[Federal Register Volume 63, Number 151 (Thursday, August 6, 1998)]
[Notices]
[Pages 42068-42079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21001]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10349, et al.]
Proposed Exemptions; Harris Trust & Savings Bank
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 restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests 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.
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
[[Page 42069]]
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.
Harris Trust & Savings Bank and Its Affiliates (Harris Trust) Located
in Chicago, Illinois
[Application No. D-10349]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Exemption for Acquisition of Fund Shares With Assets
Transferred in-Kind From a CIF
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 March 21, 1997, to the
acquisition by employee benefit plans (the Plans), including two plans
sponsored by Harris Trust for its own employees (the In-house Plans),
of shares of any open-end investment companies (the Funds) registered
under the Investment Company Act of 1940 (the '40 Act) for which Harris
Trust is an investment adviser and may provide other services, with
Plan assets transferred in-kind to the Funds from certain collective
investment funds maintained by Harris Trust (the CIFs), in connection
with the termination of the CIFs, provided that the following
conditions are satisfied:
(a) For each Plan, a second fiduciary who is unrelated to, and
independent of, Harris Trust (the Independent Fiduciary) receives prior
written notice of the in-kind transfer of Plan assets from a CIF to a
Fund in exchange for shares of the Fund, as well as the disclosures
described in Section II(f).
(b) On the basis of the information described in Section II(f), the
Independent Fiduciary gives prior written approval for each acquisition
of Fund shares with Plan assets transferred from a CIF and the fees to
be received by Harris Trust in connection with its services to the
Fund. Such approval must be consistent with the general fiduciary
responsibility provisions 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 acquisition of Fund shares with Plan assets transferred from a CIF.
(d) All or a pro rata portion of the assets of a CIF are
transferred in-kind to a Fund in exchange for shares of the Fund.
(e) Each Plan receives Fund shares having a total net asset value
equal to the value of the Plan's pro rata share of the corresponding
CIF's assets on the date of the in-kind transfer, based on the current
market value of the CIF's assets as determined in a single valuation
performed in the same manner and as of the close of business of the
same day, using independent sources in accordance with Securities and
Exchange Commission (SEC) Rule 17a-7 1 of the '40 Act and
the procedures established by the Fund pursuant to Rule 17a-7. Such
procedures require that all securities for which a current market value
cannot be obtained by reference to the last sales price for
transactions reported on a recognized securities exchange or quoted in
the NASDAQ system, must be valued based upon an average of the highest
current independent bid and lowest current independent offer, as of the
close of business on the last business day preceding the in-kind
transfer, determined on the basis of reasonable inquiry from at least
three sources that are broker-dealers or pricing services independent
of Harris Trust;
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\1\ 17 CFR 270.17a-7.
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(f) Within 30 days after completion of each acquisition of Fund
shares with Plan assets transferred in-kind from a CIF, Harris Trust
sends by regular mail to the Independent Fiduciary a written
confirmation 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 market price, as of the date of the in-kind transfer, of
each such security; and
(3) The identity of each pricing service or market-maker consulted
in determining the value of such securities.
(g) Within 90 days after completion of each acquisition of Fund
shares with Plan assets transferred in-kind from a CIF, Harris Trust
sends by regular mail to the Independent Fiduciary a written
confirmation containing the following information:
(1) The number of CIF units held by the Plan immediately before the
in-kind 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 Plan
immediately after the in-kind transfer, the related per share net asset
value, and the total dollar amount of such shares.
(h) The conditions set forth in paragraphs (c), (d), (e), (f), (i),
(o), (p), and (q) of Section II are satisfied.
Section II--Exemption for Receipt of Fees From the Funds
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 March 21, 1997, to the receipt
of fees by Harris Trust from the Funds for acting as an investment
adviser for the Funds, as well as for acting as the custodian, transfer
agent, sub-administrator for the Funds, or for providing any other
``secondary service'' (as defined in Section III(i), below) to the
Funds, in connection with the investment in shares of the Funds by
Plans for which Harris Trust is a fiduciary (the Client Plans), other
than the In-house Plans, provided that the following conditions are
satisfied:
(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 such shares by the Client
Plans to the Funds.
(b) The price paid or received by a Client Plan for shares of a
Fund is the net asset value per share, as defined in Section III(f), 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) Neither Harris Trust nor an affiliate (including officers or
directors, and other persons, as defined in Section III(b), below)
purchases from or sells to the Client Plans shares of the Funds.
(d) For each Client Plan, the combined total of all fees received
by Harris Trust for its services to the Client Plan, and in connection
with its services to any of the Funds in which the Client Plan may
invest, constitutes no more than ``reasonable compensation'' within the
meaning of section 408(b)(2) of the Act.
(e) Harris Trust receives no fees payable pursuant to Rule 12b-1
under the 40 Act (12b-1 fees) in connection with the transactions.
(f) Prior to the initial investment by a Client Plan in any of the
Funds, the Independent Fiduciary receives full and
[[Page 42070]]
detailed written disclosure of information concerning the Fund,
including, but not limited to
(1) A current prospectus for the Fund;
(2) A statement describing the fees for investment management,
investment advisory, or other similar services, any fees for Secondary
Services, as defined in Section III(i), and all other relevant fees to
be paid by the Client Plan and by the Fund to Harris Trust, including
the nature and extent of any differential between the rates of such
fees;
(3) The reasons why Harris Trust considers an investment in the
Fund to be appropriate for the Client Plan;
(4) A statement describing whether there are any limitations
applicable to Harris Trust with respect to which assets of a Client
Plan may be invested in the Fund, and, if so, the nature of such
limitations; and
(5) Upon request of the Independent Fiduciary, a copy of the notice
of exemption, if granted (and a copy of this notice of proposed
exemption), once published in the Federal Register.
(g) On the basis of the information described in paragraph (f), the
Independent Fiduciary gives prior written authorization for
(1) The investment of assets of the Client Plan in shares of a
Fund;
(2) The Funds in which the assets of the Client Plan may be
invested; and
(3) The fees to be paid to Harris Trust in connection with its
services to the Funds.
Such authorization by the Independent Fiduciary must be consistent
with the general fiduciary provisions of Part 4 of Title I of the Act.
(h) The authorization described in paragraph (g) is terminable by
the Independent Fiduciary at will without penalty to the Client Plan,
upon written notice of termination to Harris Trust. Harris Trust shall
effect such termination by selling the shares of the Fund held by the
Client Plan by the close of the business day following the date of
receipt by Harris Trust of the termination form (the Termination Form),
as defined in Section III(j), or any other written notice of
termination. However, if, due to circumstances beyond the control of
Harris Trust, the sale cannot be executed within one business day,
Harris Trust shall have one additional business day to complete such
sale.
(i) Each Client Plan receives a credit, either through cash, or, if
applicable, the purchase of additional shares of the Funds pursuant to
an annual election made by the Client Plan (which may be revoked at any
time), of such Client Plan's proportionate share of all investment
advisory fees charged to the Funds by Harris Trust, including any
investment advisory fees paid by Harris Trust to third party sub-
advisers, within one business day of the receipt of such fees by Harris
Trust. The crediting of all such fees to the Client Plans by Harris
Trust must be audited by an independent accounting firm at least
annually to verify the proper crediting of the fees to each Client
Plan.
(j) In the event of an increase in the rate of any fees paid by the
Funds to Harris Trust for any investment management services,
investment advisory services, or other similar services above the rate
which has been approved previously by an Independent Fiduciary, in
accordance with paragraph (g), Harris Trust will provide at least 30
days' written notice (separate from the Fund Prospectus) to each Client
Plan invested in a Fund which is increasing such fees.
(k) In the event of an addition of a Secondary Service by Harris
Trust to a Fund for which a fee is charged, or in the event of an
increase in a fee paid by the Funds to Harris Trust for any Secondary
Service (which may result from either an increase in the rate of such
fee or a decrease in the number or kind of services performed for such
fee) above the rate which has been approved previously by an
Independent Fiduciary, in accordance with paragraph (g), Harris Trust
will provide at least 30 days' written notice (separate from the Fund
Prospectus) to each Client Plan invested in a Fund which is adding a
service or increasing its fees. Such notice shall be accompanied by the
Termination Form.
(l) The Independent Fiduciary is supplied with a Termination Form
at the times specified in paragraphs (k), (l), and (m), which expressly
provides an election to terminate the authorization described in
paragraph (g), with instructions regarding the use of the Termination
Form, including the following information:
(1) The authorization is terminable by the Independent Fiduciary at
will without penalty to the Client Plan, upon written notice of
termination to Harris Trust. Harris Trust shall effect such termination
by selling the shares of the Fund held by the Client Plan by the close
of the business day following the date of receipt by Harris Trust of
the Termination Form, or any other written notice of termination.
However, if, due to circumstances beyond the control of Harris Trust,
the sale cannot be executed within one business day, Harris Trust shall
have one additional business day to complete such sale; and
(2) Failure of the Independent Fiduciary to return the Termination
Form will be deemed to be an approval of the additional Secondary
Service for which a fee is charged or an increase in the rate of any
fees, if such Termination Form is supplied pursuant to paragraphs (k)
and (l), and will result in continuation of authorization, as described
in paragraph (g), for Harris Trust to engage in the transactions on
behalf of the Client Plan.
(m) The Independent Fiduciary is supplied annually with a
Termination Form during the first quarter of each calendar year,
beginning with the calendar year immediately following the date of
publication in the Federal Register of a notice of exemption for the
subject transactions. However, the Termination Form need not be
supplied to the Independent Fiduciary sooner than six months after it
has been supplied pursuant to paragraphs (k) and (l), except to the
extent required to disclose either an additional Secondary Service for
which a fee is charged or an increase in fees.
(n)(1) With respect to each of the Funds in which a Client Plan
invests, Harris Trust will provide the Independent Fiduciary of such
Client Plan:
(A) at least annually, a copy of an updated prospectus of the Fund;
(B) upon the request of the Independent 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 Harris Trust; and
(2) With respect to each of the Funds in which a Client Plan
invests, in the event such Fund places brokerage transactions with
Harris Trust, Harris Trust, at least annually, will provide the
Independent Fiduciary of such Client Plan with a statement specifying:
(A) the total dollar amount of brokerage commissions of each Fund's
investment portfolio paid to Harris Trust by such Fund;
(B) the total dollar amount of brokerage commissions of each Fund's
investment portfolio that are paid by such Fund to brokerage firms
unrelated to Harris Trust;
(C) the average brokerage commissions per share, in cents per
share, paid to Harris Trust by each portfolio of a Fund; and
(D) the average brokerage commissions per share, in cents per
share, paid by each portfolio of a Fund to brokerage firms unrelated to
Harris Trust.
(o) All dealings between the Client Plans and the Funds are on a
basis no
[[Page 42071]]
less favorable to the Client Plans than dealings between the Fund and
its other shareholders holding shares of the same class as the Client
Plans.
(p) Harris Trust maintains for a period of six years the records
necessary to enable the persons described in paragraph (q) to determine
whether the conditions of this exemption have been satisfied, except
that
(1) a party in interest with respect to a Plan, other than Harris
Trust, shall not be subject to a civil penalty under section 502(i) of
the Act or to the taxes imposed by section 4975 (a) and (b) of the
Code, if such records are not maintained or are not available for
examination, as required by paragraph (q); and
(2) a prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond Harris Trust's control, such records
are lost or destroyed prior to the end of the six year period;
(q) Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, Harris Trust makes the records referred to in
paragraph (p) unconditionally available during normal business hours at
their customary location to the following persons or a duly authorized
representative thereof:
(A) the Department or the Internal Revenue Service; (B) any
fiduciary of a Client Plan with the authority to acquire or dispose of
shares of the Funds owned by the Client Plan; and (C) any participant
or beneficiary of a Client Plan. However, none of the persons described
in (B) or (C) are authorized to examine the trade secrets of Harris
Trust, or commercial or financial information which is privileged or
confidential.
Section III--Definitions
For purposes of this proposed exemption:
(a) The term ``Harris Trust'' means Harris Trust & Savings Bank and
any affiliate thereof, as ``affiliate'' is defined in paragraph (b).
(b) The term ``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 ``collective investment fund'' or ``CIF'' means a
common or collective trust fund or pooled investment fund maintained by
Harris Trust.
(e) The term ``Fund'' or ``Funds'' means any diversified open-end
management investment company or companies registered under the `40 Act
for which Harris Trust serves as an investment adviser, and may also
provide custodial or other services approved by the Funds.
(f) The term ``net asset value'' per share means the amount which
is calculated by dividing the value of all securities (determined by a
method set forth in a Fund's prospectus and statement of additional
information) and other assets belonging to each portfolio in the Fund,
less the liabilities chargeable to each such Fund portfolio, by the
number of outstanding shares.
(g) The term ``relative'' means a ``relative'' as defined in
section 3(15) of the Act (or a ``member of the family'' as defined in
section 4975(e)(6) of the Code), or a brother, a sister, or a spouse of
a brother or a sister.
(h) The term ``Independent Fiduciary'' means a fiduciary of a Plan
who is unrelated to, and independent of, Harris Trust. For purposes of
this proposed exemption, a Plan fiduciary will not be deemed to be
unrelated to, and independent of, Harris Trust if
(1) such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Harris Trust;
(2) such fiduciary, or any officer, director, partner, employee, or
relative of such fiduciary is an officer, director, partner, or
employee of Harris Trust (or is a relative of such persons); or
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration from Harris Trust for his or her own personal
account in connection with any transaction described in this proposed
exemption. However, with respect to the In-house Plans, the Independent
Fiduciary may receive compensation from Harris Trust in connection with
the subject transactions, provided that the amount or payment of such
compensation is not contingent upon, nor in any way affected by, the
Independent Fiduciary's ultimate decision regarding the Plans'
participation in the transactions.
With the exception of the In-house Plans, if an officer, director,
partner or employee of Harris Trust (or relative of such persons) is a
director of the Plan fiduciary and abstains from participation in (i)
the choice of the Plan's investment adviser, (ii) the approval of any
purchase or sale between the Plan and the Funds, and (iii) the approval
of any change in fees paid by the Plan in connection with any of the
subject transactions, then paragraph (g)(2) shall not apply.
(i) The term ``Secondary Service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by Harris Trust to the Funds, including, but not limited
to, custodial, accounting, transfer agent, administrative, brokerage,
or any other service.
(j) The term ``Termination Form'' means the form supplied to the
Independent Fiduciary, at the times specified in Section II(k), (l),
and (m), which expressly provides to the Independent Fiduciary an
election to terminate at will the authorization described in Section
II(g) without penalty to the Plan. The Independent Fiduciary may use
such Termination Form to provide written notice of termination to
Harris Trust and instruct Harris Trust to effect the termination by
selling the shares of a Fund held by the Plan by the close of the
business day following the date of receipt by Harris Trust of the
Termination Form. However, if, due to circumstances beyond the control
of Harris Trust, the sale cannot be executed within one business day,
Harris Trust shall have one additional business day to complete such
sale.
(k) The term ``security'' shall have the same meaning as defined in
section 2(36) of the '40 Act, as amended, 15 USC 80a-2(36)(1996).
Effective Date: The proposed exemption, if granted, will be
effective as of March 21, 1997.
Summary of Facts and Representations
1. Harris Trust & Savings Bank is an Illinois state-chartered bank,
a member of the Federal Reserve system, and the largest of 14 banks
owned by Harris Bankcorp, Inc. Harris Bankcorp, Inc. is a wholly owned
subsidiary of Bankmont Financial Corp., which, in turn, is a wholly
owned subsidiary of Bank of Montreal, a publicly traded Canadian
banking institution. Harris Trust & Savings Bank and its affiliates are
hereafter collectively referred to as Harris Trust.
As of December 30, 1995, Harris Trust had total assets of
approximately $17.1 billion. Harris Trust serves as trustee, investment
manager, and/or custodian for approximately 600 Plans. As of December
30, 1995, Harris Trust had approximately $162 billion in Plan assets
under management, of which
[[Page 42072]]
approximately $2 billion was invested in the CIFs.
2. On January 11, 1996, the sale of a portion of Harris Trust's
investment management business to Citibank, N.A. was announced. In
connection with such sale, Harris Trust terminated certain CIFs on
March 21, 1997 and transferred the CIFs' assets in-kind to the Funds in
exchange for shares of the Funds. Harris Trust requests an exemption
for the in-kind transfer of assets of Plans that were invested in these
CIFs who received shares of the Funds. Harris Trust was a fiduciary for
Plan assets that were held in these CIFs, and was also an investment
adviser for the Funds in which the Plans invested.2 The
Plans that invested in the terminated CIFs included not only the Client
Plans of Harris Trust but also two In-house Plans.3 In
addition, Harris Trust represents that conversions of other CIFs to
Funds, through an in-kind transfer of the CIFs' assets to those Funds
in exchange for Fund shares, may occur in the future. Thus, Harris
Trust requests that the proposed exemption cover these future
conversions, provided that the same terms and conditions discussed
herein are satisfied.4
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\2\ Prohibited Transaction Class Exemptions 77-4 and 97-41 (PTCE
77-4, 42 FR 18732, April 8, 1977 and PTCE 97-41, 62 FR 42830, August
8, 1997) permit, under certain conditions, the purchase or sale by
an employee benefit plan of shares of a registered, open-end
investment company whose investment adviser is also a fiduciary of
such plan (but not an employer of employees covered by the plan). In
Advisory Opinion 94-35A, the Department expressed the view that the
relief provided by PTCE 77-4 is unavailable for the purchase of
investment company shares other than for cash. PTCE 97-41 provides,
under certain conditions, specific relief for the purchase of
investment company shares with assets transferred in-kind from a
collective investment fund, but, like PTCE 77-4, does not extend to
in-house plans, and also requires that the other conditions of PTCE
77-4 are satisfied (see Section III of PTCE 97-41, 62 FR 42836).
Thus, Harris Trust has requested that all the conversion
transactions described herein, as well as its fee arrangement (which
is outside the scope of relief afforded by either PTCE 77-4 or PTCE
97-41), be covered by a single individual exemption.
\3\ Prohibited Transaction Exemption 77-3 (PTCE 77-3, 42 FR
18734, April 8, 1977) permits, under certain conditions, 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. However, the Department, at this time, offers
no opinion as to whether PTCE 77-3 covers the purchase of investment
company shares other than for cash.
\4\ In addition, Harris intends to offer Client Plans which are
invested in certain non-terminating CIFs the opportunity to redeem
for cash all or a portion of their interests in these CIFs and
purchase shares of a corresponding Fund. These redemption
transactions will not involve in-kind exchanges and are mentioned
only in connection with the requested exemption for the receipt of
fees.
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Harris Trust also requests an exemption for Harris Trust to receive
fees from the Funds for services rendered to the Funds, in connection
with the investments made in Fund shares by Plans for which Harris
Trust is a fiduciary. This exemption would include those Client Plans
whose assets were transferred from a terminated CIF but would not
include assets transferred by the In-house Plans. One affiliate of
Harris Trust, Harris Trust Bank of Arizona, and a number of the
community banks of Harris Trust which have trust departments, may offer
shares of the Funds to their Client Plans. These banks include Harris
Bank Naperville, Harris Bank Wilmette, N.A., Harris Bank Barrington,
N.A., Harris Bank Winnetka, N.A., Harris Bank St. Charles, Harris Bank
Batavia, N.A. and Harris Trust Company of Florida.
3. The terminated CIFs consisted of the five portfolios of an
entity known as the Harris Trust and Savings Bank Trust for Collective
Investment of Employee Benefit Accounts. These portfolios were (i) the
Government/Agency Intermediate Fund, (ii) the Convertible Fund, (iii)
the International Equity Fund, (iv) the Balanced Blend Fund, and (v)
the Special Capital Fund.
The Funds corresponding to the terminated CIFs consisted of five
portfolios of Harris Insight Funds (the Insight Funds). These
portfolios are (i) the Intermediate Government Bond Fund, (ii) the
Convertible Securities Fund, (iii) the International Fund, (iv) the
Balanced Fund, and (v) the Small-Cap Value Fund.
The Insight Funds further consist of the Harris Insight Funds Trust
and HT Insight Funds, Inc., both open-end, diversified management
investment companies registered under the ``40 Act. Harris Trust serves
as investment adviser to each of the Insight Funds. Harris Trust
retains subadvisers for certain of the Insight Funds to whom it pays a
direct fee. Harris Trust has also entered into portfolio management
contracts with an affiliate, Harris Investment Management, Inc., to
whom Harris Trust pays the investment advisory fees it receives from
the Funds.
Harris Trust requests that the exemption cover not only the Insight
Funds but any mutual fund with respect to which Harris Trust may be the
investment adviser.
The Conversion Transactions
4. Harris Trust represents that permitting the acquisition by the
Plans of Fund shares with Plan assets transferred in-kind to the Funds
will avoid the transaction costs that would otherwise be incurred in
liquidating CIF assets and making the same investments for the Funds,
thus resulting in significant savings, direct and indirect, to the
Plans. No sales commissions (other than customary transfer charges to
parties other than Harris Trust) will be paid by the Plans in
connection with the acquisition of Fund shares with Plan assets
transferred from a CIF. Harris Trust believes that the Funds will offer
the Plans advantages over the CIFs as pooled investment vehicles. In
addition to readily obtainable daily price quotations, ease of trading,
and faster distributions (shares of a Fund may be distributed in-kind),
the Plans as shareholders of a Fund would have the opportunity to
exercise voting and other shareholder rights.
5. With respect to both the past conversion of CIFs to Funds that
occurred on March 21, 1997, and the potential conversion of other CIFs
to Funds that may occur in the future, Harris Trust makes the following
representations regarding disclosures to the Independent Fiduciaries
for the Plans. Prior to any conversion, Harris Trust will provide to
the Independent Fiduciary of each Plan (including that of the In-house
Plans) written notice of termination of the CIF, as well as full and
detailed written disclosure of information concerning the Fund,
including, but not limited to
(1) A current prospectus for the Fund;
(2) A statement describing the fees for investment management,
investment advisory, or other similar services, Secondary Services, and
all relevant other fees to be paid by the Plan and by the Fund to
Harris Trust, including the nature and extent of any differential
between the rates of such fees;
(3) The reasons why Harris Trust considers an investment in the
Fund to be appropriate for the Plan;
(4) A statement describing whether there are any limitations
applicable to Harris Trust with respect to which assets of a Plan may
be invested in the Fund, and, if so, the nature of such limitations;
and
(5) Upon request of the Independent Fiduciary, a copy of the notice
of exemption, if granted (and a copy of this notice of proposed
exemption), once published in the Federal Register.
On the basis of this information, the Independent Fiduciary must
give prior written approval for each acquisition of Fund shares with
Plan assets transferred from a CIF and the fees to be received by
Harris Trust in connection with its services to the Fund. Such approval
must be consistent with the general
[[Page 42073]]
fiduciary responsibility provisions of Part 4 of Title I of the Act.
Plans whose Independent Fiduciaries do not consent to their
participation in the CIF conversion will have their interests in the
CIF redeemed in accordance with the terms of the CIF prior to the
conversion.
Specifically, with respect to the In-house Plans, Harris Trust
appointed Magna Trust Company (Magna), formerly known as Illinois State
Trust Company, as the Independent Fiduciary to oversee and approve the
in-kind transfer of CIF assets attributable to the In-house Plans that
were involved in the conversions that occurred on March 21, 1997. Magna
provides various services to more than 4,900 fiduciary accounts. These
services include employee benefit plan administration, investment
management services, and serving as custodian of securities and
investment advisor for two bank proprietary mutual funds. Magna is
responsible for more than $2 billion in assets, with $1.2 billion in
discretionary assets.
As part of its written report, dated January 24, 1997, Magna
confirmed both its independence from Harris Trust and its
qualifications to serve as the Independent Fiduciary for the In-house
Plans. Magna also represented that it understood and accepted the
duties, responsibilities, and liabilities in acting as a fiduciary
under the Act for the In-house Plans. Based on the disclosures made by
Harris Trust regarding the conversion transactions, Magna determined
that participation therein was in the best interests of, and
appropriate for, each In-house Plan.
In a supplemental report, dated July 7, 1997, Magna represented
that following the conversion transactions, it was provided by Harris
Trust with the required confirmation statements. In addition, Magna
confirmed that the conversion transactions were performed in accordance
with the proposed exemption.
6. With respect to both the past conversion of CIFs to Funds that
occurred on March 21, 1997, and any future conversions of other CIFs to
Funds that may occur, Harris Trust makes the following representations
regarding the valuation and other procedures for such transactions.
All or a pro rata portion of the assets of a CIF are transferred
in-kind to a Fund in exchange for shares of the Fund distributed to the
Plans. The assets transferred consist entirely of cash and marketable
securities. Other CIF assets, or assets which do not meet the
investment objectives of the Fund, are sold on the open market through
an unaffiliated brokerage firm prior to the conversion. The current
market value of the CIF assets is determined by a single valuation for
each asset, with all valuations performed in the same manner and as of
the close of business of the same day, in accordance with Rule 17a-7 of
the '40 Act 5 and the procedures established by the Fund
pursuant to Rule 17a-7. Rule 17a-7 requires, among other things, that
such transactions be effected at the ``independent current market
price'' for each security.6 In this regard, the
``independent current market price'' for specific types of CIF
securities involved in the conversion is determined as follows:
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\5\ Rule 17a-7 provides an exemption from the prohibited
transaction provisions of section 17(a) of the '40 Act (15 U.S.C.
80a-7(a)), which prohibit, among other things, transactions between
an investment company and its investment adviser or affiliates of
its investment adviser. Thus, Rule 17a-7 permits transactions
between the Funds and other accounts that use the same or affiliated
investment advisers, subject to certain conditions that are designed
to insure fair valuation of the assets involved in the transaction.
\6\ Rule 17a-7 also includes the following requirements: (a) the
transaction must be consistent with the investment objectives and
policies of the Fund, as described in its registration statement;
(b) the security that is the subject of the transaction must be one
for which market quotations are readily available; (c) no brokerage
commissions or other remuneration may be paid in connection with the
transaction; and (d) the Fund's board of directors (i.e., those
directors who are independent of the Fund's investment adviser) must
adopt procedures to insure that the requirements of Rule 17a-7 are
followed, and determine no less frequently than quarterly that the
transactions during the preceding quarter were in compliance with
such procedures.
(a) If the security is a ``reported security,'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934
(the '34 Act)(17 C.F.R. 240.11Aa3-1), the last sale price with
respect to such security reported in the consolidated transaction
reporting system (the Consolidated System; or, if there are no
reported transactions in the Consolidated System that day, the
average of the highest current independent bid and the lowest
current independent offer for such security (reported pursuant to
Rule 11Ac1-1), as of the close of business on the CIF valuation
date; or
(b) If the security is not a reported security, and the
principal market for such security is an exchange, then the last
sale on such exchange or, if there are no reported transactions on
such exchange that day, the average of the highest current
independent bid and lowest current independent offer on the exchange
as of the close of business on the CIF valuation date; or
(c) If the security is not a reported security and is quoted in
the NASDAQ system, then the average of the highest current
independent bid and lowest current independent offer reported on
Level 1 of NASDAQ as of the close of business on the CIF valuation
date; or
(d) For all other securities, the average of the highest current
independent bid and lowest current independent offer determined on
the basis of reasonable inquiry from at least three independent
sources as of the close of business on the CIF valuation date.
Harris Trust represents that the values for the securities
established in determining the amount transferred from the CIF are the
same values used in determining the amount received by the Fund. Thus,
each Plan receives Fund shares having a total net asset value equal to
the value of the Plan's pro rata share of the CIF's assets on the date
of the in-kind transfer.
Within 30 days after completion of each acquisition of Fund shares
with Plan assets transferred in-kind from a CIF, Harris Trust sends by
regular mail to the Independent Fiduciary a written confirmation
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 market price, as of the date of the in-kind transfer, of
each such security; and
(3) The identity of each pricing service or market-maker consulted
in determining the value of such securities.
Within 90 days after completion of each acquisition of Fund shares
with Plan assets transferred in-kind from a CIF, Harris Trust sends by
regular mail to the Independent Fiduciary a written confirmation
containing the following information:
(1) The number of CIF units held by the Plan immediately before the
in-kind 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 Plan
immediately after the in-kind transfer, the related per share net asset
value, and the total dollar amount of such shares.
Harris Trust's Receipt of Fees From the Funds
7. Prior to the investment by a Client Plan in any of the Funds,
the Independent Fiduciary receives a full and detailed written
disclosure of information concerning the Fund, as previously described
in paragraph 5 above (with respect to the conversion transactions). On
the basis of this information, the Independent Fiduciary must give
prior written approval for the investment by the Client Plan in each
Fund and the fees to be paid to Harris Trust in connection with its
services to the Fund. Such authorization must be consistent with the
general fiduciary provisions of Part 4 of Title I of the Act. The
authorization is terminable by the Independent Fiduciary at will
without
[[Page 42074]]
penalty to the Client Plan, upon written notice of termination to
Harris Trust.
8. Harris Trust represents that there are two levels of fees
charged to a Client Plan: (i) those fees which Harris Trust charges for
serving as a trustee, investment manager, or custodian of the Client
Plan (the Plan-level fees); and (ii) those fees which Harris Trust
charges to the Funds (the Fund-level fees) for serving as an investment
adviser to the Fund, as well as for serving as a custodian or transfer
agent for the Funds or for providing other Secondary Services to the
Funds. Harris Trust's rebate procedures relating to its Fund-level fees
are described below. These rebate procedures insure that there is a
credit of Fund-level fees against all Plan-level investment management
fees charged to a Client Plan by Harris Trust and eliminates any
``double fees'' for such services, similar to the requirements of PTCE
77-4, Part II(c).7
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\7\ As previously noted in Footnote 2, PTCE 77-4 permits, under
certain conditions, the purchase or sale (for cash) by an employee
benefit plan of shares of a registered, open-end investment company
whose investment adviser is also a fiduciary of such plan (but not
an employer of employees covered by the plan). PTCE 77-4 requires,
among other things, that the plan not pay an investment management,
investment advisory, or other similar fee with respect to the plan
assets invested in such shares for the entire period of such
investment. However, Section II(c) of PTCE 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 '40 Act.
Section II(c) further states that this condition does not preclude
the payment of investment advisory fees by the Client Plan, based on
total plan assets, where a credit representing the Client Plan's pro
rata share of investment advisory fees paid by the investment
company has been subtracted.
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The Rebate Procedures
In its capacity as a plan fiduciary, Harris Trust charges each
Client Plan a fee for investment management/trustee services, based
upon its standard fee schedules and the terms of the specific agreement
it has with the Client Plan. 8 Plan-level fees for
investment management, investment advisory, or other similar services
provided by Harris Trust are currently charged in the form of a single
asset-based investment management fee, which is billed on a quarterly
basis. There is also a Plan-level trustee fee for basic administrative
services provided by Harris Trust, as well as other specific service
fees. Currently, the annual investment management fee ranges from .375%
to .80% of the market value of the assets calculated at the end of each
calendar quarter prior to the quarterly billing date, depending upon
the amount of assets under management. Plan-level fees are subject to
annual minimums for administration and management, expressed as flat
dollar amounts.
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\8\ Harris Trust represents that all fees paid by the Client
Plans directly to Harris Trust for services performed by Harris
Trust are statutorily exempt under section 408(b)(2) of the Act and
the regulations thereunder. However, the Department expresses no
opinion herein as to whether the fees received by Harris Trust for
the provision of services to the Client Plans would comply with the
requirements of section 408(b)(2).
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Harris Trust also provides ``sweep'' services to the Client Plans,
which allow idle cash to be automatically invested temporarily in Fund
shares, in order to insure that a Client Plan's assets are fully
invested at all times. Harris Trust does not charge separate fees for
the provision of such sweep services. Instead, charges for sweep
services are built into Harris Trust's Plan-level investment management
and trustee fees, and any investment advisory fees received by Harris
Trust from the Fund into which idle cash is swept will be credited back
to the Client Plan in the manner of other Fund investments.
9
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\9\ See the Department's 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, which
states the Department's views regarding the application of the
prohibited transaction provisions of the Act to sweep services
provided to employee benefit plans by fiduciary banks and the
potential applicability of certain statutory exemptions.
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For its services as investment adviser to the Insight Funds, Harris
Trust is entitled to receive monthly advisory fees from the Insight
funds, as disclosed in the prospectus, currently ranging from
approximately 0.11% to 1.05% of the Funds' assets under management,
subject to certain voluntary fee waivers. In addition, Harris Trust may
receive fees from the Insight Funds for certain Secondary Services.
Harris Trust receives no 12b-1 fees payable pursuant to Rule 12b-1
under the ``40 Act.
The Funds accrue daily as an expense payable to Harris Trust a
ratable portion of Harris Trust's investment advisory and other
administrative fees, based upon the average daily net asset value of
the Funds. Such fees are paid by the Fund to Harris Trust monthly in
arrears. Harris Trust intends that the Client Plans generally will not
incur any increased fees for investing in the Funds. Harris Trust
rebates to each Client Plan, on the same business day as the receipt of
such fees by Harris Trust, the Client Plan's proportionate share of all
advisory fees payable to Harris Trust by the Funds as of such date.
Such rebate is effectuated through the purchase of additional shares of
the Funds. This rebate procedure is approved by the Independent
Fiduciary at the time it provides its original written approval of the
investment of a Client Plan's assets in the Funds. Harris Trust
continues to charge each Client Plan (other than the In-house Plans)
its full investment management fee for all assets under management,
including those assets invested in the Funds. The net effect of these
procedures is that no Client Plan ever pays, in any period, a
``double'' investment advisory fee for any Client Plan assets invested
in the Funds. Harris Trust represents that the combined total of all
fees it receives for its services to a Client Plan, and for its
services to any of the Funds in which the Client Plan invests,
constitute no more than ``reasonable compensation'' within the meaning
of section 408(b)(2) of the Act.
In the case of the In-house Plans, from which Harris Trust receives
no Plan-level fees, Harris Trust also rebates to each In-house Plan its
proportionate share of all advisory fees payable to Harris Trust by the
Funds through the purchase of additional shares of the Funds, in
accordance with the procedures described above.
9. Harris Trust represents that it maintains a system of internal
accounting controls for the crediting of all Fund-level fees to the
Client Plans. Harris Trust is audited by its independent accounting
firm, currently KPMG Peat Marwick LLP (the Auditor), at least annually
to verify the proper crediting of the fees to each Client Plan.
Information regarding fees is used in the preparation of required
financial disclosure reports of the Funds for the benefit of the Client
Plans.
Specifically, in performing its audit, the Auditor: (a) reviews and
tests compliance with the specific operational controls and procedures
established by the Harris Trust for making credits; (b) verifies, on a
test basis, the daily credit factors transmitted to Harris Trust by the
Funds; (c) verifies, on a test basis, the credits paid in total to sum
of all credits paid to each Client Plans; (d) verifies, on a test
basis, the credits paid in total to the sum of all credits paid to each
Client Plan; and (e) recomputes, on a test basis, the amount of the
credit determined for selected Client Plans and verifies that the
proper credit was made to the proper Client Plan.
In the event that either the internal audit by Harris Trust or the
independent audit by the Auditor identifies an error made in the
crediting of fees to the Client Plans, Harris Trust will correct the
error. With respect to any shortfall in credited fees to a Client Plan,
Harris Trust will make a cash payment to the Client Plan equal to the
amount of the error plus interest based on the greater of either (a)
the money market rate
[[Page 42075]]
offered by Harris Trust for the period involved, or (b) the total rate
of return for shares of the Funds, including dividends, 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 Plan for the period involved.
10. Harris Trust states that any increase in the rate of fees paid
by a Fund to Harris Trust must receive the prior written approval from
every Independent Fiduciary of every plan investing in shares of the
Fund. Harris Trust uses a ``negative consent'' procedure to obtain such
approvals. This procedure is described as follows.
In the event of an increase in the rate of any fees paid by the
Funds to Harris Trust for any investment management services,
investment advisory services, or other similar services above that rate
which has been approved by an Independent Fiduciary for a Client Plan,
Harris Trust provides at least 30 days' written notice to each Client
Plan investing in shares of a Fund which is increasing such fees. Such
notice may take the form of a proxy statement, letter, or similar
communication that is separate from the Fund Prospectus and must
explain the nature and amount of the additional service or the nature
and amount of the increase in fees.
In the event of an addition of a Secondary Service by Harris Trust
to a Fund for which a fee is charged, or in the event of an increase in
a fee paid by the Funds to Harris Trust for any Secondary Service
(which may result from either an increase in the rate of such fee or a
decrease in the number or kind of services performed for such fee)
above that rate which has been approved by an Independent Fiduciary,
notice provided to Client Plans must be accompanied by a Termination
Form, which is described in paragraph 11 below.
However, with respect to the In-house Plans, Harris Trust did not
retain the Independent Fiduciary for the In-house Plans for purposes of
reviewing Fund-level fee changes on an on-going basis. Harris Trust
states that following completion of the conversion transactions on
March 21, 1997, the In-house Plans' investments in the Funds were
managed by in-house fiduciaries, consistent with the requirements of
PTCE 77-3.\10\
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\10\ The Department expresses no opinion herein as to whether
any transactions with the Funds by the In-house Plans are covered by
PTCE 77-3.
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11. Each Independent Fiduciary will be supplied annually with a
Termination Form during the first quarter of each calendar year,
beginning with the calendar year immediately following the date of
publication in the Federal Register of a notice of exemption for the
subject transactions. However, the Termination Form need not be
supplied to the Independent Fiduciary sooner than six months after it
has already been supplied, except to the extent required to disclose
either an additional Secondary Service for which a fee is charged or an
increase in fees.
The Termination Form, which expressly provides an election to
terminate the authorization, provides instructions regarding the use of
the Termination Form, including the information discussed in Section
II(l)(1) and (2), above.
12. 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 such shares by the Client
Plans to the Funds. In addition, neither Harris Trust nor an affiliate
(including officers or directors, and other persons) will be allowed to
directly purchase from or sell to the Client Plans any shares of the
Funds. The price paid or received by a Client Plan for shares of a Fund
is the net asset value per share 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. Finally, all dealings between the
Client Plans and the Funds are on a basis no less favorable to the
Client Plans than dealings between the Fund and its other shareholders.
13. To insure that the Independent Fiduciary has the information
necessary to effectively monitor each of the Funds in which a Client
Plan invests, Harris Trust provides to the Independent Fiduciary
certain on-going disclosures, as discussed in Section II(n)(1) and (2),
above.
In this regard, a Harris Trust affiliate may execute securities
brokerage transactions for the investment portfolios of certain of the
Funds. To the extent that Harris Trust does not currently execute
securities brokerage transactions with respect to any Fund for which a
fee is paid to Harris Trust, but proposes to do so in the future,
Harris Trust will provide at least 30 days' written notice to each
Client Plan investing in shares of such Fund. Such notice will be
accompanied by a Termination Form allowing the Client Plan an option to
object to the addition of brokerage services to a Fund, as a Secondary
Service, by Harris Trust. Failure of the Independent Fiduciary to
return the Termination Form will be deemed to be approval by the Client
Plan of brokerage services by Harris Trust. Harris Trust currently has
one affiliated broker, Harris Investors Direct, Inc. (Harris
Investors). Harris Trust represents that Harris Investors has not
provided any brokerage services with respect to the transactions which
have taken place to date.
If any Harris Trust affiliate, including Harris Investors, provides
brokerage services to a Fund, Harris Trust will provide the Independent
Fiduciary of the Client Plan with a statement at least annually that
specifies information about the commissions received by the Harris
Trust affiliate, as discussed in Section II(n)(2)(A) through (D),
above.
14. In summary, Harris Trust represents that the subject
transactions satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) the Funds
provide the Client Plans and the In-house Plans with a more
advantageous investment vehicle than the CIFs, yet avoid the payment to
Harris Trust of any duplicative fees for investment management,
investment advisory, or other similar services;
(b) with respect to the conversions of CIFs to Funds, an
Independent Fiduciary approves in advance any transfer of Plan assets
in exchange for Fund shares and only after full written disclosure of
information concerning the Funds; (c) each Plan receives Fund shares
having a total net asset value equal to the value of the Plan's pro
rata share of the CIF's assets on the date of the in-kind transfer, as
determined by a single valuation for each asset, with all valuations
performed in the same manner and as of the close of business of the
same day, in accordance with the procedures established by the Fund
pursuant to Rule 17a-7 of the 40 Act (requiring the use of independent
sources); (d) the Independent Fiduciary receives written confirmation
of the entire transaction that discloses the number of CIF units held
by the Plan immediately before the conversion and the number of Fund
shares held by the Plan immediately after, the related per unit and per
share values, and the total dollar amount of the CIF units and the Fund
shares involved in the transaction;
(e) with respect to any investments in a Fund by the Client Plans
and the payment of any fees by the Fund to Harris Trust, an Independent
Fiduciary approves such investments and fees in advance and only after
full written disclosure of information concerning the Fund, including a
current prospectus and a statement describing
[[Page 42076]]
all fees to be paid to Harris Trust; (f) any authorizations made by a
Client Plan regarding investments in a Fund, fees paid by the Fund to
Harris Trust, or any increases in fees for secondary services provided
to the Fund by Harris Trust, are terminable by the Independent
Fiduciary at will, without penalty to the Client Plan, upon written
notice to Harris Trust; (g) annual audits by an independent accounting
firm are required to verify the proper crediting to the Client Plans of
fees charged by Harris Trust to the Funds; (h) the Client Plans and the
In-house Plans do not pay any commissions or redemption fees in
connection with their acquisition of Fund shares (either through a
direct purchase of the shares or through a transfer of CIF assets in
exchange for the shares) or the Plans' sale of Fund shares; and (i) all
dealings between the Client Plans and the In-house Plans and the Funds
are on a basis no less favorable to the Plans than dealings between the
Fund and its other shareholders.
Notice to Interested Persons
Harris Trust will provide notice of the proposed exemption to
interested persons by first-class or overnight mail within 15 days of
the date of publication of this notice of pendency in the Federal
Register. Interested persons consist of the Independent Fiduciaries of
all Plans which had investments in a CIF which terminated on March 21,
1997. Interested persons also consist of any other Independent
Fiduciaries for Plans which, at the time this notice is published in
the Federal Register, have approved, or will approve, any transfer of a
Plan's assets from a CIF to a Fund, in connection with the termination
of a CIF prior to the date this proposed exemption is granted. Such
notice shall include a copy of this notice of the proposed exemption,
as published in the Federal Register, and shall inform interested
persons of their right to comment and/or request a hearing with respect
to the proposed exemption. Comments and requests for a hearing are due
within 45 days of the date of publication of this notice in the Federal
Register.
For Further Information Contact: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Individual Retirement Accounts (the IRAs) for Marcia A. Hendrichsen,
Larry L. Hendrichsen, Lawrence D. Hendrichsen, Located in Burlington,
Iowa, and William H. Napier, George Rashid, Jr., Jake E. Rashid, Carl
A. Saunders, and John C. Schuldt, Located in Fort Madison, Iowa
(Collectively, the Participants)
[Exemption Application Number: D-10547]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, 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 proposed
cash sale (the Sale) of certain membership units (the Units) in the
Catfish Bend Casinos, L.C. (Catfish Bend), by the IRAs 11 to
the Participants, disqualified persons with respect to the IRAs,
provided that the following conditions are met:
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\11\ Because each IRA has only one participant, there is no
jurisdiction under 29 CFR Sec. 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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(a) The Sale of the Units by each IRA is a one-time transaction for
cash;
(b) The terms and conditions of each Sale are at least as favorable
to each IRA as those obtainable in an arm's length transaction with an
unrelated party;
(c) Each IRA receives the fair market value of the Units at the
time of each Sale; and
(d) Each IRA is not required to pay any commissions, costs or other
expenses in connection with each Sale.
Summary of Facts and Representations
1. The IRAs are individual retirement accounts, as described in
section 408(a) of the Code. Among the assets of each IRA are certain
membership Units in Catfish Bend, an Iowa limited liability company
which operates the riverboat casino Catfish II. Currently, there are
66,521 Units outstanding which are owned by 496 members.
The applicants describe the IRAs and their holdings of the Units as
follows:
(a) The IRA of Marcia A. Hendrichsen currently holds assets valued
at approximately $59,127, which includes 20 Units. The IRA originally
purchased the Units on January 27, 1994 for $2,000.
(b) The IRA of Larry L. Hendrichsen currently holds assets valued
at approximately $48,490, which includes 20 Units.
The IRA originally purchased the Units on January 27, 1994 for
$2000.
(c) The IRA of Lawrence D. Hendrichsen currently holds assets
valued at approximately $49,832, which includes 10 Units. The IRA
originally purchased the Units on January 27, 1994 for
$1000.12
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\12\ The Department notes that the Units held in the IRAs of
Marcia, Larry L., and Laurence Hendrichsen, are valued at $250 per
Unit, based on the Deloitte and Touche appraisal discussed below.
However, in the case of the remaining IRAs, the participants carried
the value of the Units at $200 per unit. This amount reflects the
value of the Units prior to the Deloitte and Touche appraisal, and
is, in effect, obsolete. Thus, the value of the Catfish interests is
$250 per Unit as reflected in the aforementioned Deloitte and Touche
appraisal.
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(d) The IRA of William H. Napier currently holds assets valued at
approximately $20,000, which includes 100 Units. The IRA obtained the
Units when Mr. Napier rolled them over with the rest of his assets from
his individual account in the Napier Wright & Wolf law firm plan, which
originally purchased the Units on January 27, 1994 for $10,000.
(e) The IRA of George Rashid, Jr. currently holds assets valued at
approximately $42,434, which includes 200 Units. The IRA originally
purchased the Units on January 28, 1994 for $20,000.
(f) The IRA of Jake E. Rashid currently holds assets valued at
approximately $619,014, which includes 300 Units. The IRA originally
purchased the Units on January 28, 1994 for $30,000.
(g) The IRA of Carl A. Saunders currently holds assets valued at
approximately $36,797, which includes 100 Units. The IRA originally
purchased the Units on January 31, 1994 for $10,000.
(h) The IRA of John C. Schuldt, president of Catfish Bend,
currently holds assets valued at approximately $104,665, which includes
320 Units. The IRA purchased the Units on June 13, 1994 for $32,000.
2. The applicants request exemptions for the Sale of the Units by
each individual IRA to its respective Participant. The applicants
represent that the IRAs have benefitted from significant appreciation
and returns since purchasing the Units. The applicants believe that at
present price levels, an excellent opportunity for the Sale of the
Units now exists. Accordingly, they wish to sell the Units from their
respective IRAs to ensure that each IRA realizes a substantial
profit.13
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\13\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions in regard to the exclusive benefit rule under
section 401(a) of the Code. See, e.g. Rev. Rul. 73-532, 1973-2 C.B.
128. The Department further notes that section 408(a) of the Code,
which describes the tax qualification provisions for IRAs, mandates
that the trust be created for the exclusive benefit of an individual
or his beneficiaries. However, the Department is expressing no
opinion in this proposed exemption regarding whether violations of
the Code have taken place with respect to the purchase and
subsequent retention of the Units by some of the Participants.
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[[Page 42077]]
In addition, the applicants represent that the continued holding of
the Units will cause the IRAs to incur unrelated business income tax
(UBIT) pursuant to section 512 of the Code.14 Therefore,
because of the aforementioned reasons, the applicants seek an exemption
to purchase the Units from the IRAs.
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\14\ In this regard, six of the eight IRAs have previously
incurred and paid UBIT as a result of holding the Units. The other
two IRAs did not incur UBIT due to the fact that the earnings on the
Units failed to exceed the $1000 threshold for triggering the tax.
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3. Gary Hoyer, attorney for Catfish Bend, engaged the Valuation
Group of Deloitte and Touche (D&T), an independent, qualified appraiser
located in Chicago, Illinois, to determine the fair market value of the
Units. The applicants represent that D&T has previously provided
services for Catfish Bend. However, the applicants state that payments
made by Catfish Bend to D&T constitute substantially less than one
percent (1%) of D&T's annual gross revenues. After a comprehensive
review of all relevant information, D&T valued the interests on a per
Unit basis at $250.
In its analysis, D&T sought to determine the fair market value of a
Unit on a ``nonmarketable minority interest'' basis. According to the
report submitted by D&T, a nonmarketable minority interest refers to a
minority position in the equity of an enterprise which is not actively
traded on a public exchange.
In valuing the Units, D&T considered the factors described in the
Internal Revenue Service's Revenue Ruling 59-60, which provides general
guidelines for valuing ownership interests in closely-held enterprises.
In addition, the report submitted by D&T indicates that it reviewed the
historical operational and financial data of Catfish Bend, and
conducted a thorough onsite inspection of the riverboat before arriving
at a conclusion as to the value of the Units.
4. The applicants represent that the proposed transactions will be
administratively feasible in that each Sale will be a one-time
transaction for cash. Furthermore, the applicants state that the
transactions will be in the best interests of the IRAs as they will
provide each IRA with the opportunity to dispose of the Units for a
significant profit and eliminate any potential UBIT liability. Finally,
the applicants assert that the transactions will be protective of the
rights of each participant and beneficiary as indicated by the fact
that each IRA will receive the fair market value of the Units, as
determined by a qualified, independent appraiser on the date of Sale
and will incur no commissions, costs, or other expenses as a result of
the Sale.
5. In summary, the applicants represent that the proposed
transactions satisfy the statutory criteria of section 4975(c)(2)
because: (a) the Sale of the Units by each IRA will be a one-time
transaction for cash; (b) the terms and conditions of each Sale will be
at least as favorable to each IRA as those obtainable in an arm's
length transaction with an unrelated party; (c) each IRA will receive
the fair market value of the Units at the time of each Sale; and (d)
each IRA will not be required to pay any commissions, costs or other
expenses in connection with each Sale.
Notice to Interested Persons: Because the applicants are the only
Participants in the IRAs, it has been determined that there is no need
to distribute the notice of proposed exemption (the Notice) to
interested persons. Comments and requests for a hearing are due thirty
(30) days after publication of the Notice in the Federal Register.
For Further Information Contact: Mr. James Scott Frazier, telephone
(202) 219-8881. (This is not a toll-free number).
Bernard Chaus, Inc. Employee Savings Plan (the Plan) Located in New
York, New York
[Application No. D-10606]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the
exemption is granted, the restrictions of sections 406(a), 406(b)(1)
and (b)(2) and 407(a) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply, effective
December 24, 1997, to (1) the past acquisition by the the Plan of
certain stock rights (the Rights) pursuant to a stock rights offering
(the Offering) by Bernard Chaus, Inc. (the Employer), the sponsor of
the Plan; (2) the past holding of the Rights by the Plan during the
subscription period of the Offering; (3) the past disposition or
exercise of the Rights by the Plan; and (4) the proposed payment by the
Employer to the Plan of an amount necessary to credit Plan accounts of
participants affected by an administrative error relating to Rights
which were not exercised or sold prior to the expiration of the Rights;
provided the following conditions are satisfied:
(A) The Plan's acquisition and holding of the Rights occurred in
connection with the Offering made available to all shareholders of
common stock of the Employer;
(B) The acquisition and holding of the Rights by the Plan resulted
from an independent act of the Employer as a corporate entity and all
holders of the common stock of the Employer, including the Plan, were
treated in a substantially similar manner with respect to the Offering;
(C) All decisions regarding the holding and disposition of the
Rights by the Plan were made, in accordance with the Plan provisions
for individually-directed investment of participant accounts, by the
individual Plan participants whose accounts in the Plan received Rights
in connection with the Offering, including all determinations regarding
the exercise or sale of the Rights received through the Offering,
except for those participants who failed to file timely and valid
instructions concerning the Rights, in which case the Rights were sold;
and
(D) Within 30 days of the date of publication of the final
exemption in the Federal Register, with respect to the Plan accounts of
participants affected by an administrative error whereby 27 Rights (of
the 17,041 Rights received by the Plan) were not exercised or sold
prior to the expiration of the Rights, the Employer credits the
affected accounts with an amount equal to the value such accounts would
have received if the Rights had been sold on the last day of the
Offering, including interest thereon through the date of such crediting
at a rate equal to the average rate of earnings on all Plan assets
during that period.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
December 24, 1997.
Summary of Facts and Representation
1. The Employer is a designer, manufacturer and marketer of women's
apparel. The Employer is incorporated in New York, with its corporate
headquarters in New York, New York.
2. The Plan is a defined contribution employee benefit plan with
provisions intended to satisfy section 401(k) of the Code. The trustee
of the Plan is the Prudential Trust Company of Moosic, Pennsylvania
(the Trustee), and the Plan is administered by the Employer.
[[Page 42078]]
3. The Plan provides for individual participant accounts (the
Accounts) and participant-directed investment of the Accounts among
seven investment funds (the Funds), one of which (the Stock Fund)
invests exclusively in common stock of the Employer (the Stock). As of
December 19, 1998, the Plan had total assets of approximately $3.4
million, and the Accounts of 205 Plan participants had balances
invested or partially invested in the Stock Fund. As of December 17,
1997 (the Record Date), there were 2,627,727 shares of Stock issued and
outstanding, of which 17,041 shares, or about 0.65%, were owned by the
Accounts participating in the Stock Fund.
4. The Applicant represents that as part of an effort to increase
capital, the Employer determined it was in the best interests of its
shareholders to provide for the offering of rights to purchase
additional shares of newly-issued common stock. Accordingly, on
December 24, 1997, the Employer commenced the Offering by issuing to
all holders of Stock, as of the Record Date, one transferable
subscription Right for each share of Stock held. Each Right conferred
upon its holder an entitlement to purchase 5.464751 shares of
additional Stock (the Additional Shares) at price of $1.4309 per
share15. The Employer authorized the issuance of up to
13,977,270 Additional Shares through the Offering. The provisions of
the Offering included oversubscription privileges which were
exercisable by Plan participants, whose Accounts received Rights, in
the same manner as other recipients of the Rights.16
---------------------------------------------------------------------------
\15\ Except that the Rights issued to Josephine Chaus, the chair
of the board of directors and principal shareholder of the Employer,
entitled her to subscribe for and purchase 5.1811105 Additional
Shares.
\16\ Oversubscription privileges were exercised by only one Plan
participant whose Account received Rights.
---------------------------------------------------------------------------
5. The Employer represents that the Offering did not involve any
guarantee or other assurance that any market in the Rights would
develop or remain available during the Offering. However, the Stock and
the Rights were both traded on the New York Stock Exchange (NYSE)
through the last trading day prior to the expiration of the Offering.
The terms of the Offering permitted exercise of the Rights commencing
December 24, 1997 until 5:00 p.m. EST on January 23, 1998, at which
time any unexercised Rights expired.
6. In anticipation of the Offering, the Plan was amended to permit
each Plan participant with an Account balance invested in the Stock
Fund (the Invested Participants) as of the Record Date to direct the
Trustee either to exercise or sell Rights attributable to his or her
Stock Fund account, and such amendment also established the procedure
for such directions. The Employer represents that on December 24, 1997,
all Invested Participants were sent, via first class mail, a copy of
the Offering circular published by the Employer, a letter from the Plan
administrator providing information about the Offering and describing
the procedures for participant directions with respect to the Offering,
and a direction form. The direction forms sent to the Invested
Participants enabled them to direct the Trustee either to exercise the
Rights allocated to their Accounts or to sell such Rights on the open
market. As provided in the amended Plan, with respect to any Invested
Participant who failed to submit a direction form to the Trustee by
5:00 p.m. EST on January 19, 1998, or submitted an invalid direction
form, the Trustee was required to sell the Rights on the open market.
The Employer represents that this required sale was disclosed to the
Invested Participants in the informational documents relating to the
Offering that were sent on December 24, 1997.
7. For each Invested Participant who directed the Trustee to
exercise Rights allocated to his or her Account, the funds needed to
pay the exercise price were obtained by redeeming specific investments
in one or more Funds in which the Invested Participant's Account was
invested. The Invested Participants directed the Trustee to sell any
specific dollar amount from any specific Fund for the cash needed to
pay the exercise price. Where amounts were redeemed from the Funds
prior to the last day of the Offering, the amended Plan provided that
the Trustee deposit the proceeds of such redemptions in a special
short-term investment account pending the Trustee's payment to the
subscription agent of the exercise price for the Additional Shares.
8. Rights were exercisable by an Invested Participant only to the
extent of funds available in his or her Account in the Plan. If amounts
in the Invested Participant's Account were insufficient to pay the
exercise price for the Additional Shares subscribed for, the amended
Plan provided that the Trustee was to attempt to sell any Rights not
exercised. The proceeds of any Rights that were sold and any income
from the special short-term investment account were credited, with
respect to such sale proceeds, to the Accounts of the Invested
Participants whose allocable Rights were sold, and in the case of such
income, to the Accounts of the Invested Participants whose redemption
proceeds were deposited in the special short-term investment account.
9. In the event that the market price of the Stock, including the
effect of any applicable brokerage commissions and other expenses at
the time the Trustee would submit Rights for exercise, was less than
the exercise price under the Offering, the amended Plan provided that
the Trustee would not exercise such Rights. The Employer represents
that at 5:00 p.m. EST on January 23, 1998, the time of expiration of
the Offering and the date on which the Trustee exercised Rights on
behalf of the Invested Participants directing the exercise of the
Rights, the exercise price of a Right to obtain shares of the Stock was
less than the market price for shares of the Stock on the NYSE, after
giving effect to any brokerage commissions and other expenses relating
to such transactions. Accordingly, the Trustee exercised at that time
all Rights for which a direction to exercise had been properly
submitted (i.e., with a valid direction form) by an Invested
Participant.
10. The Employer represents that, in order to give the Trustee
sufficient time to perform the administrative procedures required to
review participant direction forms and to implement directions,
including the liquidation of other Plan assets as required to enable an
Account to purchase the appropriate number of shares of the Stock at
the exercise price with the Rights, the procedure for participant
direction with respect to the Offering included timing deadlines for
the filing of instructions in advance of the expiration of the
Offering. Accordingly, Invested Participants were required to return
the direction forms to the Trustee by 5:00 p.m. EST on January 19,
1998. The Employer states that this deadline for filing instructions
with the Trustee was specifically and prominently disclosed to all
Invested Participants in the Offering materials they received on
December 24, 1997.
11. The Employer represents the following summary of the Offering:
(a) All 2,627,727 Rights, including overallotments, were exercised
in the Offering. Among the 205 Invested Participants, 23 directed the
exercise of Rights allocated to their Accounts, resulting in the
exercise of 3,771 Rights, including overallotments, or about 0.147% of
the total number of Rights exercised.
(b) Among the Invested Participants, 22 affirmatively directed that
the Rights allocated to their Accounts be sold, resulting in the sale
of 3,287 Rights.
(c) The remainder of the Invested Participants did not respond. In
[[Page 42079]]
accordance with the amended Plan, the Rights allocated to their
Accounts were sold, resulting in the sale of 9,956 Rights. Because of
an administrative error in the communications between the Plan
administrator and the Trustee, 27 Rights allocated to the Accounts were
not sold prior to the expiration of the Rights. The Employer represents
that it shall credit the Accounts of the participants affected by this
administrative error with an amount equal to the value these Accounts
would have received if the Rights had been sold as planned on the last
day of the Offering plus interest thereon through the date of such
crediting at a rate equal to the average rate of earnings on all Plan
assets during that period.
(d) The Employer represents that all directions and instructions
which were filed by the Invested Participants with respect to the
Offering were observed and executed by the Trustee. In addition, all
Invested Participants had been notified adequately in advance of the
Offering of the procedure for directing and instructing the Trustee
with respect to their Accounts' rights under the Offering. Thus, the
Employer represents that all actions by the Trustee relating to the
Offering, with respect to the Accounts, were pursuant to the express
participant directions, except for the Accounts of participants who
failed to file timely and valid instructions with the Trustee pursuant
to the direction procedure. The Employer states that the Trustee's
action on behalf of Accounts whose participants failed to file
instructions with the Trustee, which was the sale of the Rights
received by such Accounts, was disclosed in the explanatory materials
for the Offering and in the direction forms sent to Invested
Participants. The Employer states further that all actions taken by the
Trustee in connection with the Offering were consistent with the
participant-directed nature of investments under the Plan.
12. In summary, the applicant represents that the transactions
satisfied the criteria of section 408(a) of the Act for the following
reasons: (a) The Plan's acquisition of the Rights resulted from an
independent act of the Employer; (b) With respect to all aspects of the
Offering, all holders of the Stock, including the Accounts of Invested
Participants in the Plan, were treated in a substantially similar
manner; (c) All decisions with respect to the Plan's acquisition,
holding and control of the Rights were made by the individual Invested
Participants with Account balances invested in the Stock Fund, except
for those who failed to file timely and valid instruction forms, in
which case the Rights were sold; (d) The disposition or exercise of the
Rights received by the Invested Participants was executed by the
Trustee in an orderly manner pursuant to the terms of the Offering
relating to the submission of valid instruction forms by such
Participants; and (e) The acquisition and holding of the Rights by the
Plan affected all of the Invested Participants, and their Accounts held
only about 0.65% of the Stock outstanding as of the Record Date of the
Offering.
For Further Information Contact: Ronald Willett of the Department,
telephone (202) 219-8881 (This is not a toll-free number.).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 31st day of July 1998.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-21001 Filed 8-5-98; 8:45 am]
BILLING CODE 4510-29-P
