[Federal Register Volume 59, Number 158 (Wednesday, August 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20010]
[[Page Unknown]]
[Federal Register: August 17, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9240, et al.]
Proposed Exemptions; The Bank of California
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) the name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The Bank of California, N.A., Located in San Francisco, California;
Proposed Exemption
[Application No. D-9240]
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 C.F.R.
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).1
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\1\For purposes of this exemption reference to specific
provisions of title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I--Exemption for In-Kind Transfer of Assets
If the exemption is granted the restrictions of section 406(a) 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) shall not apply, effective November 12, 1993,
to the in-kind transfer to any diversified open-end investment company
(the Fund or Funds) registered under the Investment Company Act of 1940
to which the Bank of California, N.A. or any of its affiliates
(collectively, the Bank) serves as investment adviser and may provide
other services of the assets of various employee benefit plans (the
Plan or Plans) that are either held in certain collective investment
funds (the CIF or CIFs) maintained by the Bank or otherwise held by the
Bank as trustee, investment manager, or in any other capacity as
fiduciary on behalf of the Plans, in exchange for shares of such Funds;
provided that the following conditions are met:
(a) A fiduciary (the Second Fiduciary) who is acting on behalf of
each affected Plan and who is independent of and unrelated to the Bank,
as defined in paragraph (g) of section III below, receives advance
written notice of the in-kind transfer of assets of the Plans or the
CIFs in exchange for shares of the Fund and the disclosures described
in paragraph (g) of section II below;
(b) On the basis of the information described in paragraph (g) of
section II below, the Second Fiduciary authorizes in writing the in-
kind transfer of assets of the Plans in exchange for shares of the
Funds, the investment of such assets in corresponding portfolios of the
Funds, and the fees received by the Bank in connection with its
services to the Fund. Such authorization by the Second Fiduciary to be
consistent with the responsibilities, obligations, and duties imposed
on fiduciaries by Part 4 of Title I of the Act;
(c) No sales commissions are paid by the Plans in connection with
the in-kind transfers of asset of the Plans or the CIFs in exchange for
shares of the Funds;
(d) All or a pro rata portion of the assets of the Plans held in
the CIFs or all or a pro rata portion of the assets of the Plans held
by the Bank in any capacities as fiduciary on behalf of such Plans are
transferred in-kind to the Funds in exchange for shares of such Funds,
(e) The Plans or the CIFs receive shares of the Funds that are
equal in value to the assets of the Plans or the CIFs exchanged for
such shares;
(f) The value of the assets of the Plans or the CIFs to be
transferred in-kind and the net asset value of the Funds receiving
those assets in exchange for shares is determined in a single valuation
performed in the same manner and at the close of business on the same
day, in accordance with the procedures set forth in Rule 17a-7(b) (Rule
17a-7) under the Investment Company Act of 1940, as amended from time
to time or any successor rule, regulation, or similar pronouncement;
(g) Not later than thirty (30) days after completion of each in-
kind transfer of assets of the Plans or the CIFs in exchange for shares
of the Funds, the Bank sends by regular mail to the Second Fiduciary,
who is acting on behalf of each affected Plan and who is independent of
and unrelated to the Bank, as defined in paragraph (g) of section III
below, a written confirmation that contains the following information:
(1) the identity of each of the assets that was valued for purposes
of the transaction in accordance with Rule 17a-7(b)(4) under the
Investment Company Act of 1940;
(2) the price of each of the assets involved in the transaction;
and
(3) the identity of each pricing service or market maker consulted
in determining the value of such assets; and
(h) For all conversion transactions that occur after the date of
this proposed exemption, the Bank, no later than ninety (90) days after
completion of each in-kind transfer of assets of the Plans or the CIFs
in exchange for shares of the Funds, will send by regular mail to the
Second Fiduciary, who is acting on behalf of each affected Plan and who
is independent of and unrelated to the Bank, as defined in paragraph
(g) of section III below, a written confirmation that contains the
following information:
(1) the number of CIF units held by each affected Plan immediately
before the conversion (and the related per unit value or the aggregate
dollar value of the units transferred); and
(2) the number of shares in the Funds that are held by each
affected Plan following the conversion (and the related per share net
asset value or the aggregate dollar value of the shares received).
(i) The conditions set forth in paragraphs (d), (e), (f), (o), (p),
(q) and (r) of section II below are satisfied;
Section II--Exemption for Receipt of Fees From Funds
If the exemption is granted, effective November 12, 1993, the
restrictions of section 406(a) 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)(D) through (F) of the Code shall not
apply to the receipt of fees by the Bank from the Funds for acting as
the investment adviser, custodian, sub-administrator, and other service
provider for the Funds in connection with the investment in the Funds
by the Plans for which the Bank acts as a fiduciary provided that:
(a) No sales commissions are paid by the Plans in connection with
purchases or sales of shares of the Funds and no redemption fees are
paid in connection with the sale of such shares by the Plans to the
Funds;
(b) The price paid or received by the Plans for shares in the Funds
is the net asset value per share, as defined in paragraph (e) of
section III, at the time of the transaction and is the same price which
would have been paid or received for the shares by any other investor
at that time;
(c) The Bank, its affiliates, and officers or directors have not
and will not purchase from or sell to any of the Plans shares of any of
the Funds;
(d) 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 of ``reasonable compensation'' within the
meaning of section 408(b)(2) of the Act;
(e) 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;
(f) The Plans are not sponsored by the Bank;
(g) A Second Fiduciary who is acting on behalf of a Plan and who is
independent of and unrelated to the Bank, as defined in paragraph (g)
of section III below, receives in advance of the investment by a Plan
in any of the Funds a full and detailed written disclosure of
information concerning such Fund including, but not limited to:
(1) a current prospectus for each portfolio of each of the Funds in
which such Plan is considering investing,
(2) a statement describing the fees for investment management,
investment advisory, or other similar services, any fees for secondary
services (Secondary Services), as defined in paragraph (h) of section
III below, and all other fees to be charged to or paid by the Plan and
by such Funds to the Bank, including the nature and extent of any
differential between the rates of such fees,
(3) the reasons why the Bank may consider such investment to be
appropriate for the Plan,
(4) a statement describing whether there are any limitations
applicable to the Bank with respect to which assets of a Plan may be
invested in the Funds, and, if so, the nature of such limitations; and
(5) upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, if granted.
(h) On the basis of the information described in paragraph (g) of
this section II, the Second Fiduciary authorizes in writing: (1) the
investment of assets of the Plans in shares of the Fund, in connection
with the transaction set forth in section II; (2) the investment
portfolios of the Funds in which the assets of the Plans may be
invested; and (3) the fees received by the Bank in connection with its
services to the Funds; such authorization by the Second Fiduciary to be
consistent with the responsibilities obligations, and duties imposed on
fiduciaries by Part 4 of Title I of the Act;
(i) The authorization, described in paragraph (h) of this section
II, is terminable at will by the Second Fiduciary of a Plan, without
penalty to such Plan. Such termination will be effected by the Bank
selling the shares of the Fund held by the affected Plan within one
business day following receipt by the Bank, either by mail, hand
delivery, facsimile, or other available means at the option of the
Second Fiduciary, of the termination form (the Termination Form), as
defined in paragraph (i) of section III below, or any other written
notice of termination; provided that if, due to circumstances beyond
the control of the Bank, the sale cannot be executed within one
business day, the Bank shall have one additional business day to
complete such sale;
(j) Plans do not pay any plan-level investment management fees,
investment advisory fees, or similar fees to the Bank with respect to
any of the assets of such Plans which are invested in shares of any of
the Funds. This condition does not preclude the payment of investment
advisory fees or similar fees by the Funds to the Bank under the terms
of an investment advisory agreement adopted in accordance with section
15 of the Investment Company Act of 1940 or other agreement between the
Bank and the Funds;
(k) In the event of an increase in the rate of any fees paid by the
Funds to the Bank regarding any investment management services,
investment advisory services, or fees for similar services that the
Bank provides to the Funds over an existing rate for such services that
had been authorized by a Second Fiduciary, in accordance with paragraph
(h) of this section II, the Bank will, at least thirty (30) days in
advance of the implementation of such increase, provide a written
notice (which may take the form of a proxy statement, letter, or
similar communication that is separate from the prospectus of the Fund
and which explains the nature and amount of the increase in fees) to
the Second Fiduciary of each of the Plans invested in a Fund which is
increasing such fees. Such notice shall be accompanied by the
Termination Form, as defined in paragraph (i) of section III below;
(l) In the event of an addition of a Secondary Service, as defined
in paragraph (h) of section III below, provided by the Bank to the Fund
for which a fee is charged or an increase in the rate of any fee paid
by the Funds to the Bank for any Secondary Service, as defined in
paragraph (h) of section III below, that results either from an
increase in the rate of such fee or from the decrease in the number or
kind of services performed by the Bank for such fee over an existing
rate for such Secondary Service which had been authorized by the Second
Fiduciary of a Plan, in accordance with paragraph (h) of this section
II, the Bank will at least thirty (30) days in advance of the
implementation of such additional service for which a fee is charged or
fee increase, provide a written notice (which may take the form of a
proxy statement, letter, or similar communication that is separate from
the prospectus of the Fund and which explains the nature and amount of
the additional service for which a fee is charged or the nature and
amount of the increase in fees) to the Second Fiduciary of each of the
Plans invested in a Fund which is adding a service or increasing fees.
Such notice shall be accompanied by the Termination Form, as defined in
paragraph (i) of section III below.
(m) The Second Fiduciary is supplied with a Termination Form at the
times specified in paragraphs (k), (l), and (n) of this section II,
which expressly provides an election to terminate the authorization,
described above in paragraph (h) of this section II, with instructions
regarding the use of such Termination Form including statements that:
(1) the authorization is terminable at will by any of the Plans,
without penalty to such Plans. Such termination will be effected by the
Bank selling the shares of the Fund held by the Plans requesting
termination within one business day following receipt by the Bank,
either by mail, hand delivery, facsimile, or other available means at
the option of the Second Fiduciary, of the Termination Form or any
other written notice of termination; provided that if, due to
circumstances beyond the control of the Bank, the sale of shares of
such Plans cannot be executed within one business day, the Bank shall
have one additional business day to complete such sale; and
(2) failure by the Second Fiduciary to return the Termination Form
on behalf of a Plan will be deemed to be an approval of the additional
Secondary Service for which a fee is charged or increase in the rate of
any fees, if such Termination Form is supplied pursuant to paragraphs
(k) and (l) of this section II, and will result in the continuation of
the authorization, as described in paragraph (h) of this section II, of
the Bank to engage in the transactions on behalf of such Plan;
(n) The Second Fiduciary is supplied with a Termination Form,
annually during the first quarter of each calendar year, beginning with
the first quarter of the calendar year that begins after the date the
grant of this proposed exemption is published in the Federal Register
and continuing for each calendar year thereafter; provided that the
Termination Form need not be supplied to the Second Fiduciary, pursuant
to paragraph (n) of this section II, sooner than six months after such
Termination Form is supplied pursuant to paragraphs (k) and (l) of this
section II, except to the extent required by said paragraphs (k) and
(l) of this section II to disclose an additional Secondary Service for
which a fee is charged or an increase in fees;
(o)(1) With respect to each of the Funds in which a Plan invests,
the Bank will provide the Second Fiduciary of such Plan:
(A) at least annually with a copy of an updated prospectus of such
Fund;
(B) upon the request of such Second Fiduciary, with a report or
statement (which may take the form of the most recent financial report,
the current statement of additional information, or some other written
statement) which contains a description of all fees paid by the Fund to
the Bank; and
(2) With respect to each of the Funds in which a Plan invests, in
the event such Fund places brokerage transactions with the Bank, the
Bank will provide the Second Fiduciary of such Plan at least annually
with a statement specifying:
(A) the total, expressed in dollars, brokerage commissions of each
Fund's investment portfolio that are paid to the Bank by such Fund;
(B) the total, expressed in dollars, of brokerage commissions of
each Fund's investment portfolio that are paid by such Fund to
brokerage firms unrelated to the Bank;
(C) the average brokerage commissions per share, expressed as cents
per share, paid to the Bank by each portfolio of a Fund; and
(D) the average brokerage commissions per share, expressed as cents
per share, paid by each portfolio of a Fund to brokerage firms
unrelated to the Bank;
(p) All dealings between the Plans and any of the Funds are on a
basis no less favorable to such Plans than dealings between the Funds
and other shareholders holding the same class of shares as the Plans;
(q) The Bank maintains for a period of six (6) years the records
necessary to enable the persons, as described in paragraph (r) of
section II below, to determine whether the conditions of this proposed
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 (6) year
period, and
(2) no party in interest, other than the Bank, shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act,
or to the taxes imposed by section 4975 (a) and (b) of the Code, if the
records are not maintained, or are not available for examination as
required by paragraph (r) of section II below;
(r)(1) Except as provided in paragraph (r)(2) of this section II
and notwithstanding any provisions of subsection (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (q) of
section II above are unconditionally available at their customary
location for examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of each of the Plans who has authority to
acquire or dispose of shares of any of the Funds owned by such a Plan,
or any duly authorized employee or representative of such fiduciary;
and
(iii) Any participant or beneficiary of the Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (r)(1)(ii) and
(r)(1)(iii) of section II shall be authorized to examine trade secrets
of the Bank, or commercial or financial information which is privileged
or confidential.
Section III--Definitions
For purposes of this proposed exemption,
(a) The term ``Bank'' means The Bank of California, N.A. and any
affiliate of the Bank, as defined in paragraph (b) of this section III.
(b) An ``affiliate'' of a person includes: (1) Any person directly
or indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person;
(2) any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(d) The term ``Fund or Funds'' means any diversified open-end
investment company or companies registered under the Investment Company
Act of 1940 for which the Bank serves as investment adviser, and may
also provide custodial or other services as approved by such Funds;
(e) The term, ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in a Fund's prospectus
and statement of additional information, and other assets belonging to
each of the portfolios in such Fund, less the liabilities charged to
each portfolio, by the number of outstanding shares.
(f) The term, ``relative,'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term, ``Second Fiduciary,'' means a fiduciary of a plan who
is independent of and unrelated to the Bank. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to the Bank if:
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with the Bank;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary is an officer, director,
partner, or employee of the Bank (or is a relative of such persons);
(3) Such Second 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/advisor, (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.
(h) The term, ``Secondary Service,'' means a service, other than an
investment management, investment advisory, or similar service, which
is provided by the Bank to the Funds, including but not limited to
custodial, accounting, brokerage, administrative, or any other service.
(i) The term, ``Termination Form,'' means the form supplied to the
Second Fiduciary, at the times specified in paragraphs (k), (l), and
(n) of section II above, which expressly provides an election to the
Second Fiduciary to terminate on behalf of the Plans the authorization,
described in paragraph (h) of section II. Such Termination Form may be
used at will by the Second Fiduciary to terminate such authorization
without penalty to the Plans and to notify the Bank in writing to
effect such termination by selling the shares of the Fund held by the
Plans requesting termination within one business day following receipt
by the Bank, either by mail, hand delivery, facsimile, or other
available means at the option of the Second Fiduciary, of written
notice of such request for termination; provided that if, due to
circumstances beyond the control of the Bank, the sale cannot be
executed within one business day, the Bank shall have one additional
business day to complete such sale.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective retroactively, as of November 12, 1993.
Summary of Facts and Representations
1. The Bank is a national banking association having its principal
office at 400 California Street, San Francisco, California. The Bank
offers a wide range of banking services to its clients in California,
Oregon, Washington, and around the world. The Mitsubishi Bank Limited,
a Japanese bank with principal offices in Tokyo, owns either directly
or indirectly through its wholly owned subsidiary, BanCal Tri-State
Corporation, all of the outstanding stock of the Bank. The Bank has
total trust and non-trust assets of approximately $19.5 billion and
$8.4 billion, respectively. Merus Capital Management (MERUS), a
division of the Bank, belongs to the Bank's Trust and Investment
Management Group which manages approximately $5.5 billion of the assets
held in trust by the Bank.
2. The Plans involved in the transactions for which the Bank
requests exemptive relief are numerous Plans for which the Bank has
acted or will act as fiduciary and has exercised or will exercise
investment discretion with respect to all or a portion of the assets of
such Plans.2 For this reason, certain specific information
relating to each individual involved Plan does not appear in the
application. However, it is anticipated that the Plans include or will
include various employee benefit plans, as defined by section 3(3) of
the Act, and certain plans or trusts, as described in section
4975(e)(1) of the Code. These Plans are sponsored or maintained by
parties unrelated to the Bank.3 Such Plans include, among others:
(1) pension, profit sharing, stock bonus, and other retirement plans
which are qualified for tax purposes under section 401(a) of the Code,
(2) voluntary employees' beneficiary associations and other welfare
benefit plans, and (3) individual retirement accounts and simplified
employee pension plans, as described in section 408 of the Code. The
Bank serves as fiduciary to these Plans through the management of the
CIFs in which the Plans invest or through providing individual
management or advice to the Plans.
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\2\The Department herein is not proposing relief for
transactions afforded relief by Section 404(c) of the Act.
\3\The Department, herein, is not proposing relief for
transactions involving any plan sponsored by the Bank or its
affiliates.
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It is represented that the Bank, as of October 23, 1992, had under
management approximately $760 million in assets from approximately 400
Plans. The Bank receives compensation for serving as fiduciary with
respect to these Plans in accordance with standard published fee
schedules or as otherwise agreed upon by the Bank and the sponsors of
such Plans.4
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\4\The Department expresses no opinion as to whether the
provision of services by the Bank or its affiliates to the Plans
satisfies the requirements for statutory exemption, as set forth in
section 408(b)(2) of the Act and 29 CFR 2550.408(b)(2) of the
Department's regulation. To the extent that such provision of
services to the Plan by the Bank or its affiliates does not satisfy
the requirements of section 408(b)(2) of the Act, the Department,
herein, is offering no relief.
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3. The Bank or its affiliates also provide services to numerous
Funds. The Funds are open-end investment companies registered under the
Investment Company Act of 1940. Because the Bank would like the
exemption to apply prospectively to any Fund to which the Bank or any
of its affiliates may provide services, the Bank represents that it
cannot supply detailed information on each such future Fund. However,
the Bank has provided a detailed description with respect to a certain
Fund, the HighMark Group (HighMark), which is currently operating and
to which it provides services. The Bank represents that all future
Funds will assume similar structures and Plan investments therein will
be subject to the terms and conditions of this exemption. The structure
of HighMark is summarized in paragraph 4 below. To the extent Plans for
which the Bank serves as fiduciary are currently invested in HighMark,
the Bank represents that such investments were made in compliance with
Prohibited Transaction Class Exemption 77-4 (PTCE 77-4).5
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\5\PTCE 77-4 was granted April 8, 1977, at 42 FR 732 and was
proposed November 16, 1976, at 41 FR 50516.
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4. HighMark, a Massachusetts business trust organized on March 10,
1987, is registered under the Investment Company Act of 1940 as a
diversified, open-end, management investment company. HighMark is
governed by a board of trustees (the HighMark Trustees), all of whom
are independent of the Bank. MERUS, a division of the Bank, acts as
investment adviser to HighMark. In the context of registered investment
companies, the term ``investment adviser'' generally refers to the
entity that has investment management authority with respect to the
assets of the investment company. In this regard, subject to the
general supervision of the HighMark Trustees, MERUS manages each of the
separate investment portfolios within HighMark in accordance with the
investment objectives, and policies of each portfolio, makes decisions
with respect to and places orders for all purchases and sales of
securities, and maintains records with respect thereto. In addition,
the Bank serves as custodian, sub-administrator, sub-transfer agent,
and sub-accountant to HighMark. It is represented that the Bank may in
the future seek to serve in additional capacities for and to provide
additional services to HighMark.
HighMark consists of separate investment portfolios with combined
total net assets of approximately $1 billion. It is represented that
currently there are eight (8) portfolios in HighMark. Three of these
portfolios are invested in money market instruments (the Money Market
Portfolios), and three are invested primarily in non-money market debt
or equity securities (the Non-Money Market Portfolios). The remaining
two portfolios of HighMark are the California Tax-Free Fund, and the
Tax-Free Fund.6 In addition to these portfolios, HighMark is in
the process of establishing two additional portfolios, the Balanced
Fund and the Growth Fund, and may establish other portfolios.
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\6\It is represented that the Tax-Free Fund has been the subject
of an inquiry by the Securities and Exchange Commission (SEC)
concerning a municipal bond backed by Mutual Benefit Life Insurance
Company held in the Tax-Free Fund. In July 1991, when Mutual Benefit
Life Insurance Company was seized by its regulator, the Bank was
serving as accountant for the Tax-Free Fund. It is represented that
due to a clerical data entry error and the failure of an employee to
follow established procedures, the impact of the seizure on the
value of the bond was not brought to the attention of the management
of the Bank until August 1991. At that time, the Bank represents
that it informed the SEC, purchased the bond from the Tax-Free Fund
at par plus accrued interest, and informed shareholders by mailing
to them a special prospectus, dated September 5, 1991. As the
situation was corrected promptly, the Bank believes that this should
not affect the merits of the application or the availability of the
Tax-Free Fund for investment by the Plan, if deemed appropriate
under the circumstances as authorized by the Second Fibuciary, and
if based on criteria set forth in section 404 of the Act.
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In the future HighMark may modify, reorganize, or terminate any or
all of its portfolios. All existing portfolios and any portfolios
established or modified in the future will be available for investment
by the Plans, if deemed appropriate under the circumstances, as
authorized by the Second Fiduciary, and if based on criteria set forth
in section 404 of the Act. However, it is represented that the Bank
does not expect the Plans ordinarily to be invested in tax-free funds.
Winsbury Company (Winsbury), located in Columbus, Ohio, serves as
the general manager, administrator, and principal underwriter of
HighMark. For these administrative services, Winsbury receives fees
computed daily at .20% of the average net assets of each portfolio of
HighMark. Winsbury also receives fees from HighMark for serving as the
distributor of shares in HighMark. Pursuant to a plan of distribution
implemented only with respect to the Class A shares for the Money
Market Portfolios, HighMark pays out of the assets attributable to such
shares monthly fees to Winsbury in accordance with Rule 12b-1 of the
Investment Company Act of 1940 (the 12b-1 Fees) equal to .25% of the
average daily net assets attributable to such shares.7 An
affiliate of Winsbury, the Winsbury Service Corporation (Winsbury
Service), is the transfer agent, accountant, and shareholder servicing
agent of HighMark. Winsbury and Winsbury Service are unrelated to the
Bank.
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\7\It is represented that the Plans currently are invested only
in shares of HighMark that are not subject to 12b-1 Fees and that
there is no present intention to change this arrangement. The
Department notes that proposed relief is limited to the transactions
described herein, and no relief has been provided in connection with
the payment of distribution expenses, pursuant to Rule 12b-1 under
the Investment Company Act.
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5. Because the Bank recognizes that (1) in-kind transfers to Funds
that the Bank services or advises of all or a pro rata portion of Plan
assets in the CIFs or all or a pro rata portion of Plan assets that the
Bank otherwise manages, and (2) the approval process for additional
services for which a fee is charged and fee increases by the Bank for
these services may be outside the scope of PTCE 77-4, the Bank has
requested relief for the transactions described in section I and II.
Each of these transactions is discussed more fully in paragraphs 6, 7,
8, and 9 below. The exemption for each of the transactions involving
HighMark is conditioned on the satisfaction of certain requirements and
compliance with various general conditions which are also discussed
below. It is the Bank's expressed intention that the description of
these transactions and the conditions of the requested exemption with
respect to such transactions were and will be applicable uniformly to
HighMark and to any of the other Funds for which the Bank serves as the
investment advisor and in which the Plans invest.
In-Kind Transfers to Funds
6. It is represented that the Bank has maintained CIFs in which the
Plans have invested in accordance with Regulation 9 promulgated by the
Comptroller of the Currency and the Internal Revenue Service. The Bank
has decided to terminate certain CIFs and to offer to the Plans
participating in such CIFs appropriate interests in certain Funds as
alternative investments. Because interests in CIFs generally must be
liquidated or withdrawn to effect distributions, the Bank believes that
the interests of the Plans invested in CIFs would be better served by
investment in shares of the Funds which can be distributed in-kind.
Also, the Bank believes that the Funds offer the Plans numerous
advantages as pooled investment vehicles. In this regard, the Plans, as
shareholders of a Fund, have the opportunity to exercise voting and
other shareholder rights.
The Plans, as shareholders of the Funds, as mandated by the SEC,
periodically receive certain disclosures concerning the Funds: (1) a
copy of the prospectus which is updated annually; (2) an annual report
containing audited financial statements of the Funds and information
regarding such Funds performance (unless such performance information
is included in the prospectus of such Funds); (3) a semi-annual report
containing unaudited financial statements; and (4) at the option of the
Funds other pertinent information. With respect to the Plans, the Bank
reports all transactions in shares of the Funds in periodic account
statements provided the Second Fiduciary of each of the Plans. Further,
the Bank maintains that the investment performance of the portfolios of
the Funds can be monitored daily from information available in
newspapers of general circulation.
In order to avoid the potentially large brokerage expenses that
would otherwise be incurred, the Bank proposes that from time to time
assets of the CIFs be transferred in-kind to corresponding portfolios
of the Funds in exchange for shares of such Funds. In this regard, some
Funds may, as in the case of HighMark, be in existence and operating at
the time of the in-kind transfer of such assets. Some Funds may be
created to assume the assets of the terminating CIF. Similarly, the
Bank proposes that from time to time it may be appropriate for an
individual Plan for which the Bank serves as fiduciary to transfer all
or a pro rata share of its assets in-kind to any of the Funds in
exchange for shares of such Funds. In this regard, for example, in the
case of an in-kind exchange between an individual Plan whose portfolio
consists of common stock, money market securities, and real estate, and
a Fund that, under its investment policy, invests only in common stock
and money market securities, the exchange would involve all or a pro
rata share of the common stock and money market securities held by the
Plan, if such stock and securities are eligible for purchase by the
Fund,\8\ and would not involve the transfer or exchange of the real
estate holdings of such Plan. No brokerage commission or other fees or
expenses (other than customary transfer charges paid to parties other
than the Bank or its affiliates) have been or will be charged to the
Plans or the CIFs in connection with the in-kind transfers of assets
into the Funds and the acquisition of shares of the Funds by the Plans
or the CIFs. Thus, in addition to retroactive relief, the Bank has
requested prospective relief for transactions which would involve: (1)
the in-kind transfer by the CIFs of all or a pro rata portion of the
assets of any of the Plans held in such CIFs to the Funds in exchange
for shares of the Fund which subsequently are distributed to the Plans;
or (2) the in-kind transfer of all or a pro rata portion of the assets
of any of the Plans held by the Bank in any capacity as fiduciary on
behalf of such Plans to the Funds in exchange for shares of such Funds;
provided that conditions described in section I above are satisfied.
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\8\It is represented that a Fund's eligible investments are
described under ``Investment Policies and Fund Portfolio'' of its
prospectus.
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The Bank maintains that the transfers in-kind of assets in exchange
for shares of the Funds are ministerial transactions performed in
accordance with pre-established objective procedures which are approved
by the board of trustees of each Fund. Such procedures require that
assets transferred to a Fund: (1) are consistent with the investment
objectives, policies, and restrictions of the corresponding portfolios
of such Fund, (2) satisfy the applicable requirements of the Investment
Company Act of 1940 and the Code, (3) have a readily ascertainable
market, (4) are liquid, and (5) are not subject to restrictions on
resale. It is represented that assets which do not meet these
requirements will be sold in the open market through an unaffiliated
brokerage firm prior to any transfer in-kind. Further, as described in
section I, prior to entering into an in-kind transfer each affected
Plan receives certain disclosures from the Bank and approves such
transaction in writing.
The Bank represents that valuation of assets transferred in-kind to
the Funds will be established by reference to independent sources. In
this regard, for purposes of the transaction, it is represented that
all assets transferred in-kind are valued in accordance with the
valuation procedures described in Rule 17a-7(b) under the Investment
Company Act of 1940, as amended from time to time or any successor
rule, regulation, or similar pronouncement. Further, the Bank
represents that within thirty (30) days of the completion of a transfer
in-kind, it will provide to Plans written confirmation of the identity
of each security valued under Rule 17a-7(b)(4), the price of each
security, and the identity of each pricing service or market maker
consulted in determining the value of the assets transferred. The
securities subject to valuation under Rule 17(a)-7(b)(4) include all
securities other than ``reported securities,'' as the term is defined
in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the 1934
Act), or those quoted on the NASDAQ system or for which the principal
market is an exchange.
It is represented that the value of the assets transferred in-kind
will be equal to the aggregate value of the corresponding portfolios
shares of the Fund at the close of business on the date of the
transaction. In this regard, it is represented that for all conversion
transactions that occur after the date of this proposed exemption, the
Bank, no later than ninety (90) days after completion of each in-kind
transfer of assets of the Plans or the CIFs in exchange for shares of
the Funds, will mail to the Second Fiduciary a written confirmation of
the number of CIF units held by each affected Plan immediately before
the conversion (and the related per unit value or the aggregate dollar
value of the units transferred), and the number of shares in the Funds
that are held by each affected Plan following the conversion (and the
related per share net asset value or the aggregate dollar value of the
shares received).
7. The Bank has requested retroactive relief, for the in-kind
transfer to HighMark that occurred over the weekend of November 12,
1993. It is represented that on the weekend of November 12, 1993, all
of the assets of five CIFs\9\, which were maintained by the Bank and in
which the Plans held interests, were transferred to HighMark in
exchange for an appropriate number of shares of certain portfolios of
HighMark which have investment objectives and policies substantially
identical to those of the CIFs. At the same time, the five CIFs were
terminated and the assets of each, then consisting of shares in
portfolios of HighMark, were distributed in-kind to the Plans
participating in such CIFs based on each Plan's pro rata share of the
assets of the CIFs on the date of the transaction.
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\9\It is represented that the CIFs maintained by the Bank which
engaged in the transfer in-kind on November 12, 1993, were the
Balanced Fund, the Flexible Bond Fund A, the Government Fund, the
Income and Growth Equity Fund, and the Income Equity Fund A.
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The Bank provided to the Second Fiduciary for each affected Plan
disclosures that announced the termination of the CIFs, summarized the
transaction, and otherwise complied with provisions of Section I. It is
represented that based on these disclosures, the Second Fiduciary from
each affected Plan approved in writing the transfer of the CIFs assets
to the corresponding portfolios of HighMark, the investment of the
assets of the Plans in shares of HighMark, and the receipt by the Bank
of fees for services to HighMark and to the Plans. It is represented
that the assets of Plans that did not approve investment in HighMark
were withdrawn from the CIFs and held or invested in appropriate
alternative investments in accordance with the terms of such Plans.
Prior to the transaction, the assets of the five CIFs were reviewed
to confirm that such were appropriate investments for the corresponding
portfolios of HighMark into which such assets were transferred. If any
of the assets of the five CIFs were not appropriate for HighMark, it is
represented that the Bank sold such assets in the open market through
an unaffiliated brokerage firm prior to the transfer.
It is represented that the assets transferred by the five CIFs to
HighMark consisted entirely of cash and marketable securities. For
purposes of the transfer in-kind, the value of the securities in each
of the five CIFs were determined based on market values as of the close
of business on November 12, 1993, the last business date prior to the
transfer. It is represented that the values were determined in a single
valuation using the valuation procedures described in Rule 17a-7 under
the Investment Company Act of 1940. In this regard, it is represented
that the ``current market price'' for specific types of CIF securities
involved in the transaction was determined as follows:
(1) If the security was a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the 1934 Act, the last sale price with
respect to such security reported in the consolidated transaction
reporting system (the Consolidated System) for November 12, 1993; or if
there were no reported transactions in the Consolidated System that
day, the average of the highest independent bid and the lowest
independent offer for such security (reported pursuant to Rule 11Ac1-1
under the 1934 Act), as of the close of business on November 12, 1993;
or
(2) If the security was not a reported security, and the principal
market for such security was an exchange, then the last sale on such
exchange on November 12, 1993; or if there were no reported
transactions on such exchange that day, the average of the highest
independent bid and lowest independent offer on such exchange as of the
close of business on November 12, 1993; or
(3) If the security was not a reported security and was quoted in
the NASDAQ system, then the average of the highest independent bid and
lowest independent offer reported on Level 1 of NASDAQ as of the close
of business on November 12, 1993; or
(4) For all other securities, the average of the highest
independent bid and lowest independent offer as of the close of
business on November 12, 1993, determined on the basis of reasonable
inquiry. For securities in this category, the Bank represents that it
obtained quotations from at least three sources that were either
broker-dealers or pricing services independent of and unrelated to the
Bank and, where more than one valid quotation was available, used the
average of the quotations to value the securities, in conformance with
interpretations by the SEC and practice under Rule 17a-7.
It is represented that the securities received by the corresponding
portfolio of HighMark were valued by such portfolio for purposes of the
transfer in the same manner and on the same day as such securities were
valued by the CIFs. The per share value of the shares of each portfolio
of HighMark issued to the CIFs were based on the corresponding
portfolio's then current net asset value. It is represented that the
aggregate value of the shares of the corresponding portfolio of
HighMark issued to the CIFs were equal to the value of the assets (cash
and marketable securities) transferred to such portfolio as of the
close of business on November 12, 1993. It is also represented that the
value of a Plan's investment in shares of a corresponding portfolio of
HighMark as of the opening of business on the first business day after
the transaction (November 15, 1993) was equal to the value of such
Plan's investment in the CIF as of the close of business on the last
business day prior to the transaction (November 12, 1993).
It is represented that not later than thirty (30) days after
completion of the transaction (December 15, 1993), the Bank sent by
regular mail a written confirmation of the transaction to each affected
Plan. Such confirmation contained: (1) the identity of each security
that was valued in accordance with Rule 17a7(b)(4), as described in the
paragraph 7(4) above; (2) the price of each such security for purposes
of the transaction; and (3) the identity of each pricing service or
market maker consulted in determining the value of such securities. To
reiterate the above discussion, and in accordance with the conditions
under section I, similar procedures will occur upon any future in-kind
exchanges between CIFs maintained by the Bank, Plans, and the Funds.
Receipt of Fees From Funds
8. It is represented that the Bank currently invests assets of the
Plans it manages in shares of the Funds in accordance with the
conditions set forth in PTCE 77-4. Under certain conditions, PTCE 77-4
permits the Bank to receive fees from the Funds under either of two
circumstances: (a) where a Plan does not pay any investment management,
investment advisory, or similar fees with respect to the assets of such
Plan invested in shares of a Fund for the entire period of such
investment; or (b) where a Plan pays investment management, investment
advisory, or similar fees to the Bank based on the total assets of such
Plan from which a credit has been subtracted representing such Plan's
pro rata share of such investment advisory fees paid to the Bank by the
Fund. As such, it is represented that there are two levels of fees--
those fees which the Bank charges to the Plans for serving as trustee
with investment discretion or as investment manager (the Plan-level
fees); and those fees the Bank charges to the Funds (the Fund-level
fees) for serving as investment advisor, custodian, or service
provider.
It is represented that at present the vast majority of Plans for
which the Bank acts as a fiduciary do not pay any separate Plan-level
investment management, investment advisory, or similar fees with
respect to the assets of such Plans invested in shares of the Funds. A
few Plans, however, continue to pay Plan-level investment management,
investment advisory, and similar fees and receive credits which
represent each of the Plans pro rata share of investment advisory fees
paid to the Bank by the Funds. The Bank represents that Plan-level fees
currently charged are paid monthly and are calculated as a percentage
of the market value of the assets of a Plan with respect to which the
Bank provides services. It is represented that Plan-level investment
management, investment advisory or similar fees for all of the services
provided by the Bank, including services in connection with the
automated cash ``sweep'' arrangement, are charged in the form of a
single asset-based fee. It is represented that Plan-level fees are
subject to annual minimums for administration and management expressed
as flat dollar amounts and are subject to the application of certain
``break points.'' In addition to the Plan-level fees for investment
management, investment advisory, or similar services, a one-time fee
(also a flat dollar amount) may be charged in connection with the
establishment of an account for a Plan, and separate transaction fees
may be charged for various administrative transactions, such as for
example, a participant loan. It is represented that depending on the
terms of the governing documents of the Plan, Plan-level fees are paid
to the Bank either by the sponsor of the Plan or from the assets of the
Plan.
As mentioned above, the Bank also receives Fund-level fees. Such
Fund-level fees can be divided into: (1) fees paid to the Bank by a
Fund for investment management, investment advisory, or similar
services provided to such Fund, and (2) fees paid to the Bank for
administrative, custodial, transfer, accounting, and other Secondary
Services provided either to such Fund or to the distributor of shares
of such Funds and its affiliates. For example, with respect to
investment management/advisory services and Secondary Services, the
current fee arrangements between the Bank and HighMark provide for: (1)
MERUS, a division of the Bank, to receive fees from HighMark for acting
as investment advisor, (2) the Bank to receive custodian fees from
HighMark, (3) the Bank to receive fees from Winsbury for serving as
sub-administrator to HighMark, and (4) the Bank to receive fees from
Winsbury Services for services as sub-accountant and sub-transfer agent
provided to HighMark. It is represented that this compensation paid to
the Bank for investment advisory services and Secondary Services is in
accordance with various agreements between Winsbury, Winsbury Service,
HighMark, and the Bank. In this regard, it is represented that the
HighMark Trustees and the shareholders of HighMark approve the
compensation that the Bank receives from HighMark. Also, the HighMark
Trustees approve any changes in the compensation paid to the Bank for
services rendered to HighMark.
It is represented that the Fund-level fees from HighMark are
computed daily and billed monthly. The Bank represents that at the end
of each month and promptly upon receipt of the Fund-level fees from
HighMark, for those Plans which pay to the Bank Plan-level investment
management, investment advisory, or similar fees, the Bank currently
credits to each Plan its pro rata share of all investment management,
investment advisory, or similar fees charged by the Bank to HighMark.
9. Under the fee structure proposed in this exemption, it is
represented that the arrangement for Plan-level fees where assets of
the Plans managed by the Bank are invested in the Funds is different in
several respects from that described in paragraph 8 above. In this
regard, a separate Plan-level fee will be charged to the Plans for
basic administrative services not including investment management.\10\
Such administrative services would include, among others, the Bank's
acting as custodian of the assets of a Plan, maintaining the records of
a Plan, preparing periodic reports concerning the status of the Plan
and its assets, and accounting for contributions, benefit
distributions, and other receipts and disbursements. It is represented
that these functions performed by the Bank on the Plan-level are
separate and distinct from those performed on the Fund-level by the
Bank, by Winsbury, and by Winsbury Services.
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\10\The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
fiduciaries of the Plans from the general fiduciary responsibility
provisions of section 404 of the Act. Thus, the Department cautions
the fiduciaries of the Plans investing in the Funds that they have
an ongoing duty under section 404 of the Act to monitor the services
provided to the Plans to assure that the fees paid by the Plans for
such services are reasonable in relation to the value of the
services provided. Such responsibilities would include
determinations that the services provided are not duplicative and
that the fees are reasonable in light of the level of services
provided.
In addition, the Department notes that the combined total of all
fees received by the Bank directly or indirectly from the Plan for
the provision of services to the Plan and/or to the Fund should not
be in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
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It is represented that the Bank will continue to receive
compensation from the Plans for investment management services provided
with respect to assets of the Plans not invested in shares of any of
the Funds. However, under the proposed fee structure, the Bank will no
longer credit to any of the Plans their pro rata share of the
investment advisory fees, as described in paragraph 8 above, because
the Plans will no longer pay Plan-level fees to the Bank for investment
advisory services with respect to any of the assets of the Plans
invested in shares of any of the Funds. Instead, the compensation
received by the Bank for investment advisory services will be that
which is paid by the Funds to the Bank for such services rendered to
such Funds. In addition, the Bank will continue to retain fees for
providing Secondary Services to the Funds.
The applicant maintains that this proposed fee arrangement complies
with PTCE 77-4. However, there is one difference from PTCE 77-4
requested by the Bank for which an exemption is required. In this
regard, one of the requirements of PTCE 77-4 has been that any change
in any of the rates of fees would require prior written approval by the
Second Fiduciary of the Plans participating in the Funds. The applicant
maintains that where many Plans participate in a Fund, the addition of
a service or any good faith increase in fees could not be implemented
until written approval of such change is obtained from every Second
Fiduciary. The applicant proposes an alternative which the Bank
maintains provides the basic safeguards for the Plans and is more
efficient, cost effective, and administratively feasible than those
contained in PTCE 77-4.
It is represented that in the event of an increase in the rate of
any investment management fees, investment advisory fees, or similar
fees, the addition of a Secondary Service for which a fee is charged,
or an increase in the fees for Secondary Services paid by the Funds to
the Bank over an existing rate that had been authorized by the Second
Fiduciary, the Bank will provide, at least thirty (30) days in advance
of the implementation of such additional service or fee increase, to
the Second Fiduciary of all the Plans invested in such Fund a written
notice of such additional service or fee increase, (which may take the
form of a proxy statement, letter, or similar communication that is
separate from the prospectus of the Fund and which explains the nature
and amount of the additional service or the nature and amount of the
increase in fees). In this regard, such increase in fees for Secondary
Services can result either from an increase in the rate of such fee or
from the decrease in the number or kind of services performed by the
Bank for such fee over that which had been authorized by the Second
Fiduciary of a Plan. It is represented that providing notice in this
way will give the Second Fiduciary of each of the Plans adequate
opportunity to decide whether or not to continue the authorization of a
Plan's investment in any of the portfolios of the Funds in light of the
increase in investment management fees, investment advisory fees, or
similar fees, the additional Secondary Service for which a fee is
charged, or the increase in fees for any Secondary Services. In
addition, the Bank represents that such fee increase will be disclosed
to the Secondary Fiduciaries in a supplement to the Fund's prospectus
in the case of an increase in fees for investment management,
investment advisory, or similar services and in the Fund's Statement of
Additional Information in the case of an additional Secondary Service
for which a fee is charged or an increase in the fees for Secondary
Services.
10. It is represented that the written notice of an additional
service for which a fee is charged or a fee increase, as described in
paragraph 9 above, will be accompanied by a Termination Form, as
defined in paragraph (i) of section III, and by instructions on the use
of such form, as described in paragraph (m) of section II, which
expressly provide an election to the Second Fiduciaries to terminate at
will any prior authorizations without penalty to the Plans. In
addition, it is represented that the Second Fiduciary will be supplied
with a Termination Form annually during the first quarter of each
calendar year, beginning with the first quarter of the calendar year
that begins after the date the grant of this proposed exemption is
published in the Federal Register and continuing for each calendar year
thereafter, regardless of whether there have been any changes in the
fees payable to the Bank or changes in other matters in connection with
services rendered to the Funds. However, if the Termination Form has
been provided to the Second Fiduciary in the event of an increase in
the rate of any investment management fees, investment advisory fees,
or similar fees, an addition of a Secondary Service for which a fee is
charged, or an increase in any fees for Secondary Services paid by the
Fund to the Bank, then such Termination Form need not be provided again
to the Second Fiduciary until at least six months have elapsed, unless
such Termination Form is required to be sent sooner as a result of
another increase in any investment management fees, investment advisory
fees, or similar fees, the addition of a Secondary Service for which a
fee is charged, or an increase in any fees for Secondary Services.
The Termination Form will contain instructions regarding its use
which will state expressly that the authorization is terminable at will
by a Second Fiduciary, without penalty to any Plan, and that failure to
return the form will be deemed to be an approval of the additional
Secondary Service or the increase in the rate of any fees and will
result in the continuation of all authorizations previously given by
such Second Fiduciary. It is represented that termination by any Plan
of authorization to invest in the Funds will be effected by the Bank
selling the shares of the Fund held by the affected Plan within one
business day following receipt by the Bank, either by mail, hand
delivery, facsimile, or other available means at the option of the
Second Fiduciary, of the Termination Form or any other written notice
of termination. If, due to circumstances beyond the control of the
Bank, the sale cannot be executed within one business day, the Bank
shall have one additional business day to complete such sale.
11. It is represented that the rates paid by each of the portfolios
of the Funds to the Bank for services rendered may differ depending on
the fee schedule for each portfolio and on the daily net assets in each
portfolio. The investment advisory fees paid to the Bank by the Funds
will be based on the different fee rates of each of the portfolios into
which the assets of the Plans are allocated. For example, for services
provided to the Money Market Portfolios, the California Tax Free Fund,
and the Tax Free Fund, the Bank receives the following fees from
HighMark based on each portfolio's average daily net assets: (a) .40%
of the first $500 million; (b) .35% of the next $500 million; and (c)
.30% of the remaining average daily net assets. For services provided
to the Non-Money Market Portfolios, the Bank receives the following
fees from HighMark based on each portfolio's average daily net assets:
(a) 1.00% of the first $40 million; and (b) .60% on the remaining
average daily net assets. It is represented that the Bank currently
allocates investments by the Plans among the portfolios offered by
HighMark, and proposes to continue to allocate the assets of the Plans
among the portfolios of HighMark and/or any of the Funds under the
terms of this proposed exemption.
It is represented that the impact of the change in fee structures,
described in paragraph 9 above, on aggregate fees received by the Bank
is difficult to determine, because various factors and variables are
unique to each Plan. These factors include the size of the Plan, the
extent to which Plan assets are invested in the Funds, and the
application of certain ``break points'' in the schedule of Plan-level
fees. Further, Fund size and the application of certain ``break
points'' in the rate schedule of Fund-level fees, the identity of the
particular investment portfolio of the Fund into which the Plan assets
are allocated, and voluntary waivers by the Bank of Fund-level fees are
likely to be different in each situation and may affect the aggregate
amount of fees received by the Bank. In this regard, it is represented
that the combined total of all Plan-level and Fund-level fees received
by the Bank for the provision of services to the Plans and to the
Funds, respectively, are not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
12. The exemption is subject to satisfaction of certain general
conditions. Chief among such conditions is the requirement that the
proposed transactions are subject to the prior authorization of a
Second Fiduciary, acting on behalf of each of the Plans, who has been
provided with full written disclosure by the Bank. It is represented
that the Second Fiduciary will generally be the administrator, sponsor,
or a committee appointed by the sponsor to act as a named fiduciary for
a Plan.
With respect to disclosure, the Second Fiduciary of such Plan will
receive in writing in advance of the investment by a Plan in any of the
Funds: (1) a current prospectus for each portfolio of each of the Funds
in which such Plan may invest, (2) a statement describing the
investment management fees, investment advisory fees, or similar fees,
any fees for Secondary Services, and all other fees to be charged to or
paid by the Plan and by such Funds to the Bank, including the nature
and extent of any differential between the rates of such fees, (3) the
reasons why the Bank may consider such investment(s) to be appropriate
for the Plan, (4) a statement describing whether there are any
limitations applicable to the Bank with respect to which assets of a
Plan may be invested in the Funds, and, if so, the nature of such
limitations, and (5) upon request of the Second Fiduciary a copy of the
proposed exemption and/or the final exemption, if granted.
In addition to the disclosures provided to the Plan prior to
investment in any of the Funds, the Bank represents that it will
routinely provide at least annually to the Second Fiduciary updated
prospectuses of the Funds in accordance with the requirements of the
Investment Company Act of 1940 and the SEC rules promulgated
thereunder. Further, the Second Fiduciary will be supplied, upon
request, with a report or statement (which may take the form of the
most recent financial report of such Funds, the current statement of
additional information, or some other written statement) which contains
a description of all fees paid by the Fund.
It is represented that the Bank does not now execute nor in the
future intend to execute securities brokerage transactions for the
investment portfolios of any of the Funds, except as and to the extent
permitted by the Investment Company Act of 1940 and applicable rules of
the Securities and Exchange Commission. In the event the Bank ever
performs brokerage services for which a fee is paid to the Bank by the
investment portfolio of any of the Funds, the Bank represents that it
will at least thirty (30) days in advance of the implementation of such
additional service provide a written notice which explains the nature
of such additional brokerage service and the amount of the fees.
Further, the Bank represents that it will provide at least annually to
the Second fiduciary of any Plan that invests in such Funds with a
written disclosure indicating (a) the total, expressed in dollars, of
brokerage commissions of each Fund's investment portfolio that are paid
to the Bank by such Fund; (b) the total, expressed in dollars, of
brokerage commissions of each Fund's investment portfolio that are paid
by such Fund to brokerage firms unrelated to the Bank; (c) the average
brokerage commissions per share, expressed as cents per share, paid to
the Bank by each portfolio of a Fund; and (d) the average brokerage
commissions per share, expressed as cents per share, paid by each
portfolio of a Fund to brokerage firms unrelated to the Bank.
On the basis of the information disclosed, it is represented that
the Second Fiduciary will authorize in writing (i) the investment of
assets of the Plans in shares of the Fund in connection with the
transactions set forth herein; (ii) the investment portfolios of the
Funds in which the assets of the Plans may be invested; and (iii) the
compensation received by the Bank in connection with its services to
the Funds. It is represented that written authorization will extend to
only those investment portfolios of the Funds with respect to which the
Second Fiduciary has received the written disclosures referred to above
and which are specifically mentioned in such authorization. Having
obtained the authorization of the Second Fiduciary, the Bank will be
permitted to invest the assets of a Plan among the portfolios and in
the manner covered by the authorization, subject to satisfaction of the
other terms and conditions of this proposed exemption. However, the
Bank will not be permitted to invest assets of a Plan in any portfolio
not specifically mentioned in the written authorization. For example,
if the written authorization of the Second Fiduciary covered only three
of six portfolios then existing, the Bank could only invest the assets
of such Plans in those three portfolios specifically authorized.
Further, if a new portfolio were established under any of the Funds,
the Bank could invest assets of a Plan in such new portfolio only after
providing the required disclosures and obtaining from the Second
Fiduciary a separate written authorization which specifically mentions
the new portfolio.
13. The receipt of fees, as described above, are generated in
connection with the investment in the Funds by the Plans. These
investments are the result of purchases of shares in the Funds and
exchanges of assets of the Plans, including those in CIFs, for shares
in the Funds.
It is represented: (1) that Plans and other investors will
purchases or sell shares in the Funds in accordance with standard
procedures described in the prospectus for each portfolio of the Funds;
(2) that the Plans will pay no sales commissions or redemption fees in
connection with purchase or sales of shares in the Funds by the Plans;
(3) that the Bank will not purchase from or sell to any of the Plans
shares of any of the Funds; and (4) the price paid or received by the
Plans for shares of the Funds will be the net asset value per share at
the time of such purchase or sale and will be the same price as any
other investor would have paid or received at that time.11
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\1\1In this regard, it is represented that the value of
HighMark's shares and the value of each of HighMark's portfolios are
determined on a daily basis. In the case of the Non-Money Market
Portfolios, assets are valued at fair or market value, as required
by Rule 2a-4 under the Investment Company Act. In the case of the
Money Market Portfolios, the assets are valued based on the
amortized cost method authorized by SEC Rule 2a-7, in order to
maintain net asset value at $1.00 per share. Both the Money Market
Portfolios and the Non-Money Market Portfolios determine the net
asset value per share for purposes of pricing purchases and sales by
dividing the value of all securities, determined by a method as set
forth in the prospectus for each HighMark portfolio, and other
assets belonging to each of the portfolios, less the liabilities
charged to each portfolio, by the number of each portfolio's
outstanding shares.
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14. Purchases and sales of shares in any of the Funds by the Plans
may also occur in connection with daily automated cash ``sweep''
arrangements. However, agreement to such arrangement is not a condition
for the Plan otherwise choosing to invest in shares of the Fund, nor
will the reverse be required.
It is represented that at the time the application was filed, all
of the Plans served by the Bank had elected to participate in automated
cash ``sweep'' arrangements with HighMark. Further, it is represented
that the ``sweep'' procedures, as described below with respect to
HighMark, will remain in effect under the proposed exemption for any of
the Funds.
Under the automated cash ``sweep'' arrangement, a Plan may
participate in the ``sweep'' program only with the initial written
approval of the Second Fiduciary and only after certain disclosures
have been provided by the Bank. If such approval is given, cash
balances of the Plan held from time to time thereafter pending other
investment or distribution are invested automatically in shares of one
or more of HighMark's Money Market Portfolios selected by the Second
Fiduciary on behalf of a Plan at the time of the initial authorization.
It is represented that the automated cash ``sweep'' arrangement would
not involve shares of HighMark's Non-Money Market Portfolios.
After the Money Market Portfolios have been selected by the Second
Fiduciary on behalf of the Plan, otherwise uninvested cash down to the
last $1.00 balance of the Plans may be invested automatically on a
nightly basis. It is represented that the Bank has no discretion with
respect to the timing of the ``sweep'' either into or out of HighMark.
Under the automated cash ``sweep'' arrangement, the Bank's computerized
cash management system automatically scans the accounts of the Plans,
as of the end of each business day to determine whether such accounts
have positive or negative net cash balances. Based on this information
the system automatically invests the cash of the Plans having positive
balances in shares of the selected Money Market Portfolios. In the case
of a Plan having a negative cash balance, the system automatically
liquidates HighMark shares as necessary to eliminate such negative
balance.
It is represented that Plans may terminate their participation in
the automated cash ``sweep'' arrangement and withdraw at any time by
notifying the Bank. Such termination will be affected by the Bank
selling the shares of HighMark held by the Plan requesting termination
within one business day following receipt by the Bank, either by mail,
hand delivery, facsimile, or other available means at the option of the
Second Fiduciary, of the Termination Form or any other written notice
of termination. However, if due to circumstances beyond the control of
the Bank, the sale of shares of such Plan cannot be executed within one
business day, the Bank shall have one additional business day to
complete such sale.
It is represented that no fee, charge, or penalty of any kind is
charged in connections with a termination by a Plan of participation in
the automated cash ``sweep arrangement'' in HighMark or in any of the
Funds. It is further represented that the Bank does not charge separate
or additional fees to Plans in order to participate in the daily
automated cash ``sweep'' arrangement, nor is such additional
compensation contemplated by the proposed exemption.12
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\1\2The Department in a letter, dated August 1, 1986, to Robert
S. Plotkin, Assistant Director, Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System,
addressed the application of section 408(b)(2) of the Act to
arrangements involving ``sweep services.'' In that letter the
Department set forth several examples to illustrate various
circumstances under which violations of section 406(b) of the Act
would arise with respect to such arrangements. Conversely, the
letter provided that, if a bank provides ``sweep'' services without
the receipt of additional compensation or other consideration (other
than reimbursement of direct expenses properly and actually incurred
in the performance of such services), then the provision of
``sweep'' services by the bank would not, in itself, constitute a
violation of section 406(b) of the Act. Moreover, including
``sweep'' services under a single fee arrangement for investment
management services which is calculated as a percentage of the
market value of the total assets under management would not, in
itself, constitute an act described in section 406(b)(1), because
the bank would not be exercising its fiduciary authority or control
to cause a plan to pay an additional fee.
In addition, the letter also discusses the applicability of the
statutory exemptions under section 408(b)(6) fees for ``ancillary
services'' and under section 408(b)(8) for collective trust funds
maintained by such bank of the Act to such ``sweep'' service
arrangements.
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15. In summary, the Bank represents that the proposed transactions
meet the statutory criteria of section 408(a) of the Act because:
(a) Neither the Plans nor the CIFs have paid or will pay sales
commissions or redemption fees in connection with the in-kind transfer
of assets to the Funds in exchange for shares of the Funds or in
connection with purchases or sales by the Plans of shares of the Funds,
including purchases and sales handled through daily automated cash
``sweep'' arrangements;
(b) The Plans or the CIFs have received and will receive shares of
the Funds that are equal in value to the assets of the Plans or the
CIFs exchanged for such shares, as determined in a single valuation
performed in the same manner and at the close of business on the same
day in accordance with the procedures set forth in Rule 17a-7 under the
Investment Company Act of 1940, as amended from time to time or any
successor rule, regulation, or similar pronouncement;
(c) Not later than thirty (30) days after completion of each in-
kind transfer of assets in exchange for share of the Funds, the Second
Fiduciaries for affected Plans have received and will receive written
confirmation of the assets involved in the exchange, the price of such
assets, and the identity of the pricing service or market maker
consulted;
(d) For all conversion transactions that occur after the date of
this proposed exemption, the Bank, no later than ninety (90) days after
completion of each in-kind transfer of assets of the Plans or the CIFs
in exchange for shares of the Funds, will mail to the Second Fiduciary
a written confirmation of the number of CIF units held by each affected
Plan immediately before the conversion (and the related per unit value
or the aggregate dollar value of the units transferred), and the number
of shares in the Funds that are held by each affected Plan following
the conversion (and the related per share net asset value or the
aggregate dollar value of the shares received);
(e) The price that has been or will be paid or received by the
Plans for shares in the Funds is the net asset value per share at the
time of the transaction and is the same price for the shares which
would have been paid or received by any other investor at that time;
(f) The Bank, its affiliates, and officers or directors have not
and will not purchase from or sell to any of the Plans shares of any of
the Funds;
(g) 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, has not been and will not be in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act;
(h) The Bank has not and will not receive any 12b-1 Fees in
connection with the transactions;
(i) Prior to investment by a Plan in any of the Funds, in
connection with transactions, the Second Fiduciary has received and
will receive a full and detailed written disclosure of information
concerning such Fund;
(j) subsequent to the investment by a Plan in any of the Funds, the
Bank will provide the Second Fiduciary of such Plan, among other
information, at least annually with an updated copy of the prospectus
for each of the Funds in which the Plan invests;
(k) in the event such Fund places brokerage transactions with the
Bank, the Bank will provide the Second Fiduciary of such Plan at least
annually with a statement specifying the total, expressed in dollars,
of brokerage commissions of each Fund's investment portfolio that are
paid by such Fund to the Bank and to unrelated brokerage firms and the
average brokerage commissions per share, expressed as cents per share,
by each portfolio of a Fund paid to the Bank and to brokerage firms
unrelated to the Bank;
(l) On the basis of the disclosures, the Second Fiduciary has
authorized and will authorize the transactions;
(m) The authorization by the Second Fiduciary has been and will be
terminable at will without penalty to such Plans, and has been and will
be effected within one business day following receipt by the Bank,
either by mail, hand delivery, facsimile, or other available means at
the option of the Second Fiduciary, of the Termination Form or any
other written notice of termination, unless circumstances beyond the
control of the Bank delay execution for no more than one additional
business day;
(n) The Plans do not pay any investment management, investment
advisory, or similar fees to the Bank with respect to any of the assets
of such Plans which are invested in shares of any of the Funds;
(o) the Second Fiduciary has received and will receive a written
notice accompanied by a Termination Form with instructions regarding
the use of such form, at least thirty (30) days in advance of the
implementation of any increase in the rate of any fees for investment
management, investment advisory, or similar fees, any additional
Secondary Service for which a fee is charged, or any increase in fees
for Secondary Services that the Bank provides to the Funds; and
(p) All dealings between the Plans and any of the Funds have been
and will on a basis no less favorable to such Plans than dealings
between the Funds and other shareholders holding the same class of
shares as the Plans.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include the fiduciaries of Plans which have
invested, as of the effective date of this exemption, in HighMark and/
or in any of the Funds, where the Bank served as investment adviser to
such Funds and also served in any capacity as fiduciary for such Plans.
In addition, it is represented that many other Plans for which the Bank
serves in any capacity as a fiduciary may from time to time invest in
HighMark and/or in any of the Funds to which the Bank may serve as
investment adviser in the future. For this reason, the Bank does not
know the number of Plans which may therefore be affected by this
proposed exemption. Accordingly, the Department has determined that the
only practical form of providing notice to interested persons is the
distribution by the Bank by first class mail of a copy of the notice of
pendency of this proposed exemption (the Notice) within thirty (30)
days of the date of the publication of such Notice in the Federal
Register to the fiduciaries of any of the Plans which are invested, on
the date of the publication of the Notice in the Federal Register, in
HighMark and/or any the Funds to which the Bank serves as investment
adviser. Such distribution to interested persons shall include a copy
of the Notice, as published in the Federal Register, plus a copy of the
supplemental statement, as required, pursuant to 29 CFR 2570.43(b)(2),
which shall inform such interested persons of their right to comment
and to request a hearing. The Bank also represents that it will provide
a copy of the proposed exemption and/or a copy of the final exemption,
if granted, to any Second Fiduciary of a Plan upon request.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (this is not a toll-free number.)
Marshall & Ilsley Trust Company Located in Milwaukee, Wisconsin;
Proposed Exemption
[Application No. D-9257]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Exemption for In-Kind Transfer of CIF Assets
If the exemption is granted, the restrictions of section 406(a) and
406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply, as of November 20, 1992, to the in-
kind transfer of assets of plans for which Marshall & Ilsley Trust
Company or an affiliate (collectively, M&I) serves as a fiduciary (the
Client Plans), other than plans established and maintained by M&I, that
are held in certain collective investment funds maintained by M&I (the
CIFs), in exchange for shares of the Marshall Funds, Inc. (the Funds),
an open-end investment company registered under the Investment Company
Act of 1940 (the 1940 Act), for which M&I acts as investment adviser,
custodian, and/or shareholder servicing agent, in connection with the
termination of such CIFs, provided that the following conditions and
the general conditions of Section III below are met:
(a) No sales commissions or other fees are paid by the Client Plans
in connection with the purchase of Fund shares through the in-kind
transfer of CIF assets and no redemption fees are paid in connection
with the sale of such shares by the Client Plans to the Funds.
(b) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Client Plan's pro
rata share of the assets of the CIF on the date of the transfer, based
on the current market value of the CIF's assets, as determined in a
single valuation performed in the same manner at the close of the same
business day, using independent sources in accordance with Rule 17a-
7(b) of the Securities and Exchange Commission under the 1940 Act and
the procedures established by the Funds for the valuation of such
assets. Such procedures must require that all securities for which a
current market price cannot be obtained by reference to the last sale
price for transactions reported on a recognized securities exchange or
NASDAQ be valued based on an average of the highest current independent
bid and lowest current independent offer, as of the close of business
on the Friday preceding the weekend of the CIF transfers, determined on
the basis of reasonable inquiry from at least three sources that are
broker-dealers or pricing services independent of M&I.
(c) A second fiduciary who is independent of and unrelated to M&I
(the Second Fiduciary) receives advance written notice of the in-kind
transfer of assets of the CIFs and full written disclosure of
information concerning the Funds (including a current prospectus for
each of the Funds and a statement describing the fee structure) and, on
the basis of such information, authorizes in writing the in-kind
transfer of the Client Plan's CIF assets to a corresponding Fund in
exchange for shares of the Fund.
(d) For all subsequent transfers of CIF assets to a Fund following
the publication of this proposed exemption in the Federal Register, M&I
sends by regular mail to each affected Client Plan a written
confirmation, not later than 30 days after completion of the
transaction, containing the following information:
(1) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(2) The price of each such security involved in the transaction;
and
(3) The identity of each pricing service or market maker consulted
in determining the value of such securities.
(e) For all subsequent transfers of CIF assets to a Fund following
the publication of this proposed exemption in the Federal Register, M&I
sends by regular mail to the Second Fiduciary no later than 90 days
after completion of each transfer a written confirmation that contains
the following information:
(1) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(2) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
(f) The conditions set forth in paragraphs (e), (f) and (l) of
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (F) of the Code, shall not apply as of November 20, 1992, to:
(1) The receipt of fees by M&I from the Funds for acting as an
investment adviser to the Funds in connection with the investment by
the Client Plans in shares of the Funds; and (2) the receipt and
proposed retention of fees by M&I from the Funds for acting as
custodian and shareholder servicing agent to the Funds as well as for
any other services to the Funds which are not investment advisory
services (i.e. ``secondary services'') in connection with the
investment by the Client Plans in shares of the Funds, provided that
the following conditions and the general conditions of Section III are
met:
(a) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds and no redemption fees
are paid in connection with the sale of shares by the Client Plans to
the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section IV(e), and is the same price which would have
been paid or received for the shares by any other investor at that
time.
(c) Neither M&I nor an affiliate, including any officer or director
of M&I, purchases or sells shares of the Funds to any Client Plan.
(d) Each Client Plan receives a credit, either through cash or the
purchase of additional shares of the Funds pursuant to an annual
election made by the Client Plan, of such Plan's proportionate share of
all fees charged to the Funds by M&I for investment advisory services,
within no more than one business day of the receipt of such fees by
M&I.
(e) The combined total of all fees received by M&I for the
provision of services to a Client Plan, and in connection with the
provision of services to the Funds in which the Client Plan may invest,
are not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.
(f) M&I does not receive any fees payable pursuant to Rule 12b-1
under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by M&I.
(h) The Second Fiduciary receives full and detailed written
disclosure of information concerning the Funds (including a current
prospectus for each of the Funds and statement describing the fee
structure) in advance of any investment by the Client Plan in a Fund.
(i) On the basis of the information described above in paragraph
(h), the Second Fiduciary authorizes in writing the investment of
assets of the Client Plan in each particular Fund, the fees to be paid
by such Funds to M&I, and the purchase of additional shares of a Fund
by the Client Plan with the fees credited to the Client Plan by M&I.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to M&I are subject to an annual
reauthorization wherein any such prior authorization referred to in
paragraph (i) shall be terminable at will by the Client Plan, without
penalty to the Client Plan, upon receipt by M&I of written notice of
termination. A form expressly providing an election to terminate the
authorization described in paragraph (i) above (the Termination Form)
with instructions on the use of the form must be supplied to the Second
Fiduciary no less than annually. The instructions for the Termination
Form must include the following information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by M&I of written
notice from the Second Fiduciary; and
(2) Failure to return the Termination Form will result in continued
authorization of M&I to engage in the transactions described in
paragraph (i) on behalf of the Client Plan.
(k) The Second Fiduciary of each Client Plan invested in a
particular Fund receives full written disclosure, in a statement
separate from the Fund prospectus, of any proposed increases in the
rates of fees charged by M&I to the Funds for secondary services (as
defined in Section IV(h) below) at least 30 days prior to the effective
date of such increase, accompanied by a copy of the Termination Form,
and receives full written disclosure in a Fund prospectus or otherwise
of any increases in the rates of fees charged by M&I to the Funds for
investment advisory services even though such fees will be credited as
required by paragraph (d) above.
(l) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Client Plans than dealings with other
shareholders of the Funds.
Section III--General Conditions
(a) M&I maintains for a period of six years the records necessary
to enable the persons described below in paragraph (b) to determine
whether the conditions of this exemption have been met, except that:
(1) a prohibited transaction will not be considered to have occurred
if, due to circumstances beyond the control of M&I, the records are
lost or destroyed prior to the end of the six-year period, and (2) no
party in interest other than M&I shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act or to the taxes
imposed by section 4975 (a) and (b) of the Code if the records are not
maintained or are not available for examination as required by
paragraph (b) below.
(b) (1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504 (a)(2) and (b) of the Act, the records
referred to in paragraph (a) are unconditionally available at their
customary location for examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1)(ii) and (iii)
shall be authorized to examine trade secrets of M&I, or commercial or
financial information which is privileged or confidential.
Section IV--Definitions
For purposes of this proposed exemption:
(a) The term ``M&I'' means the Marshall & Ilsley Trust Company and
any affiliate thereof as defined below in paragraph (b) of this
section.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the Marshall
Funds, Inc., or any other diversified open-end investment company or
companies registered under the 1940 Act for which M&I serves as an
investment adviser and may also serve as a custodian, shareholder
servicing agent, transfer agent or provide some other ``secondary
service'' (as defined below in paragraph (h) of this Section) which has
been approved by such Funds.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of and unrelated to M&I. For purposes of this
exemption, the Second Fiduciary will not be deemed to be independent of
and unrelated to M&I if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with M&I;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner or employee
of M&I (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner or employee of M&I (or relative of
such persons), is a director of such Second Fiduciary, and if her or
she abstains from participation in: (i) The choice of the Client Plan's
investment adviser, (ii) the approval of any such purchase or sale
between the Client Plan and the Funds, and (iii) the approval of any
change in fees charged to or paid by the Client Plan in connection with
any of the transactions described in Sections I and II above, then
paragraph (g)(2) of this section shall not apply.
(h) The term ``secondary service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by M&I to the Funds. However, for purposes of this
exemption, the term ``secondary service'' will not include any
brokerage services provided to the Funds by M&I for the execution of
securities transactions engaged in by the Funds.
(i) The term ``Termination Form'' means the form supplied to the
Second Fiduciary which expressly provides an election to the Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described in paragraph (j) of Section II. Such Termination Form may be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify M&I in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan requesting such termination within one business day
following receipt by M&I of the form; provided that if, due to
circumstances beyond the control of M&I, the sale cannot be executed
within one business day, M&I shall have one additional business day to
complete such sale.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective November 20, 1992.
Summary of Facts and Representations
1. Marshall & Ilsley Trust Company (M&I Trust) is a Wisconsin
corporation with its principal offices located at 770 North Water
Street, Milwaukee, Wisconsin, and is a subsidiary of Marshall & Ilsley
Corporation (M&I Corp.), a bank holding company. M&I Corp. and various
affiliates (referred to herein as ``M&I''), serve as trustee, directed
trustee, investment manager, or custodian for approximately 1,163
employee benefit plans. As of September 30, 1992, M&I had total assets
of approximately $25.3 million and total assets under management of
approximately $4.86 billion.
M&I represents that its status as a fiduciary with investment
discretion for a Client Plan arises out of its relationship as a
trustee or investment manager for such Plan, but does not result from
the rendering of any investment advice to a Plan fiduciary that has
investment discretion for the Client Plan. As a custodian or directed
trustee of a Client Plan, M&I has custody of Plan assets, collects all
income, performs bookkeeping and accounting services, generates
periodic statements of account activity and other reports, and makes
payments or distributions from the account as directed. However, M&I
has no duty as custodian or directed trustee to review investments or
make recommendations, acting only as directed by an authorized Second
Fiduciary.
The Client Plans include various pension, profit sharing, and stock
bonus plans as well as voluntary employees' beneficiary associations,
supplemental unemployment benefit plans, simplified employee benefit
plans, retirement plans for self-employed individuals (i.e., Keogh
plans), and individual retirement accounts (IRAs).13 M&I, in its
capacity as a fiduciary of the Client Plans, may exercise investment
discretion for all or a portion of he assets of such Client Plans.
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\1\3M&I states that only pension, profit sharing and Keogh plans
were invested in the CIFs at the time of the transfers of assets
from the CIFs to the Funds.
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2. M&I requests an exemption for investments in a Fund which occur
through an in-kind transfer of a Client Plan's pro rata share of assets
from a terminating CIF to a corresponding Fund in exchange for shares
of such Fund.14 M&I also requests an exemption for the receipt of
fees from the Funds in connection with the investment of assets of a
Client Plan (including any assets of a Client Plan which were held in a
terminating CIF) for which it acts as a trustee, directed trustee,
investment manager, or custodian, in shares of the Funds in instances
where M&I is an investment adviser, custodian, and shareholder
servicing agent for the Funds. The exemption would include Client Plans
for which M&I exercises investment discretion as well as Client Plans
where investment decisions are directed by a Second Fiduciary.
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\1\4M&I is not requesting an exemption for any investment in the
Funds by the M&I Plans. M&I represents that the M&I Plans may
acquire or sell shares of the Funds pursuant to Prohibited
Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734, April 8, 1977).
PTE 77-3 permits the acquisition or sale of shares of a registered,
open-end investment company by an employee benefit plan covering
only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met. The Department is expressing no opinion
in this proposed exemption regarding whether any transactions with
the Funds by the M&I Plans would be covered by PTE 77-3.
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The Client Plans' pro rata share of fees paid by the Funds to M&I
for investment advisory services are credited to the Client Plans, in
accordance with the conditions of the proposed exemption (as discussed
in Item 7 below), with respect to the assets of the Client Plans
involved in Fund investments. Any amounts received by M&I for serving
as a custodian and shareholder servicing agent of the Funds are also
currently credited to the Client Plans to the extent that such amounts
exceed M&I's direct expenses for providing the service to the Funds.
However, M&I proposes to retain such fees in the future. All
investments in the Funds are made by M&I pursuant to an initial written
authorization and an annual reauthorization of the investment by the
Second Fiduciary. M&I invests assets of a Client Plan in any of the
Funds for which it has received prior written authorization for such
investment from the Second Fiduciary during the period that the
authorization is effective.
3. The Funds are a Wisconsin corporation organized as an open-end
investment company registered under the 1940 Act. The Funds currently
consist of five Funds or ``portfolios'', each having a separate
prospectus and representing a distinct investment vehicle. The shares
of each Fund represent a proportionate interest in the assets of that
Fund. The existing Funds include the Marshall Money Market Fund, the
Marshall Government Income Fund, the Marshall Intermediate Bond Fund,
the Marshall Short-Term Income Fund, and the Marshall Stock Fund. M&I
states that additional Funds may be established in the future. Shares
of the Funds are offered and sold to eligible investors. Certain
shares, identified by each prospectus as Trust Shares, are offered to
trust accounts of M&I as a means of acquiring an interest in a
diversified porfolio of investments. M&I states that the Trust Shares
are offered to M&I's trust customers, including the Client Plans, under
terms and conditions which are at least as favorable to such customers
as the terms and conditions involved in any other class of Fund shares.
If the proposed exemption is granted, the exemption would cover only
investments by Client Plans in Trust Shares. Thus, all references
herein to the transactions involving the Client Plans refer only to the
Trust Shares described by the prospectus for each Fund.
Investments of Client Plan assets in the Funds occur either through
a transfer of assets from a terminating CIF, the direct purchase of
shares of the Funds for a Client Plan by M&I, the transfer by M&I of
Client Plan assets from one Fund to another Fund, or a daily automated
sweep of uninvested cash of a Client Plan by M&I into one or more Funds
previously designated by the Client Plan for sweeping such cash.15
All such investments for the Client Plans are made pursuant to the
Second Fiduciary's prior written authorization and annual
reauthorization to M&I (as described in Item 8 below).
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\1\5M&I states that an automated sweep of uninvested cash is
currently available as a means of investment by the Client Plans
into either the Marshall Money Market Fund, the Marshall Government
Income Fund, and the Marshall Short-Term Income Fund.
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4. Federated Securities Corporation (FSC) is the principal
distributor for all shares of the Funds including Trust Shares which
are sold to the Client Plans.16 There are no fees for distribution
expenses, pursuant to Rule 12b-1 under the 1940 Act, paid to FSC with
respect to the Trust Shares. In addition, M&I does not and will not
receive fees payable pursuant to Rule 12b-1 in connection with
transactions involving any shares of the Funds. The Trust Shares are
charged for certain administrative expenses of the Funds. FSC is a
subsidiary of Federated Investors (Federated) which, through other
subsidiaries, acts as the transfer and dividend disbursing agent for
the Funds and provides certain personnel and administrative services
for the Funds. Federated and its subsidiaries are unrelated to M&I.
However, M&I Trust is the custodian for the securities and cash of the
Funds and Marshall Funds Investor Services (MFIS), another affiliate of
M&I Corp., is the shareholder servicing agent for the Funds.
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\1\6According to the Fund prospectuses, investors may purchase
shares of the Funds through M&I Brokerage Services, Inc. (M&I
Brokerage Services), an affiliate of M&I Corp. However, the
involvement of M&I Brokerage Services in selling Fund shares is
limited to transactions through M&I ``retail'' accounts--i.e.,
accounts other than those accounts handled by M&I Trust or other M&I
affiliated trust companies. M&I represents that purchases and sales
of Fund shares for all M&I trust accounts, including the Client
Plans, are handled by M&I trust officers dealing directly with
Federated, the Funds' distributor.
In addition, M&I Brokerage Services does not provide portfolio
execution services for the Funds. M&I states that securities
transactions for a Fund's portfolio are executed by broker-dealers
unrelated to M&I and do not generate commissions or other fees to
M&I Brokerage Services or any affiliate. The Department notes that
for purposes of this exemption the term ``secondary service'' does
not include any brokerage services provided to the Funds by M&I for
the execution of securities transactions engaged in by the Funds
(see Section IV(h) above).
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5. M&I Investment Management Corp. (M&I Management), a wholly-owned
subsidiary of M&I Corp., serves as the investment adviser for the Funds
pursuant to investment advisory agreements with the Funds (the
Agreements) which allow M&I Management to receive monthly investment
advisory fees based on a percentage of the average daily net assets of
each of the Funds. The Agreements and the fees received by M&I
Management are approved by the Board of Directors of the Funds (the
Funds' Directors), in accordance with the applicable provisions of the
1940 Act. Any changes in the fees are approved by the Funds' Directors.
All of the Funds' Directors are independent of M&I.
6. Prior to November 20, 1992, M&I generally invested assets of
Client Plans for which it acted as a trustee with investment discretion
in a series of CIFs. In addition, certain Client Plans where investment
decisions are directed by a Second Fiduciary generally used an M&I CIF
as an investment option for individual accounts in the Client Plans.
However, on Friday, November 20, 1992, M&I terminated three of its
CIFs--the M&I Employee Benefit Money Market Fund, the M&I Employee
Benefit Bond Fund, and the M&I Employee Benefit Stock Fund. The assets
in these CIFs were transferred to the Marshall Money Market Fund, the
Marshall Intermediate Bond Fund, and the Marshall Stock Fund,
respectively. Each CIF transferred its assets to the corresponding Fund
in exchange for Trust Shares of that Fund at the then current market
value of the CIF assets, in accordance with Rule 17a-7 under the 1940
Act (as discussed below).17 The CIFs were liquidated and the Trust
Shares were distributed to the Client Plans, subject to the prior
written consent of the Second Fiduciary for the Client Plan. Any Client
Plan that had not provided prior written approval for the transfer of
its CIF assets to the Funds, by the deadline set for such approvals,
received a cash distribution of its pro rata share of the CIF assets no
later than Friday, November 20, 1992, preceding the transfers.
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\1\7Rule 17a-7 permits transactions between investment funds
that use the same investment adviser, subject to certain conditions.
Rule 17a-7 requires, among other things, that such transactions be
effected at the ``independent current market price'' for each
security, involve only securities for which market quotations are
readily available, involve no brokerage commissions or other
remuneration, and comply with valuation procedures adopted by the
board of directors of the investment company to ensure that all
requirements of the Rule are satisfied.
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The assets of the CIFs were reviewed by M&I Management as
investment adviser to the Funds, in coordination with Federated
Administrative Services (FAS), the Funds' third party administrator, to
determine that the assets were appropriate investments for the
corresponding Funds. FAS created a portfolio accounting system to track
the securities to be acquired by the Funds. Prior to the transfer of
CIF assets to the Funds, the Funds did not hold any securities or other
assets except cash or, as in the case of the Marshall Money Market
Fund, U.S. Treasury Bills.
The transfer transactions occurred using market values as of the
close of business on Friday, November 20, 1992. The securities
transferred from the CIFs were the same as the securities received by
the Funds. The applicant states that the value of the securities was
determined in a single valuation by M&I as investment adviser for the
Funds, in accordance with the requirement of Rule 17a-7(b) that
transactions be effected at the ``independent current market price'' of
the securities. The valuation of the securities was performed in the
same manner for both the CIF and the corresponding Fund at the close of
the same business day. Specifically, as required by the Rule,
securities listed on exchanges were valued at their closing prices on
Friday, November 20, and unlisted securities were valued based on the
average of bid and ask quotations at the close of the market on Friday,
November 20, obtained from three brokers independent of M&I. Any fees
charged by the independent brokers for the bid and ask prices were paid
by M&I.
Each Client Plan that approved the CIF asset transfers to the Funds
received account statements describing the asset transfers either in
mid-December 1992, if such Plans were on a monthly account statement
schedule, or mid-January 1993, if such Plans were on a quarterly
account statement schedule. The statements showed the disposition of
the CIF units from the Client Plan account and the acquisition by the
account of Fund shares, both posted as of Monday, November 23,
1992.\18\ This information provided the affected Client Plans with
written confirmation of the number of CIF units held by the Client Plan
immediately before the transfer, the related per unit value and the
total dollar amount of such CIF units as well as the number of shares
of the Funds held by the Client Plan following the transfer, the
related per share net asset value, and the total dollar amount of such
shares.
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\1\8The applicant has provided the following example: Assume a
Client Plan held 12,506 units of the M&I Employee Benefit Stock Fund
prior to the asset transfers. The account statement showed a
disposition of 12,506 units of M&I Employee Benefit Stock Fund, at a
value of $72.08 per unit, on November 23, 1992, with total proceeds
of $901,432.18. The statement also showed a purchase on that same
date of 90,143.218 shares of the Marshall Stock Fund, the Fund
corresponding to the M&I Employee Benefit Stock Fund, at $10 per
share, at a total cost of $901,432.18, the same amount as the
proceeds of the disposition from the M&I Employee Benefit Stock
Fund.
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Thus, the applicant represents that as of November 23, 1992, Client
Plans that were formerly invested in the terminated CIFs held Trust
Shares of the corresponding Funds which were of the same value, based
on the Client Plans' pro rata share of the underlying market value of
the securities transferred to the Funds, as their assets in the CIF as
of the close of business on Friday, November 20, 1992. M&I represents
that the other CIFs may be terminated in the future and that all such
terminations and subsequent transfers of CIF assets for Trust Shares of
the Funds will comply with Rule 17a-7 as described above and the
conditions of this proposed exemption.19
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\1\9On Friday, October 1, 1993, M&I terminated the M&I Dividend
Fund and transferred its assets upon written approval from the
investors to a new Marshall Fund, the Marshall Equity Income Fund.
The transfer of assets occurred in the same manner as the asset
transfers which occurred on November 20, 1992.
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M&I states that for all subsequent transfers of CIF assets to a
Fund following the publication of this proposed exemption in the
Federal Register, M&I will send by regular mail to each affected Client
Plan a written confirmation, not later than 30 days after completion of
the transaction, containing the following information:
(1) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(2) The price of each such security involved in the transaction;
and
(3) The identity of each pricing service or market maker consulted
in determining the value of such securities. Securities which are
valued in accordance with Rule 17a-7(b)(4) are securities for which the
current market price cannot be obtained by reference to the last sale
price for transactions reported on a recognized securities exchange or
the NASDAQ system. M&I states that such securities are valued based on
an average of the highest current independent bid and lowest current
independent offer, as of the close of business on the Friday preceding
the weekend of the CIF transfers, determined on the basis of reasonable
inquiry from at least three sources that are broker-dealers or pricing
services independent of M&I.
In addition, for all in-kind transfers of CIF assets to a Fund that
occur after the date this proposed exemption is published in the
Federal Register, M&I will send by regular mail to the Second Fiduciary
no later than 90 days after completion of each transfer a written
confirmation that contains the following information:
(1) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(2) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
M&I believes that the interests of the Client Plans are better
served by the collective investment of assets of the Client Plans in
the Funds rather than in the CIFs. The Funds are valued on a daily
basis, whereas the majority of the CIFs are valued monthly. The daily
valuation permits: (i) Immediate investment of Client Plan
contributions in various types of investments; (ii) greater flexibility
in transferring assets from one type of investment to another; and
(iii) daily redemption of investments for purposes of making
distributions. In addition, information concerning the investment
performance of the Funds will be available in newspapers of general
circulation which will allow Client Plan fiduciaries to monitor the
performance of investments on a daily basis and make more informed
investment decisions.
7. For investments in the Funds on behalf of Client Plans
subsequent to the transfer of the CIF assets to the Funds where the
assets involved were not previously invested in any CIFs, M&I currently
offsets its investment management or advisory fees for assets invested
in the Funds in accordance with one of the methods for offsetting
double investment advisory fees described in Prohibited Transaction
Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8, 1977).\20\
Consequently, the applicant represents that the fee structure for these
investments complies with the fee structure under PTE 77-4, and that
the other conditions of PTE 77-4 are met.\21\ However, for Client Plan
investments in the Funds with respect to assets that were previously
held in the CIFs prior to the investment of such assets in the Funds,
M&I uses the fee structure (the Fee Structure) described below. M&I
anticipates using the Fee Structure for future Client Plan investments
in the Funds where the assets involved were not previously invested in
the CIFs if the Second Fiduciary for the Client Plan elects to use the
Fee Structure in lieu of the offset or credit methods prescribed by PTE
77-4. M&I states that the Fee Structure preserves a Client Plan's
existing fee rates for investment management services by M&I when such
Plan invests in the Funds or when such Plan's assets are transferred
from the CIFs to the Funds. The Fee Structure is described as follows:
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\2\0PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that,
among other things, the plan does not pay an investment management,
investment advisory or similar fee with respect to the plan assets
invested in such shares for the entire period of such investment.
Section II(c) of PTE 77-4 states that this condition does not
preclude the payment of investment advisory fees by the investment
company under the terms of an investment advisory agreement adopted
in accordance with section 15 of the Investment Company Act of 1940.
Section II(c) states further that this condition does not preclude
payment of an investment advisory fee by the plan based on total
plan assets from which a credit has been subtracted representing the
plan's pro rata share of investment advisory fees paid by the
investment company.
\2\1The Department is expressing no opinion in this proposed
exemption regarding whether any transactions with the Funds under
the circumstances described herein would be covered by PTE 77-4.
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(a) M&I charges its standard fees to all the Client Plans for
serving as a trustee, directed trustee, investment manager, or
custodian for the Client Plans.\22\ All fees are billed on a quarterly
basis. The annual charges for a Client Plan account are based on fee
schedules negotiated with M&I. For example, if the fee is unbundled,
the standard charge by M&I to a Client Plan for serving as a trustee
with solely custodial responsibilities varies from 17.5 basis points
for account assets under $5 million to 5 basis points for account
assets over $75 million, subject to a base annual charge of $1,500 and
additional charges for specific services. Where M&I serves as
investment manager to a Client Plan account, depending on the type of
portfolio, the charge may vary from 30 basis points up to 80 basis
points. This charge is separate from, and would be in addition to, the
fee for custodial services described above. M&I provides services to
the Client Plans for which it acts as a trustee with investment
discretion, including sweep services for uninvested cash balances in
such Plans, under a bundled or single fee arrangement which is
calculated as a percentage of the market value of the Plan assets under
management. Thus, in such instances, there are no separate charges for
the provision of particular services to the Client Plans. However, for
Client Plans where investment decisions are directed by a Second
Fiduciary, a separate charge is assessed for particular services,
including sweep services, where the Second Fiduciary specifically
agrees to have M&I provide such services to the Client Plan.\23\ M&I
states that in many cases fees charged by M&I to a Client Plan are paid
by the Client Plan sponsor rather than by the Client Plan.
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\2\2The applicant represents that all fees paid by Client Plans
directly to M&I for services performed by M&I are exempt from the
prohibited transaction provisions of the Act by reason of section
408(b)(2) of the Act and the regulations thereunder (see 29 CFR
2550.408b-2). The Department notes that to the extent there are
prohibited transactions under the Act as a result of services
provided by M&I directly to the Client Plans which are not covered
by section 408(b)(2), no relief is being proposed herein for such
transactions.
\2\3See DOL Letter dated August 1, 1986 to Robert S. Plotkin,
Assistant Director, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, stating the
Department's views regarding the application of the prohibited
transaction provisions of the Act to sweep services provided to
plans by fiduciary banks and the potential applicability of certain
statutory exemptions as described therein.
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(b) M&I Management charges the Funds for its services to the Funds
as investment adviser, in accordance with the Agreements between M&I
and the Funds. Under the Agreements, M&I Management charges fees at a
different rate for each Fund, computed based on the average daily net
assets for the respective Fund. The fee differentials among the Funds
result from the particular level of services rendered by M&I Management
to the Funds.
(c) The investment advisory and other fees paid by each of the
existing Funds are accrued on a daily basis and billed by M&I
Management to the Funds at the beginning of the month following the
month in which the fees accrued. The applicant states that any
additional Funds will follow the same monthly billing arrangement.
(d) At the beginning of each month (pursuant to the terms of the
applicable Agreements) and essentially simultaneously with the billing
described in (c) above, but in no event more than one business day
following the receipt of such fees by M&I Management, M&I credits to
each Client Plan directly with cash such Plan's pro rata share of all
investment advisory fees charged by M&I Management to the Funds (the
Credit Program). In addition, M&I currently credits to each Client Plan
any amounts it is paid for providing custody and shareholder services
to the Funds in the same manner as the investment advisory fees but
only to the extent that these amounts exceed M&I's direct expenses for
providing such services. However, M&I proposes in the future to retain
any fees received by M&I from the Funds for custody and shareholder
services or other secondary services.24
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\2\4M&I states that such secondary services are distinct from
the services provided by M&I as trustee to a Client Plan. Trustee
services rendered at the Plan-level include maintaining custody of
the assets of the Client Plan (including the Fund shares, but not
the assets underlying the Fund shares), processing benefit payments,
maintaining participant accounts, valuing plan assets, conducting
non-discrimination testing, preparing Forms 5500 and other required
filings, and producing statements and reports regarding overall plan
and individual participant holdings. These trustee services are
necessary regardless of whether the Client Plan's assets are
invested in the Funds. Thus, M&I represents that its proposed
receipt of fees for both secondary services at the Fund-level and
trustee services at the Plan-level would not involve the receipt of
``double fees'' for duplicative services to the Client Plans because
a Fund is charged for custody and other services relative to the
individual securities owned by the Fund, while a Client Plan is
charged for the maintenance of Plan accounts reflecting ownership of
the Fund shares and other assets.
In this regard, the Department notes that the combined total of
all fees received by M&I directly and indirectly from the Client
Plans for the provision of services to the Plans and/or to the Funds
should not be in excess of ``reasonable compensation'' within the
meaning of section 408(b)(2) of the Act.
In addition, the fact that certain transactions and fee
arrangements are the subject of an administrative exemption does not
relieve a Client Plan fiduciary from the general fiduciary
responsibility provisions of section 404 of the Act. Thus, the
Department cautions the fiduciaries of the Client Plans investing in
the Funds that they have an ongoing duty under section 404 of the
Act to monitor the services provided to the Client Plans to assure
that the fees paid by the Client Plans for such services are
reasonable in relation to the value of the services provided. Such
responsibilities would include determinations that the services
provided are not duplicative and that the fees are reasonable in
light of the level of services provided.
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M&I represents that the credited fees are currently paid to the
Client Plan only in cash, but that the credits may be effectuated in
the future through the purchase of additional shares of the Funds
pursuant to an annual election made by the Second Fiduciary for the
Client Plan. The purchase of the shares will occur in lieu of a cash
credit on the same day that such credit would have been paid to the
Client Plan. M&I states that the fee credits were initially made in
cash to the Client Plans so that no authorizations for crediting fees
in the form of additional shares of the Funds would be involved at the
time of the transfers of the CIF assets to the Funds. All decisions
regarding the use of the credited fees to purchase additional shares of
the Funds, including annual reauthorizations for such credits, will be
made by a Second Fiduciary for the Client Plan.
The Credit Program ensures that M&I does not receive any additional
investment management, advisory or similar fees from the Funds as a
result of investments in the Funds by the Client Plans. Thus, M&I
represents that the Fee Structure is at least as advantageous to the
Client Plans as an arrangement pursuant to the conditions of PTE 77-4
whereby investment advisory fees paid by the Funds to M&I Management
would be offset or credited against investment management fees charged
directly by M&I to the Client Plans. In this regard, M&I states that
the Credit Program essentially has the same effect in offsetting M&I
Management's investment advisory fees as an arrangement under PTE 77-4,
section II(c), allowing for a credit by subtracting the amount of such
fees from the investment management fees charged directly by M&I to the
Client Plans (the Subtraction Method). M&I states further that in many
instances the Credit Program is more advantageous to a Client Plan than
an arrangement using the Subtraction Method because under the Credit
Program a Client Plan receives a credit in either cash or shares on the
same day (or within one business day after) the fees are received by
M&I Management from the Funds. However, under the Subtraction Method, a
Client Plan would not receive a credit on the same day (or within one
business day after) the fees are paid to M&I Management from the Funds
if the billing period for services to the Funds is different than the
billing period for M&I's fiduciary services to the Client Plan. The Fee
Structure with the Credit Program allows M&I to maintain a fixed
fiduciary fee schedule for services to the Client Plans without any
adjustments in billing for such services, as required under the
Subtraction Method. M&I notes that the Fee Structure also allows the
Client Plan sponsor the option to pay the Client Plan's fees to M&I for
serving as a trustee, directed trustee, investment manager, or
custodian and have the Client Plan receive a credit of the Plan's pro
rata share of the investment advisory fees paid to M&I.25
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\2\5To the extent that the Department of the Treasury determines
that this arrangement should be deemed a contribution by an employer
to a Client Plan of the credited fees, the transaction must be
examined under the applicable provisions of the Internal Revenue
Code, including sections 401(a)(4), 404 and 415.
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M&I is responsible for establishing and maintaining a system of
internal accounting controls for the Credit Program. In addition, M&I
has retained the services of Arthur Anderson & Co. of Milwaukee,
Wisconsin (the Auditor), an independent accounting firm, to audit
annually the crediting of fees to the Client Plans under the Credit
Program. M&I states that such audits provide independent verification
of the proper crediting to the Client Plans of fees charged by M&I to
the Funds. M&I states further that information obtained from the audits
is used in the preparation of required financial disclosure reports to
the Client Plans' fiduciaries.
By letter dated November 6, 1992, the Auditor describes the
procedures that are used in the annual audit of the Credit Program. The
Auditor obtains: (i) A calculation of the daily actual balances for all
the Funds and for the total Client Plan shareholders of such Funds;
(ii) a detailed list of the expenses charged to the Funds' shareholders
by type of expense; and (iii) calculations of the total expenses
charged by M&I to each Fund which are reimbursable to the Client Plans.
On the basis of such information, the Auditor: (i) Reviews and tests
compliance with the Credit Program's operational controls and
procedures established by M&I; (ii) verifies the daily credit factors
transmitted to M&I from the Funds, including the proper assignment of
identification numbers to all Client Plan shareholders; and (iii)
verifies the credits paid in total to the sum of all credits paid to
each Client Plan. The Auditor recomputes, in total, the cash received
in connection with the credit of each Client Plan's expenses to ensure
that the proper amount of cash was issued to the Client Plan. Finally,
the Auditor recomputes on a test basis the amount of credits received
by selected Client Plan shareholders of the Funds to verify that such
credits were properly made. In this regard, the Auditor obtains a
listing of the credits paid to each Client Plan regarding its shares in
each of the Funds to determine that the total credit paid to the Client
Plan by M&I equals the total amount that was required to be credited.
At such time as M&I offers Client Plans the option to have the fees
credited as additional Fund shares, the Auditor will also recompute the
number of Fund shares issued to the Client Plans to ensure that each
Client Plan received the proper number of shares.
In the event either the internal audit by M&I or the independent
audit by the Auditor identifies that an error has been made in the
crediting of fees to the Client Plans, M&I will correct the error. With
respect to any shortfall in credited fees to a Client Plan involving
cash credits, M&I will make a cash payment to the Client Plan equal to
the amount of the error plus interest paid at money market rates
offered by M&I for the period involved. With respect to a shortfall in
credited fees involving a Client Plan where the Second Fiduciary's
election is to have credited fees invested in shares of a particular
Fund, M&I will make a cash payment equal to at least the amount of the
error plus interest based on the greater of either: (i) The money
market rates offered by M&I for the period involved, or (ii) the total
rate of return for shares of the Fund that would have been acquired
during such period. Any excess credits made to a Client Plan will be
corrected by an appropriate deduction and reallocation of cash during
the next payment period to reflect accurately the amount of total
credits due to the Client Plan for the period involved.
8. With respect to any transfer of a Client Plan's CIF assets to a
Fund, M&I states that a Second Fiduciary for the Client Plan receives
advance written notice of the in-kind transfer of assets of the CIFs
and full written disclosure of information concerning the Fund. On the
basis of such information, the Second Fiduciary authorizes in writing
the in-kind transfer of the Client Plan's CIF assets to a Fund in
exchange for shares of the Fund. With respect to the receipt of fees by
M&I from a Fund in connection with any Client Plan's investment in the
Fund, M&I states that a Second Fiduciary receives full and detailed
written disclosure of information concerning the Fund in advance of any
investment by the Client Plan in the Fund. On the basis of such
information, the Second Fiduciary authorizes in writing the investment
of assets of the Client Plan in the Fund and the fees to be paid by the
Fund to M&I. Such authorization will include in the future an election
for the Second Fiduciary to purchase additional shares of the Fund with
the fees credited to the Client Plan by M&I. In addition, M&I
represents that the Second Fiduciary of each Client Plan invested in a
particular Fund will receive full written disclosure, in a statement
separate from the Fund prospectus, of any proposed increases in the
rates of fees charged by M&I to the Funds for secondary services which
are above the rate reflected in the prospectus for the Fund, at least
30 days prior to the effective date of such increase. The Second
Fiduciary will also receive full written disclosure in a Fund
prospectus or otherwise of any increases in the rate of fees charged by
M&I to the Funds for investment advisory services even though such fees
will be credited, as required by Section II(d) above.
Any authorizations by a Second Fiduciary regarding the investment
of a Client Plan's assets in a Fund and the fees to be paid to M&I,
including any future increases in rates of fees for secondary services,
are or will be terminable at will by the Second Fiduciary, without
penalty to the Client Plan, upon receipt by M&I of written notice of
termination. A Termination Form expressly providing an election to
terminate the authorization with instructions on the use of the form is
supplied to the Second Fiduciary no less than annually. The
instructions for the Termination Form include the following
information:
(a) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by M&I of written
notice from the Second Fiduciary; and
(b) Failure to return the form will result in continued
authorization of M&I to engage in the subject transactions on behalf of
the Client Plan.
M&I states that the Termination Form may be used at will by the
Second Fiduciary to terminate an authorization without penalty to the
Client Plan and to notify M&I in writing to effect a termination by
selling the shares of the Funds held by the Client Plan requesting such
termination within one business day following receipt by M&I of the
form; provided that if, due to circumstances beyond the control of M&I,
the sale cannot be executed within one business day, M&I shall have one
additional business day to complete such sale.
Any disclosure of information regarding a proposed increase in the
rate of any fees for secondary services will be accompanied by an
additional Termination Form with instructions on the use of the form as
described above. Therefore, the Second Fiduciary will have prior notice
of the proposed increase and an opportunity to withdraw from the Funds
in advance of the date the increase becomes effective. Although the
Second Fiduciary will also have notice of any increase in the rates of
fees charged by M&I to the Funds for investment advisory services,
through an updated prospectus or otherwise, such notice will not be
accompanied by an additional Termination Form since all increases in
investment advisory fees will be credited by M&I to the Client Plans
and will be subject to an annual reauthorization as described above.
M&I states that the Second Fiduciary always receives a current
prospectus for each Fund and a written statement giving full disclosure
of the Fee Structure prior to any investment in the Funds. The
disclosure statement explains why M&I believes that the investment of
assets of the Client Plan in the Funds is appropriate. The disclosure
statement also describes whether there are any limitations on M&I with
respect to which Client Plan assets may be invested in shares of the
Funds and, if so, the nature of such limitations.26
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\2\6See section II(d) of PTE 77-4 which requires, in pertinent
part, that an independent plan fiduciary receive a current
prospectus issued by the investment company and a full and detailed
written disclosure of the investment advisory and other fees charged
to or paid by the plan and the investment company, including a
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested
in shares of the investment company and, if so, the nature of such
limitations.
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M&I states further that the Second Fiduciary receives an updated
prospectus for each Fund at least annually and either annual or semi-
annual reports for each Fund. M&I provides monthly reports to the
Second Fiduciary of all transactions engaged in by the Client Plan,
including purchases and sales of Fund shares.
9. No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds. In addition, no
redemption fees are paid in connection with the sale of shares by the
Client Plans to the Funds. The applicant states that all other dealings
between the Client Plans and the Funds, M&I Management or any
affiliate, are on a basis no less favorable to the Client Plans than
such dealings are with the other shareholders of the Funds.
10. In summary, M&I represents that the transactions described
herein satisfy the statutory criteria of section 408(a) of the Act
because: (a) The Funds provide the Client Plans with a more effective
investment vehicle than the CIFs maintained by M&I without any increase
in investment management, advisory or similar fees paid to M&I; (b)
with respect to the transfer of a Client Plan's CIF assets into a Fund
in exchange for Fund shares, a Second Fiduciary authorizes in writing
such transfer prior to the transaction only after full written
disclosure of information concerning the Fund; (c) each Client Plan
receives shares of a Fund in connection with the transfer of assets of
a terminating CIF which have a net asset value that is equal to the
value of the Client Plan's pro rata share of the CIF assets on the date
of the transfer, based on the current market value of such assets as
determined in a single valuation at the close of the same business day
using independent sources in accordance with procedures established by
the Fund which comply with Rule 17a-7 of the 1940 Act; (d) with respect
to any investments in a Fund by the Client Plans and the payment of any
fees by the Fund to M&I, a Second Fiduciary receives full written
disclosure of information concerning the Fund, including a current
prospectus and a statement describing the Fee Structure, and authorizes
in writing the investment of the Client Plan's assets in the particular
Fund and the fees paid by such Fund to M&I; (e) any authorizations made
by a Client Plan regarding investments in a Fund and fees paid to M&I,
or any increases in the rates of fees for secondary services which are
retained by M&I, are or will be terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by M&I of written
notice of termination from the Second Fiduciary; (f) M&I requires
annual audits by an independent accounting firm to verify the proper
crediting to the Client Plans of fees charged by M&I to the Funds; (g)
no commissions or redemption fees are paid by the Client Plan in
connection with either the acquisition of Fund shares, through either a
direct purchase of the shares or a transfer of CIF assets in exchange
for the shares, or the sale of Fund shares; and (h) all dealings
between the Client Plans, the Funds and M&I, are on a basis which is at
least as favorable to the Client Plans as such dealings are with other
shareholders of the Funds.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all Second
Fiduciaries of Client Plans described herein that had investments in a
terminating CIF and from whom approval was sought, or will be sought
prior to the granting of this proposed exemption, for a transfer of a
Client Plan's CIF assets to a Fund. In addition, interested persons
shall include the Second Fiduciaries of all Client Plans which have
invested in the Funds, from the effective date of the proposed
exemption (November 20, 1992) until the date the notice of the proposed
exemption is published in the Federal Register, where M&I has provided
services to the Funds and received fees which would be covered by the
exemption, if granted. Notice to interested persons shall be provided
by first class mail within fifteen (15) days following the publication
of the proposed exemption in the Federal Register. Such notice shall
include a copy of the notice of proposed exemption as published in the
Federal Register and a supplemental statement (see 29 CFR
2570.43(b)(2)) which informs all interested persons of their right to
comment on and/or request a hearing with respect to the proposed
exemption. Comments and requests for a public hearing are due within
forty-five (45) days following the publication of the proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
New Standard Corporation Pension Plan (the Plan) Located in Mt. Joy,
Pennsylvania; Proposed Exemption
[Application No. D-9698]
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) and 406(b) (1) and (2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the sale of a certain parcel of real
property (the Property) from the Plan to New Standard Corporation (the
Employer), a party in interest with respect to the Plan, provided that
the following conditions are met:
1. The fair market value of the Property is established by a real
estate appraiser independent of the Plan and the Employer;
2. The Employer pays the greater of $115,000 or the current fair
market value of the Property (excluding site improvements) with the
enhancement value for an adjoining owner as of the date of sale;
3. The sale is a one-time transaction for cash;
4. The Plan pays no fees or commissions in regard to the sale; and
5. The Employer pays any applicable excise taxes to the Internal
Revenue Service under section 4975(a) of the Code resulting from its
use of the Property since October 1993.
Summary of Facts and Representations
1. The Employer is a metal stampings manufacturing concern with
offices in Mt. Joy and Hellam Township, Pennsylvania. The Plan is a
defined benefit plan which had approximately 66 participants and total
assets of approximately $1,083,139 as of the time of filing of the
exemption application.
2. The Plan purchased the Property in April 1978 from unrelated
parties for a purchase price of $22,689 in cash. The Property is a
vacant lot of about 2.51 acres located in Hellam Township adjacent to
property of the Employer. The adjacent property includes a one-story
manufacturing and warehouse complex utilized by the Employer.
The total cost to the Plan of acquiring and holding the Property
since the time of purchase has been only the original purchase price.
All taxes and other costs related to the holding of the Property by the
Plan have been paid by the Employer. A small portion of the lot was
recently paved at the expense of the Employer to provide an additional
parking opportunity to the Employer, and certain other improvements to
the Property (including storm sewer installation and driveway access)
have been financed by the Employer. The Employer has expended a total
of $72,260, including taxes, on the Property since the time it was
acquired by the Plan.
3. The applicant obtained an appraisal on the Property dated April
14, 1994, from B. Daniel Wagner, MAI (Wagner) of Associated Appraisers
in York, Pennsylvania. The applicant represents that Wagner is
independent of the Plan and the Employer. Wagner states that he is
aware that the Employer is the owner of contiguous property and is the
prospective buyer of the Property. In Wagner's opinion, the fair market
value of the Property (excluding site improvements which were
constructed at the expense of the Employer) to an adjoining owner and
including the enhancement value for such adjoining owner was $115,000
as of the date of the appraisal.
4. The Plan now proposes to sell the Property to the Employer. The
Employer will pay the greater of the current fair market value of the
Property (excluding site improvements) for an adjoining owner, based on
an updated independent appraisal, or the total amount the Plan has
expended on the Property as of the date of sale. The sale of the
Property will be entirely for cash, and the Plan will pay no fees or
commissions in regard to the transaction.
The applicant represents that portion of the Property which was
paved for parking has been utilized by employees of the Employer. This
parking area contains 48 spaces and was completed in October 1993. A
supplement to the above described appraisal, prepared by Wagner on June
20, 1994, estimates the total fair market rental for such usage to be
approximately $350 per month. The Employer will compensate the Plan in
that amount for the period of time the Employer has utilized the
parking area from October 1993 to the date of sale of the
Property.27
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\2\7The applicant recognizes that the use of a portion of the
Property for parking purposes of the Employer may have constituted
prohibited transactions under section 406 of the Act and section
4975 of the Code. Accordingly, the Employer will pay the Internal
Revenue Service any excise taxes that are applicable under section
4975(a) of the Code within 90 days of the publication in the Federal
Register of the grant of this proposed exemption.
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5. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria of section 408(a) of
the Act because: (1) The fair market value of the Property will be
established by a real estate appraiser independent of the Plan and the
Employer; (2) the Employer will pay the greater of the current fair
market value of the Property (excluding site improvements) for an
adjoining owner or the total amount the Plan has expended on the
Property; (3) the Plan will pay no fees or commissions in connection
with the sale; and (4) the sale of the Property will be an all cash
transaction.
FOR FURTHER INFORMATION CONTACT: Paul Kelty of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 11th day of August, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-20010 Filed 8-16-94; 8:45 am]
BILLING CODE 4510-29-P
