds and Large Plans (as
defined in Part I, Section (e) of the proposed exemption), including
the purchase and sale of common stock of BAC. Like the proposed
exemption, the final exemption is restricted to those transactions
defined and identified in Parts I through IV of the exemption, which do
not include transactions with ``other client accounts for which the
Bank is the investment manager, or with mutual funds or institutional
accounts for which the Bank is the investment advisor.''
2. The Applicant notes a typographical error in Section 9 of the
Summary: The reference to rule 10b-189, in the second paragraph, line
10, should read as a reference to SEC Rule 10b-18.
ADDITIONS: In this final exemption the Department has included a new
condition (g) in Part I--Exemption for Cross-Trading Between Certain
Funds, which was inadvertently omitted from the notice of proposed
exemption. Condition (g) requires the Bank of America to provide
certain information regarding its cross-trading program to employee
benefit plans which invest in the Funds.
After consideration of the entire record, including the Applicant's
comment, the Department has determined to grant the exemption.
FOR FURTHER INFORMATION CONTACT: Ronald Willett 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 or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application are true and complete and accurately describe all material
terms of the transaction which is the subject of the exemption. In the
case of continuing exemption transactions, if any of the material facts
or representations described in the application change after the
exemption is granted, the exemption will cease to apply as of the date
of such change. In the event of any such change, application for a new
exemption may be made to the Department.
Signed at Washington, DC, this 16th day of June 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-15005 Filed 6-20-94; 8:45 am]
BILLING CODE 4510-29-P
