[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: 94-15006]
[[Page Unknown]]
[Federal Register: June 21, 1994]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
[Prohibited Transaction Exemption 94-4S; Application Nos. D-9337 and D-
9415]
Smith Barney, Inc. (SBI), Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration.
ACTION: Grant of individual exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers,
Inc. (Shearson Lehman).
-----------------------------------------------------------------------
SUMMARY: This document contains an individual exemption which
supersedes PTE 92-77 (57 FR 45833, October 5, 1992).1 This
exemption permits the replacement of Shearson Lehman with an entity
known as ``Smith Barney Inc.''2 It also allows SBI to adopt a
daily-traded collective investment fund (the GIC Fund) for Plans
investing in the Consulting Group Capital Markets Funds (the Trust).
The exemption provides conditional relief that is identical to that
provided by PTE 92-77 and it will affect participants and beneficiaries
of, and fiduciaries with respect to, Plans participating in the Trust.
\1\PTE 92-77 provides exemptive relief from section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of
the Code, with respect to the purchase or redemption of shares in
the Trust for TRAK Investments (which has been redesignated as the
``Consulting Group Capital Markets Funds'' and is referred to herein
as the Trust) by Plans investing therein. In addition, PTE 92-77
provides exemptive relief from the restrictions of section 406
(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(E) of the Code, with respect to the provision, by the
Consulting Group of Shearson Lehman, of investment advisory services
to an Independent Plan Fiduciary of a Plan participating in the TRAK
Personalized Investment Advisory Service (the TRAK Program) which
may result in such fiduciary's selection of a Portfolio in the TRAK
Program for the investment of Plan assets.
\2\Effective June 1, 1994, Smith Barney Shearson, Inc. (SBS) was
renamed ``Smith Barney Inc.'' Hereinafter, SBS is referred to in
this grant notice as either ``Smith Barney Inc.'' or ``SBI.''
---------------------------------------------------------------------------
EFFECTIVE DATE: This exemption is effective July 31, 1993 for
transactions that are covered by PTE 92-77. With respect to
transactions involving the GIC Fund, the exemption is effective March
29, 1994.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, telephone (202) 219-8881. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: On March 29, 1994, the Department of Labor
(the Department) published a notice of proposed exemption (the Notice)
in the Federal Register (59 FR 14680) that would replace PTE 92-77. PTE
92-77 provides an exemption from certain prohibited transaction
restrictions of section 406 of the Employee Retirement Income Security
Act of 1974 (the Act) and from the sanctions resulting from the
application of section 4975 of the Internal Revenue Code of 1986 (the
Code), as amended, by reason of section 4975(c)(1) of the Code. The
proposed exemption was requested in an application filed by SBI
pursuant to section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures (the Procedures) set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Accordingly, this replacement exemption is
being issued solely by the Department.
The Notice gave interested persons an opportunity to comment on the
proposed exemption and to request a public hearing. The only written
comments submitted to the Department during the comment period were
made by SBI. These comments expressed SBI's substantive concerns about
the Notice and offered suggestions for clarifying certain language of
the Notice. Discussed below are SBI's comments and the Department's
responses thereto. Also discussed is a comment made by the Department.
SBI's Comments
SBI notes that there is an ambiguity regarding the effective date
of the GIC Fund. SBI represents that the Notice provides in the last
paragraph under the heading ``Supplementary Information,'' that with
respect to transactions involving the GIC Fund, the exemption ``would
become effective as of the date of the grant of the notice of
pendency.'' However, under the captions Effective Dates and Dates, SBI
explains that the Notice states that the exemption will be effective
``upon its grant,'' or ``as of the date the grant notice is
published.'' Because it was the intention of the parties that the
effective date for transactions involving the GIC Fund would be March
29, 1994, the date of publication of the Notice in the Federal
Register, SBI requests that the Department make the exemption
retroactive to this date for the GIC Fund.
The Department has considered SBI's comment and has made the
requested modification.
SBI wishes to modify the exemption in order that it may offer the
GIC Fund to both fiduciary-directed Plans as well as Plans providing
for participant-directed investments (the Section 404(c) Plans). The
Department believes this comment has merit and that it would be
potentially beneficial to participants and beneficiaries since it
provides different types of Plans participating in the TRAK Program
with the opportunity to invest in the GIC Fund.
SBI explains that in the preamble to the Notice there is a
statement to the effect that it will ``describe the GIC Fund in a
prospectus (the Prospectus) and promotional materials that will be
furnished to Section 404(c) Plan participants.'' SBI represents that
interests in the GIC Fund are not subject to the registration and
Prospectus delivery requirements of the Securities Act of 1933. Also,
SBI points out that the conditions of PTE 92-77 require it to deliver
copies of the Trust Prospectus only to the Plan administrator and not
to the individual participants. Because it has no practical means of
delivering Prospectuses or other disclosures to participants, SBI
indicates that the responsibility for providing these materials to
participants rests with the Plan administrator. In this regard, SBI
represents that the disclosure information it will make available to
all Plans proposing to invest in the GIC Fund will include copies of
the Trust Prospectus and a separate description of the GIC Fund's
investment objectives, policies and processes. SBI explains that its
description of the GIC Fund will be designed to provide a participant
with sufficient information in order that the participant can make an
informed investment decision.
The Department concurs with these comments.
In addition to principal comments discussed above, SBI has made
certain technical clarifications and updates to the Notice in the
following areas:
(1) General.
a. Redesignations. SBI explains that effective December 31, 1993,
Primerica Corporation changed its name to ``The Travelers Inc.'' and
that effective May 9, 1994, the ``Trust for TRAK Investments'' was
renamed ``Consulting Group Capital Markets Funds.'' Also effective June
1, 1994, ``Smith Barney Shearson Inc.'' was renamed ``Smith Barney
Inc.''
(2) Supplementary Information.
a. Asset Sale Transaction. SBI explains that the transaction by
which Smith Barney Harris Upham & Company, Inc. (Smith Barney) acquired
Shearson Lehman and its Asset Management Divisions was an asset sale
and not a merger. Accordingly, SBI suggests that the fourth sentence of
the third paragraph under the heading ``Supplementary Information,''
read as follows: ``As a result of the transaction, most of the assets
and business of the Shearson divisions were transferred to Smith
Barney, which was renamed `Smith Barney Shearson Inc.'''
b. Fees Paid to Transfer Agent. SBI represents that in the seventh
paragraph under the heading ``Supplementary Information,'' the Notice
states that The Shareholder Services Group (TSSG), as transfer agent,
will charge a fee of $8.50 to $9.50 per plan for its transfer agency
services. While these are the current expected fee levels, SBI notes
that such fees may increase or decrease in the future. Because TSSG is
no longer an affiliate, SBI requests that the paragraph be amended to
provide that TSSG as transfer agent will receive a reasonable fee for
its services rather than specifying a precise dollar amount.
(3) General Conditions.
a. Written Disclosures. Section II(k)(1)(F) of the General
Conditions of the Notice states that SBI will provide copies of PTE 92-
77 and documents pertaining to the proposed replacement exemption to
each Plan participating in the TRAK Program. SBI wishes to clarify that
the ``documents pertaining to the proposed replacement exemption''
refer to copies of the Notice and, when issued, the final exemption.
The Department concurs with the above supplemental clarifications
to the Notice that have been made by SBI and hereby incorporates these
changes, as well as the substantive changes also described above, by
reference into the Notice and, where applicable, into this final
exemption.
Department's Comment
Section III of the Notice, which is captioned ``Definitions,''
provides several meanings of the term ``Independent Plan Fiduciary'' in
subparagraph (b). For purposes of the exemption, the term ``Independent
Plan Fiduciary'' may include a Plan administrator, a participant in a
Keogh Plan, an individual covered under a self-directed IRA or a
trustee of a Title I Plan that does not permit participant-directed
investments as contemplated under section 404(c) of the Act. However,
due to an oversight, the definition does not extend to a participant in
a Section 404(c) Plan. Because the TRAK Program is being marketed as an
investment alternative to Section 404(c) Plans and the individual
participant of such Plan makes the decision on whether to invest
therein, the Department has amended the definition of the term
``Independent Plan Fiduciary'' by providing a new subparagraph (b)(5)
which includes a Section 404(c) Plan participant.
Accordingly, after consideration of the entire exemption record,
including the written comments, the Department has determined to grant
the replacement exemption as modified herein.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, a fiduciary to
discharge his or her duties respecting the plan solely in the interest
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, the Department has found that the exemption is
administratively feasible, in the interest of the Plans and their
participants and beneficiaries and protective of the rights of
participants and beneficiaries of the Plans; and
(3) The exemption is supplemental to, and not in derogation of, any
other provisions of the Act and the Code, including statutory or
administrative exemptions. Furthermore, the fact that a transaction is
subject to an administrative or statutory exemption is not dispositive
of whether the transaction is in fact a prohibited transaction.
(4) In addition to transactions involving the GIC Fund, the
exemption is applicable to the transactions previously described in PTE
92-77 only if the conditions specified therein are met.
Exemption
Under the authority of section 408(a) of the Act and section
4975(c)(2) of the Code and in accordance with the Procedures cited
above, the Department hereby replaces PTE 92-77 as follows:
Section I. Covered Transactions
(a) The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (D) of the Code, shall not apply to
the purchase or redemption of shares by Plans in the SBI-established
Trust in connection with such Plans' participation in the TRAK
Personalized Investment Advisory Service.
(b) The restrictions of section 406(b) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1) (E) and (F) of the Code, shall not apply to the
provision, by the Consulting Group, of investment advisory services to
an Independent Plan Fiduciary of a participating Plan which may result
in such fiduciary's selection of a Portfolio in the TRAK Program for
the investment of Plan assets.
The exemption is subject to the following conditions that are set
forth in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved
by an Independent Plan Fiduciary. For purposes of this requirement, an
employee, officer or director of SBI and/or its affiliates covered by
an IRA not subject to Title I of the Act will be considered an
Independent Plan Fiduciary with respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the
acquisition or redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares shall
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations based
upon objective criteria.
(f) Any recommendation or evaluation made by the Consulting Group
to an Independent Plan Fiduciary will be implemented only at the
express direction of such independent fiduciary.
(g) The Consulting Group will generally give investment advice in
writing to an Independent Plan Fiduciary with respect to all available
Portfolios. However, in the case of a Section 404(c) Plan, the
Consulting Group will provide investment advice that is limited to the
Portfolios made available under the Plan.
(h) Any Sub-Adviser that acts for the Trust to exercise investment
discretion over a Portfolio will be independent of SBI and its
affiliates.
(i) Immediately following the acquisition by a Portfolio of any
securities that are issued by SBI and/or its affiliates, the percentage
of that Portfolio's net assets invested in such securities will not
exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to
the Consulting Group for investment advisory services rendered to such
Plan will be offset by such amount as is necessary to assure that the
Consulting Group retains no more than 20 basis points from any
Portfolio (with the exception of the Government Money Investments
Portfolio and the GIC Fund Portfolio for which the Consulting Group and
SBI Trust will retain no investment management fee) which contains
investments attributable to the Plan investor.
(k) With respect to its participation in the TRAK Program prior to
purchasing Trust shares,
(1) Each Plan will receive the following written or oral
disclosures from the Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, SBI and its
subsidiaries and the compensation paid to such entities.3
---------------------------------------------------------------------------
\3\The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
Independent Plan Fiduciary from the general fiduciary responsibility
provisions of section 404 of the Act. In this regard, the Department
expects the Independent Plan Fiduciary to consider carefully the
totality of fees and expenses to be paid by the Plan including the
fees paid directly to SBI or to other third parties and/or
indirectly through the Trust to SBI.
---------------------------------------------------------------------------
(B) Upon written or oral request to SBI, a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest,
the investment policies and strategies that the Portfolios may utilize
and certain risks attendant to those investments, policies and
strategies.
(C) A copy of the investment advisory agreement between the
Consulting Group and such Plan relating to participation in the TRAK
Program.
(D) Upon written request of SBI, a copy of the respective
investment advisory agreement between the Consulting Group and the Sub-
Advisers.
(E) In the case of a Section 404(c) Plan, if required by the
arrangement negotiated between the Consulting Group and the Plan, an
explanation by an SBI Financial Consultant (the Financial Consultant)
to eligible participants in such Plan, of the services offered under
the TRAK Program and the operation and objectives of the Portfolios.
(F) Copies of PTE 92-77 and documents pertaining to the replacement
exemption.
(2) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing, prior to purchasing Trust shares that such fiduciary has
received copies of the documents described above in subparagraph (k)(1)
of this Section.
(3) With respect to a Section 404(c) Plan, written acknowledgement
of the receipt of such documents will be provided by the Independent
Plan Fiduciary (i.e., the Plan administrator, trustee or named
fiduciary, as the recordholder of Trust shares). Such Independent Plan
Fiduciary will be required to represent in writing to SBI that such
fiduciary is (a) independent of SBI and its affiliates and (b)
knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the
Act, where investment decisions are made by a trustee, investment
manager or a named fiduciary, such Independent Plan Fiduciary is
required to acknowledge, in writing, receipt of such documents and
represent to SBI that such fiduciary is (a) independent of SBI and its
affiliates, (b) capable of making an independent decision regarding the
investment of Plan assets and (c) knowledgeable with respect to the
Plan in administrative matters and funding matters related thereto, and
able to make an informed decision concerning participation in the TRAK
Program.
(l) Subsequent to its participation in the TRAK Program, each Plan
receives the following written or oral disclosures with respect to its
ongoing participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include
financial statement for the Trust and investment management fees paid
by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis
and an evaluation of a Plan investor's account to ascertain whether the
Plan's investment objectives have been met and recommending, if
required, changes in Portfolio allocations.
(3) If required by the arrangement negotiated between the
Consulting Group and a Section 404(c) Plan, a quarterly, detailed
investment performance monitoring report, in writing, provided to an
Independent Plan Fiduciary of such Plan showing, Plan level asset
allocations, Plan cash flow analysis and annualized risk adjusted rates
of return for Plan investments. In addition, if required by such
arrangement, Financial Consultants will meet periodically with
Independent Plan Fiduciaries of Section 404(c) Plans to discuss the
report as well as with eligible participants to review their accounts'
performance.
(4) If required by the arrangement negotiated between the
Consulting Group and a Section 404(c) Plan, a quarterly participant
performance monitoring report provided to a Plan participant which
accompanies the participant's benefit statement and describes the
investment performance of the Portfolios, the investment performance of
the participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to
amend his or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all
Plans of the (a) percentage of each Portfolio's brokerage commissions
that are paid to SBI and its affiliates and (b) the average brokerage
commission per share paid by each Portfolio to SBI and its affiliates,
as compared to the average brokerage commission per share paid by the
Trust to brokers other than SBI and its affiliates, both expressed as
cents per share.
(m) SBI shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (n) of this
Section to determine whether the conditions of this exemption have been
met, except that (1) a prohibited transaction will not be considered to
have occurred if, due to circumstances beyond the control of SBI and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period, and (2) no party in interest other than SBI shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act, or to the taxes imposed by section 4975 (a) and (b)
of the Code, if the records are not maintained, or are not available
for examination as required by paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and
notwithstanding any provisions of subsections (a) (2) and (b) of
section 504 of the Act, the records referred to in paragraph (m) of
this Section shall be unconditionally available at their customary
location during normal business hours by:
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of
this paragraph (n) shall be authorized to examine the trade secrets of
SBI or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this exemption:
(a) An ``affiliate'' of SBI includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with SBI. (For purposes of this subsection, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(b) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is
independent of SBI and its affiliates and is either
(1) A Plan administrator, sponsor, trustee or named fiduciary, as
the recordholder of Trust shares of a Section 404(c) Plan,
(2) A participant in a Keogh Plan,
(3) An individual covered under a self-directed IRA which invests
in Trust shares,
(4) A trustee, investment manager or named fiduciary responsible
for investment decisions in the case of a Title I Plan that does not
permit individual direction as contemplated by Section 404(c) of the
Act, or
(5) A participant in a Section 404(c) Plan.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for
transactions involving the GIC Fund. The exemption will be effective
March 29, 1994 with respect to the inclusion of the GIC Fund in the
TRAK Program.
The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
applications for exemption are true and complete and accurately
describe all material terms of the transactions. In the case of
continuing transactions, if any of the material facts or
representations described in the applications change, the exemption
will cease to apply as of the date of such change. In the event of any
such change, an application for a new exemption must be made to the
Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant PTE 92-77, refer to the
proposed exemption and grant notice which are cited above.
Signed at Washington, DC, this 16th day of June 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-15006 Filed 6-20-94; 8:45 am]
BILLING CODE 4510-29-P
