[Federal Register Volume 60, Number 177 (Wednesday, September 13, 1995)]
[Notices]
[Pages 47593-47608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22753]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09845 and D-09846, et al.]
Proposed Exemptions; Prudential Property Investment Separate
Account (PRISA) and Prudential Property Investment Separate Account II
(PRISA II)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
-----------------------------------------------------------------------
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.
Prudential Property Investment Separate Account (PRISA) and Prudential
Property Investment Separate Account II (PRISA II) Located in Newark,
NJ
[Application Nos. D-09845 and D-09846]
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 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a), 406(b)(1), and
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code,1 shall not apply, effective December 31, 1995, to
the advanced commitment to provide an enhanced return and the payment
of such return by the Prudential Insurance Company of America
(Prudential) to various employee benefit plans (the Plan or Plans) on
the assets of such Plans which are invested either in PRISA and/or
PRISA II (the Account or Accounts), as of April 1, 1994, and which
remain invested for all or any portion of a twenty-one (21) month
period, beginning April 1, 1994, and ending December 31, 1995, (the
Investment Period), provided that the following conditions are met:
1 For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
(1) The decision to invest funds in either or both of the Accounts
for all or a portion of the Investment Period has
[[Page 47594]]
been and will be made by fiduciaries of the Plans independent of
Prudential;
(2) The amount of the enhanced return payment with respect to the
assets of the Plans that are invested in either or both of the Accounts
for only a portion of the Investment Period will be calculated in the
same manner as the amount of the enhanced return payment with respect
to the assets of the Plans that remain invested in either or both of
the Accounts for the entire Investment Period;
(3) The enhanced return will be derived by comparing the cumulative
total return for the Investment Period reported by the expanded
Russell-NCREIF Property Index (the Index) with the cumulative total
return of PRISA or PRISA II for the same period;
(4) The Plans will obtain an enhanced rate of return (but not more
than 200 basis points) for amounts invested in one or both of the
Accounts during all or any portion of the Investment Period, if the
cumulative total investment return of such Account for such Investment
Period is less than that reported for the Index;
(5) The payments, if any, of enhanced return will be made by
Prudential to investors in the Accounts not later than thirty (30) days
following the final determination of the amounts owed;
(6) Every property held by the Accounts is individually valued at
least once during the Investment Period and thereafter will be valued
at least once in each calendar year by an independent qualified
appraiser;
(7) A valuation policy committee (the Valuation Policy Committee),
consisting of representatives from an valuation management firm (the
Valuation Management Firm), Prudential Real Estate Investors (PREI),
the interim and permanent advisory councils (the Advisory Council or
Advisory Councils) composed of investors in PRISA and PRISA II and
their consultants, and other clients of PREI, will meet at least
quarterly and set valuation policy for the Accounts;
(8) The Valuation Management Firm, an independent third party, will
be responsible for retaining (and terminating) all appraisal firms
which value the properties in the Accounts; reviewing all appraisals
generated by such appraisal firms; and collecting, reviewing, and
distributing any information needed by such appraisal firms to appraise
the properties in the Accounts;
(9) The Plans invested in the Accounts who receive the enhanced
return will incur no additional cost or risk in connection with the
transaction;
(10) In connection with the determination of enhanced return
payments, no upward adjustment will be made by Prudential to the value
reported by an external independent appraiser of any Property in PRISA
and PRISA II without the concurrence of the Valuation Management Firm;
(11) Any required state insurance regulatory approvals are obtained
for the transaction; and
(12) The Plans will receive the same treatment and proportional
payment under the enhanced return as any other investor in PRISA and
PRISA II.
Summary of Facts and Representations
1. Prudential is a mutual life insurance company organized under
the laws of the State of New Jersey and subject to the supervision and
examination by the Insurance Commissioner of the State of New Jersey.
It is represented that Prudential is the largest life insurance company
in the United States, with total consolidated assets, as of December
31, 1993, of approximately $218 billion.
Among the variety of insurance products and services it offers,
Prudential provides funding, asset management and other services for
thousands of employee benefit plans subject to the provisions of Title
I of the Act. In this regard, Prudential maintains separate accounts in
which pension, profit-sharing, and thrift plans participate. Prudential
also manages the assets of such plans held in single customer separate
accounts and advisory accounts.
2. PRISA and PRISA II are both open-end pooled separate accounts
created by Prudential in 1970 and 1980, respectively. The Accounts were
designed as funding vehicles for tax-qualified employee pension benefit
plans to invest in real estate on a commingled basis. It is represented
that the establishment and operation of PRISA and PRISA II have been
approved by the New Jersey Insurance Commissioner.
As of June 30, 1994, PRISA had total net assets of approximately
$2.25 billion, including interests in 124 properties located in 22
states and the District of Columbia. The investors in PRISA, as of June
30, 1994, consisted of 190 employee pension benefit plans, including
171 plans covered under the Act and 19 governmental plans that are
exempt from coverage under the Act.
As of June 30, 1994, PRISA II had total net assets of approximately
$575.6 million, including interests in 18 properties located in 12
states and the District of Columbia. The 38 investors in PRISA II, as
of June 30, 1994, consisted of 28 plans covered under the Act and 10
governmental plans that are exempt from coverage under the Act.
The assets of the Accounts consist primarily of real property, and
may also include mortgage loans, interests in companies, including
partnerships, which acquire, develop or manage real property, and cash
or cash equivalents. Interests in the Accounts are expressed in terms
of units of participation, the value of which is determined
periodically, based upon the net value of each of the Accounts (i.e.
the market value of the real property and other assets held in an
Account, less the amount of liability for indebtedness and expenses).
It is represented that every property held by the Accounts is valued at
least once in each calendar year by an independent qualified appraiser.
As separate accounts, PRISA and PRISA II hold assets which are
segregated from all other assets held or managed by Prudential. In this
regard, it is represented that the assets of each of the Accounts may
be charged only with liabilities arising from the operation of that
Account and may not be charged with liabilities arising from other
business conducted by Prudential.
3. The assets of PRISA and PRISA II are managed by PREI. PREI is a
division of the Prudential Investment Corporation which is a direct
subsidiary of Prudential. It is represented that PREI is a full-service
real estate investment advisor whose sole function is to provide real
estate investment advisory and portfolio and asset management services
to institutional investors. In addition to PRISA and PRISA II, PREI
manages several other pooled separate accounts maintained by Prudential
and also manages various single customer separate accounts and advisory
accounts. It is represented that PREI currently manages real estate
assets of approximately $4.6 billion.
4. The Plans which invest in PRISA and PRISA II consist of defined
benefit plans and defined contribution plans. Investment in PRISA by
defined contribution plans, where a unit value account is maintained
for each individual plan participant, is limited to no more than 33
percent (33%) of the investment fund for which such unit value is
determined. It is represented that PRISA II does not have this
restriction on the extent of participation by defined contribution
plans. The Retirement System for U.S. Employees and Special Agents, a
defined benefit plan sponsored by Prudential has invested in PRISA and
PRISA II since 1970 and 1980, respectively. It is represented that, as
of June 30, 1994, approximately 4 percent (4%) of the
[[Page 47595]]
assets of this plan were in the aggregate invested in the Accounts.
The Plans participate in the Accounts, in accordance with the
provisions of group pension annuity contracts offered by Prudential.
Pursuant to the terms of such group pension annuity contracts,
Prudential is appointed as an investment manager to each of the Plans,
with discretion to delegate to one or more of its direct or indirect
wholly-owned subsidiaries all or part of its authority under such
contract. It is represented that for the performance of its duties as
investment manager of each of the Accounts, Prudential charges a
quarterly fee of a percentage of the value of the assets in each
Account.\2\ In this regard, Prudential acknowledges that it is a
fiduciary and party in interest, pursuant to section 3(14) of the Act,
with respect to each Plan, to the extent of the assets of such Plans
which are invested in either or both Accounts, pursuant to the terms of
such group pension annuity contracts.
\2\ It is represented that Prudential and its affiliates rely
upon the statutory exemption, as set forth in section 408(b)(2) of
the Act, for the receipt of fees for investment management services
provided with respect to PRISA and PRISA II. The Department, herein,
expresses no opinion as to whether the provision of services by
Prudential and its affiliates to PRISA and PRISA II and the
compensation received therefore satisfy the terms and conditions, as
set forth in section 408(b)(2) of the Act.
---------------------------------------------------------------------------
5. It is represented that allegations of improprieties by
Prudential in connection with the overvaluation of properties in the
PRISA and PRISA II portfolios arose in November 1993, as part of a suit
brought against Prudential by a former employee. In addition, such
allegations were the subject of an investigation by the Department of
Labor.\3\ It is represented that Prudential hired an outside counsel,
Sonnenschein Nath & Rosenthal (Sonnenschein), and an independent
accounting firm, Kenneth Leventhal & Company (Leventhal), to conduct
independent reviews of various aspects of these allegations. In this
regard, Prudential made available to investors in PRISA and PRISA II on
April 27, 1994, and to the Department on April 25 and June 26, 1994,
the results of such independent reviews conducted by Sonnenschein and
Leventhal.
\3\ Prudential represents that, by letter dated March 21, 1995,
it was advised that the Department had concluded its investigation,
and that no further action was contemplated at that time.
---------------------------------------------------------------------------
As a result of these investigations and conclusions made by
Sonnenschein and Leventhal, Prudential determined to taken certain
steps to improve the operation and management of the Accounts. These
efforts include: (a) Changing certain of the personnel responsible for
the management of the Accounts; (b) establishing the Advisory Councils
for each of the Accounts; (c) transferring responsibility for the
valuation of properties from PREI to Prudential's Department of the
Comptroller (the Comptroller); (d) retaining the services of the
independent Valuation Management Firm; (e) creating the Valuation
Policy Committee; (e) implementing a fiduciary education program for
associates of Prudential; and (f) making financial remediation to
investors in PRISA and PRISA II in order to restore each investor to
his financial position, absent any overvaluation of PRISA and PRISA II
properties.
6. In order to make the Accounts more attractive investments for
the Plans and in addition to the other efforts taken by Prudential, as
described above, Prudential proposes to provide an enhanced return and
to pay such return to the Plans on the assets of such Plans which are
invested in either or both Accounts, as of April 1, 1994, and which
remain invested for all or any portion of the twenty-one (21) month
Investment Period; provided any required state insurance regulatory
approvals are obtained and the proposed exemption is granted.\4\ In
this regard, Prudential has requested exemptive relief from the
prohibited transaction provision, set forth in section 406(a) of the
Act, because it believes that its obligation to make the enhanced
return payments could be viewed as an implicit or indirect extension of
credit by the Plans to Prudential which will remain outstanding until
such time as Prudential satisfies its obligation by payment of the
enhanced return.
\4\ By letter dated April 11, 1995, Prudential was advised that
the New Jersey Insurance Department has approved the proposed
enhanced return payment, as described herein.
---------------------------------------------------------------------------
Further, in Prudential's view, the proposed enhanced return could
give rise to a conflict of interest between Prudential and the Plans
that invest in the Accounts in violation of section 406(b)(1) and
(b)(2) of the Act. In this regard, the amount of each Account's
cumulative total return for the Investment Period will be affected in
part by Prudential's exercise of its fiduciary authority, control, and
responsibility with respect to the operation and management of the
Accounts, including the valuation of assets of the Accounts.
Accordingly, it could appear that Prudential has an interest in
maximizing the cumulative total return of the Accounts, as determined
for the Investment Period, April 1, 1994 through December 31, 1995,
thereby reducing the amount of, or entirely eliminating, Prudential's
obligation to make the enhanced return payment.
7. With certain limitations, as more fully described below, the
amount of enhanced return Prudential proposes to pay to the Plans
invested in one or both of the Accounts will be derived by comparing
the cumulative total return for the Investment Period reported by a
preselected Index with the cumulative total return of PRISA or PRISA II
for the same period.
The Index is an index of returns (before deduction of management
fees) on real property investments in the United States. The Index is
produced in partnership between Russell Real Estate Consulting (a
division of the Frank Russell Company, an investment consulting firm)
and the National Council of Real Estate Investment Fiduciaries
(NCREIF). NCREIF is a non-profit association of institutional real
estate investment professionals, including investment managers, plan
sponsors, academicians, consultants, appraisers, CPAs, and other
service providers who have significant involvement in pension fund real
estate investments.
It is represented that all events giving rise to Prudential's
payment obligation on the enhanced return will have occurred by
December 31, 1995. However, Prudential expects that the information
necessary to compare the cumulative total returns of PRISA and PRISA II
to that of the Index for the Investment Period, April 1, 1994, through
December 31, 1995, will not be available before the end of the second
quarter of 1996. It is contemplated that the payments, if any, of
enhanced return will be made by Prudential to investors in the Accounts
not later than thirty (30) days following the final determination of
the amounts owed.
Specifically, the maximum enhanced return shall be equal to the
product of (i) one-seventh (1/7th), multiplied by (ii) the difference
(but not more than 200 basis points) between the cumulative total
return for the entire Investment Period reported by the Index and the
cumulative total return of PRISA or PRISA II, prior to reduction for
Prudential's management fees, for such entire period, multiplied by
(iii) the number of complete calendar quarters that the amounts remain
invested in PRISA or PRISA II during the Investment Period.
For example, in the case of an amount that is invested in an
Account as of April 1, 1994, and is withdrawn on June 30, 1995, the
enhanced return will be
[[Page 47596]]
equal to the difference between the cumulative total return for such
period reported by the Index and the cumulative total return of the
Account, prior to reduction for Prudential's management fees, for the
same period, but not more than the enhanced return (not in excess of
200 basis points) determined with respect to the entire period April 1,
1994 through December 31, 1995, multiplied by five-sevenths (5/7ths).
9. Prudential represents that the exemption is administratively
feasible in that the proposed transaction is narrowly circumscribed and
of limited duration. In this regard, the proposed transaction involves
a one-time determination of comparative investment returns based upon a
recognized real estate industry index that can be readily reviewed and
monitored for compliance in all applicable requirements. In addition,
it is represented that the comparative return calculation involves a
relatively simple and objective comparison of readily available return
information, which can be easily confirmed by the fiduciaries of the
Plans invested in the Accounts and by the Department. Further, it is
represented that the Plans invested in the Accounts who receive the
enhanced return will incur no additional cost or risk in connection
with the proposed payment, and that Prudential will bear the cost of
the exemption application and of notifying interested persons.
10. It is represented that the exemption is in the interest of the
Plans and their participants and beneficiaries in that the Plan will
obtain an enhanced rate of return (but not more than 200 basis points)
for amounts invested in one or both of the Accounts during all or any
portion of the Investment Period, if the cumulative total investment
return of such Account for such Investment Period is less than that
reported for the Index. In addition, Prudential expects that its
commitment to provide the enhanced return will reduce requests from
investors in one or both Accounts for withdrawal, and will thereby
avoid the negative impact on the performance of such Accounts that
would likely result from forced liquidation of the properties in the
Accounts in order to obtain the cash necessary to satisfy withdrawal
requests.
11. It is represented that the proposed exemption contains
safeguards which protect the interests of the Plans and the rights of
participants and beneficiaries. In this regard, the decision to invest
funds in either or both of the Accounts for all or a portion of the
Investment Period has been and will be made by fiduciaries of Plans
independent of Prudential. In this regard, disclosure of Prudential's
proposal to make enhanced return payments was first made to investors
in the Accounts by correspondence, dated April 27, 1994. In addition,
it is represented that the investors in the Accounts have been kept
apprised of related developments in the Accounts, such as state
insurance regulatory approvals and the filing of the exemption
application. Further, it is represented that an additional level of
independent oversight of the proposed transaction will occur through
the review of the operations and returns of the Accounts conducted by
interim and permanent Advisory Councils for PRISA and PRISA II.
It is represented that the interim Advisory Councils were created
by Prudential to be in place through year-end 1994 or until the
transition to the permanent Advisory Councils. The responsibilities of
the interim Advisory Councils were: (a) To review and comment upon the
composition, structure, responsibilities, frequency of meetings,
selection of members, and other procedures to be followed by the
permanent Advisory Councils; (b) to review and comment on suggested
structural changes to the Accounts, including valuation and appraisal
policy, dividend policy, and fees; and (c) prior to appointment of the
permanent Advisory Councils, to satisfy all the responsibilities
pertaining to the duties of such permanent Advisory Councils, as listed
in the paragraph below.
The permanent Advisory Council for each Account will be composed of
from seven to eleven (preferably nine) investors in the Accounts or
their consultants or other representatives who have in-depth knowledge
of real estate investment and management. Members of the Advisory
Councils will be elected by investors on an investment weighted basis
and will serve for a minimum of two (2) years. It is represented that
formal meetings of the Advisory Councils will be held quarterly
approximately thirty (30) days following the end of each quarter, with
additional meetings to be held at the discretion of the Advisory
Councils. It is represented that the Advisory Councils do not have veto
authority. The role of the Advisory Councils is to monitor, review,
comment, and advise. For each of the Accounts, the responsibilities of
the permanent Advisory Council are: (a) To review Account investment
strategy and philosophy, including diversification strategy; (b) to
review the annual business plan for each Account, including the
criteria for acquisitions, dispositions, capital expenditures and
budgets, and to review quarterly variations to the business plan; (c)
to review property and portfolio leverage strategy; (d) to review
PREI's plans for paying out redemption requests; (e) to review data and
reports sent to all clients; (f) to review and comment on acquisitions
and dispositions; and (g) to make suggestions and to comment on all
information presented at quarterly meetings.
It is represented that Prudential will calculate the enhanced
return payments and will disclose such calculations in the open forum
of the Advisory Councils with full disclosure (through distribution of
the minutes of Advisory Council meetings) to all investors in the
Accounts. Further, PREI will review the returns for each Account with
the Advisory Councils for each Account. It is represented that the
comparative return calculation for determining the amount of the
enhanced return payments involves a relatively simple and objective
comparison of readily available information, which can easily be
confirmed by the Advisory Council and the account investors.
With respect to the valuation process, it is represented that all
the properties in the Accounts will be individually valued at least
once during the Investment Period and thereafter will be appraised by
external, independent, qualified MAI appraisers at least annually. In
this regard, it is represented that external appraisals are performed
as of the last day of a calendar quarter. The current Prudential policy
is for properties with market values in excess of $50 million to be
externally appraised twice each year and properties with values below
such amount to be externally appraised once each calendar year. In
addition, it is represented that certain events (e.g., significant
property or market changes, or internal adjustment of value over a
certain threshold) can trigger additional external valuations.
Prudential proposes to strengthen the independence of the valuation
process through the appointment of the Valuation Management Firm and
the creation of the Valuation Policy Committee. In addition, Prudential
has limited the role of PREI in the valuation process to the provision
of property, tenant, and market information and participation on the
Valuation Policy Committee.
The Valuation Policy Committee will consist of representatives from
the Valuation Management Firm, PREI, the PRISA Advisory Council, and
other clients of PREI. The Valuation Policy Committee will be chaired
by an MAI
[[Page 47597]]
appraiser employed by Prudential (the Prudential Valuation Reviewer).
It is represented that Phyllis A. Cummins (Ms. Cummins), Vice President
and Chief Appraiser of Prudential and a member of the Comptroller's
Department, is currently serving as the Prudential Valuation Reviewer.
It is represented that Ms. Cummins is qualified to serve as the
Prudential Valuation Reviewer in that she has been employed by
Prudential for over twenty (20) years and in that time has had
significant experience in valuations, development, assets management,
acquisitions, sales, and mortgages of all property types. In addition
to being an MAI appraiser since 1983, Ms. Cummins holds the Counselor
of Real Estate (CRE), the Certified Property Manager (CPM), and the
Certified Shopping Center Manager (CSM) designations. Further, Ms.
Cummins is certified in New Jersey as a General Appraiser and licensed
as a Broker-Salesperson. Ms. Cummins is a graduate of The Ohio State
University and received her MBA from the University of North Florida.
It is represented that the Valuation Policy Committee will meet at
least quarterly and set valuation policy, including such items as the
minimum qualifications for appraisal firms, fee schedules for such
firms, rotation of appraisal firms, and valuation methodology.
Prudential represents that it will bear the costs of the Valuation
Policy Committee.
Prudential represents that, pursuant to guidelines established by
the Valuation Policy Committee, it will retain for a non-renewable
fixed term an experienced and qualified, independent third party to
serve as the Valuation Management Firm. It is represented that the
Valuation Management Firm will report to the Valuation Policy
Committee. The Valuation Management Firm will be responsible for: (a)
Retaining (and terminating) all appraisal firms which value the
properties in the Accounts; (b) reviewing all appraisals generated by
such appraisal firms for conformance to certain standards, including
those established by the Valuation Policy Committee; and (c)
collecting, reviewing, and distributing any information from PREI
portfolio managers, asset managers, market intelligence coordinators,
and third party property managers needed by such appraisal firms to
appraise the properties in the Accounts. It is represented that Price
Waterhouse is currently serving as the Valuation Management Firm.
It is represented that the costs of the appraisal firms and the
Valuation Management Firm are currently paid by Prudential. However,
after significant discussions with the PRISA and PRISA II Advisory
Councils and investors in the Accounts, Prudential has proposed a
revised fee schedule which includes passing on the costs of third party
appraisers and the Valuation Management Firm to the Accounts.
Prudential believes that this practice is customary in the industry. A
proposal to revise the fee schedule is currently being reviewed by the
appropriate state insurance departments. Subject to the necessary
regulatory approval, Prudential has notified the investors in the
Accounts (as required by contract) that it intends to implement this
new fee schedule on March 31, 1997.5 In the interim, it is
represented that investors in the Accounts will be charged the lower of
the two schedules until the new schedule goes into effect.
5 Prudential has not requested relief for the institution
of the revised fee schedule which proposes to pass on the costs of
third party appraisers and the Valuation Management Firm to the
Accounts.
---------------------------------------------------------------------------
The Prudential Valuation Reviewer will serve as the Valuation
Management Firm's contact at Prudential. In this regard, it is
anticipated that the Valuation Management Firm will report the values
of the properties in the Accounts to the Prudential Valuation Reviewer
who will have final approval authority. In addition, the Prudential
Valuation Reviewer may order additional external appraisals; or, as
necessary, may adjust property values, based on tenant, property, or
market information provided by PREI or otherwise made available, in
calendar quarters when no independent appraisals have been performed.
Prudential anticipates that the Prudential Valuation Reviewer will
adjust a value estimate provided by an external appraisal only in rare
circumstances and extremely infrequently. In this regard, since April
1, 1994, the Prudential Valuation Reviewer has modified the estimate of
value of a property in an Account provided by an external appraiser in
only one circumstance and where both the Prudential Valuation Reviewer
and the Valuation Management Firm believed the external appraiser's
estimate of value was overstated. It is represented that this
adjustment in the value of a property was disclosed to the investors in
the Account in the PRISA Quarter 1995 Report and in minutes of the May
3, 1995 Advisory Council meeting. It is represented that any such
similar occurrences in the future will be disclosed in a like manner.
Further, it is represented that no upward adjustment will be made to
the value reported by an external appraiser of any property in the
Accounts without the Valuation Management Firm's concurrence to such
increase in value. It is represented that the Prudential Valuation
Reviewer will document any such changes and will report all property
values to Prudential's Comptroller, rather than to the PREI business
unit.
It is represented that Prudential's Comptroller will be responsible
for presenting values on financial statements (after adjusting any
property not held in fee for the Account's applicable ownership
interest). In addition, Prudential's Comptroller will calculate and
present the unit values and returns for the Accounts.
12. In summary, the applicant represents that the proposed
transaction meets the statutory criteria of section 408(a) of the Act
because:
(1) The decision to leave funds invested in either or both of the
Accounts for all or a portion of the Investment Period has been and
will be made by fiduciaries of the Plans independent of Prudential;
(2) The amount of the enhanced return payment with respect to the
assets of the Plans that are invested in either or both of the Accounts
for only a portion of the Investment Period will be calculated in the
same manner as the amount of the enhanced return payment with respect
to the assets of the Plans that remain invested in either or both of
the Accounts for the entire Investment Period;
(3) The enhanced return will be derived by comparing the cumulative
total return for the Investment Period reported by the Index with the
cumulative total return of PRISA or PRISA II for the same period;
(4) The Plans will obtain an enhanced rate of return (but not more
than 200 basis points) for amounts invested in one or both of the
Accounts during all or any portion of the Investment Period, if the
cumulative total investment return of such Account for such Investment
Period is less than that reported for the Index;
(5) The payments, if any, of enhanced return will be made by
Prudential to investors in the Accounts not later than thirty (30) days
following the final determination of the amounts owed;
(6) Every property held by the Accounts is individually valued at
least once during the Investment Period and thereafter will be valued
at least once in each calendar year by an independent qualified
appraiser;
(7) Independent oversight of the proposed transaction will occur
through
[[Page 47598]]
the review of the operations and returns of the Accounts conducted by
interim and permanent Advisory Councils for PRISA and PRISA II;
(8) The Valuation Policy Committee will meet at least quarterly and
set valuation policy for the Accounts;
(9) The Valuation Management Firm will be responsible for retaining
(and terminating) all appraisal firms which value the properties in the
Accounts; reviewing all appraisals generated by such appraisal firms;
and collecting, reviewing, and distributing any information needed by
such appraisal firms to appraise the properties in the Accounts;
(10) In connection with the determination of enhanced return
payments, no upward adjustment will be made by Prudential to the value
reported by an external independent appraiser of any Property in PRISA
and PRISA II without the concurrence of the Valuation Management Firm;
(11) The Plans invested in the Accounts who receive the enhanced
return will incur no additional cost or risk in connection with the
transaction;
(12) The transaction is subject to state insurance regulatory
approvals;
(13) The calculation of the enhanced return involves a one-time
determination of comparative investment returns based upon a recognized
real estate industry index that can be readily reviewed and monitored
for compliance in all applicable requirements;
(14) The comparative return calculation involves a relatively
simple and objective comparison of readily available return
information, which can be easily confirmed by the fiduciaries of the
Plans invested in the Accounts and by the Department; and
(15) The Plans will receive the same treatment and proportional
payment under the enhanced return as any other investor in PRISA and
PRISA II.
Notice to Interested Persons
Those persons who may be interested in the pendency of the proposed
exemption include fiduciaries, participants and beneficiaries of the
Plans that are invested in one or both of the Accounts. However, it is
represented that there are hundreds of thousands of participants in the
Plans that invest in one or both of the Accounts. Because of the
impracticality of providing notice to all such persons, Prudential
proposes to give notice to interested persons by distributing the
Notice of Proposed Exemption, as published in the Federal Register,
together with a supplemental statement in the form set forth in the
Department's regulations under 29 C.F.R. 2570.43(b)(2), to the
contractholder on behalf of each of the Plans that was invested in
PRISA or PRISA II, as of April 1, 1994. It is represented that these
contractholders are generally the sponsors of the Plans or the trustees
or administrators of the Plans. Distribution of notice will be effected
by first-class mail, postage pre-paid, within fifteen (15) days of the
date of publication of the Notice of Proposed Exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (This is not a toll-free number.)
First Hawaiian Bank Located Honolulu, HI
[Application No. D-09877]
Proposed Exemption
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 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).6
6 For purposes of this exemption, reference to provisions of
Title I of the Act, unless otherwise specified, refer also to
corresponding provisions of the Code.
---------------------------------------------------------------------------
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) of the Code, shall not apply to the in-kind
transfer to any open-end investment company (the Fund or Funds)
registered under the Investment Company Act of 1940 (the '40 Act) to
which First Hawaiian Bank 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 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 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 have a
total net asset value equal in value to the assets of the Plans or the
CIFs exchanged for such shares on the date of transfer.
(f) The current market value of the assets of the Plans or the CIFs
to be transferred in-kind 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, using independent sources in accordance with
the procedures set forth in Rule 17a-7b (Rule 17a-7) under the '40 Act,
as amended from time to time or any successor rule, regulation, or
similar pronouncement and the procedures established by the Funds
pursuant to Rule 17a-7 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
last business day preceding the date of the Plan or CIF transfers
determined on the basis of reasonable inquiry from at least three
sources that are broker-dealers or pricing services independent of the
Bank.
(g) Not later than 30 business days after completion of each in-
kind transfer of assets of the Plans or the CIFs in
[[Page 47599]]
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 '40
Act;
(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) No later than 90 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 number of CIF units held by each affected Plan immediately
before the conversion (and the related per unit value and 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 and 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, 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 proposed
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) Neither the Bank nor an affiliate, including any officer or
director purchases from or sells to any of the Plans shares of any of
the Funds.
(d) As to each individual Plan, the combined total of all fees
received by the Bank for the provision of services to the Plan, and in
connection with the provision of services to any of the Funds in which
the Plan may invest, is 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 '40 Act (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 each 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 the
Plan in any of the Funds a full and detailed written disclosure of
information concerning such Fund (including, but not limited to, a
current prospectus for each portfolio of each of the Funds in which
such Plan is considering investing and a statement describing the fee
structure).
(h) On the basis of the information described in paragraph (g) of
this Section II, the Second Fiduciary authorizes in writing the
investment of assets of the Plans in shares of the Funds and the fees
received by the Bank in connection with its services to the Funds. Such
authorization by the Second Fiduciary is 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 redemption.
(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 '40 Act 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 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 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
[[Page 47600]]
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 redeeming 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 redemption of shares
of such Plans cannot be executed within one business day, the Bank
shall have one additional business day to complete such redemption; 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 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 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, the Internal Revenue Service (the Service) or the
Securities and Exchange Commission (the SEC);
(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 First Hawaiian Bank 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 '40 Act 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
[[Page 47601]]
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/adviser, (ii) the approval of any purchase or
redemption 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 redeeming 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 redemption cannot be
executed within one business day, the Bank shall have one additional
business day to complete such redemption.
Summary of Facts and Representations
Description of the Parties
1. The parties or entities that are involved in the subject
transactions are described as follows:
a. The Bank is state-chartered bank that is incorporated under the
laws of Hawaii and maintains its principal office at 1132 Bishop
Street, Honolulu, Hawaii. The Bank is a wholly-owned subsidiary of
First Hawaiian, Inc., a Delaware holding company.
Over the past seventy years, the Bank and its corporate
predecessors have provided asset management services to several types
of accounts including personal trusts, guardianship and probate
accounts, corporate assets portfolio accounts and employee benefit
plans including HR-10 Plans. As of May 1, 1994, the Bank had total
assets under management of approximately $1.5 billion. The Bank serves
as trustee with respect to the CIFs and as an investment adviser to the
Fund portfolios described herein.
b. The Plans consist of retirement plans qualified under section
401(a) of the Code with respect to which the Bank serves or will serve
as a trustee or investment fiduciary and that constitute ``pension
plans'' as defined in section 3(2) of the Act and section 4975(e)(1) of
the Code. The Plans do not include any plans that are sponsored by the
Bank.\7\
\7\ The Department herein is not proposing relief for
transactions afforded relief by Section 404(c) of the Act.
---------------------------------------------------------------------------
c. The CIFs consist of separate investment portfolios of the First
Hawaiian Bank Collective Investment Trust for Employee Benefit Trusts
(the Collective Investment Trust) or similar investment trusts that may
be established and maintained by the Bank. The Bank serves as trustee
of the Collective Investment Trust.
As of June 30, 1993, the aggregate fair market value of the current
CIFs maintained by the Bank was approximately $165.3 million.
Participation in the CIFs is limited to Plans and public retirement
funds for which the Bank acts as trustee or co-trustee or agent for the
trustee or trustees of such Plan or CIF.
The CIFs that will be involved initially in the subject
transactions are the Equity Fund, the HR-10 Equity Fund and the Pooled
Fixed Income Fund.\8\ These CIFs will be terminated immediately
following the in-kind transfers.\9\
\8\ The Pooled Equity Fund and the HR-10 Equity Fund principally
invest in equity securities. The Pooled Fixed Income Fund invests
primarily in fixed income securities or other tangible or intangible
property or interests in either real or personal property.
\9\ A fourth CIF, the Pooled Short-Term Fixed Income Fund, will
be terminated at or prior to the time that the other CIFs are
converted. At present, the only investor in this CIF is the Pooled
Fixed Income Fund.
d. The Funds are separate portfolios of open-end investment
companies registered under the '40 Act. The Funds currently consist of
the Bishop Street Funds, a Massachusetts business trust that was
established on May 25, 1994. The Bishop Street Funds constitute a no-
load, open-end management investment company with four portfolios in
existence. The existing Funds include the Equity Fund (corresponding to
the Pooled Equity Fund and the HR-10 Equity Fund of the Collective
Investment Trust) and the High-Grade Income Fund (corresponding to the
Fixed Income Fund of the Collective Investment Trust).
The Bishop Street Funds will issue two classes of shares.
Institutional Class A shares will be offered primarily to agency,
fiduciary, custodial and advisory clients of the Bank. Retail Class B
shares will be offered primarily to individuals. The Bishop Street
Funds will be offered and sold exclusively through the use of
prospectuses and other materials and will be offered and sold in full
compliance with regulations of the SEC.
The Bank will serve as the investment adviser to each of the Bishop
Street Funds. As the investment adviser, the Bank will make investment
decisions with respect to the assets of each Fund and continuously
review, supervise and administer each Fund's investment program. For
investment advisory services rendered to the Funds, the Bank will
receive an investment advisory fee. The Bishop Street Funds will pay
separate fees for services provided to the Funds by the transfer agent,
administrator and custodian, all of whom will not be affiliated with
the Bank. Neither the Bank nor its affiliates will receive any 12b-1
fees from the Funds.
Description of the Transactions
2. Because the Bank recognizes that (a) 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
[[Page 47602]]
that the Bank otherwise manages, and (b) 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 Prohibited
Transaction Exemption 77-4 (42 FR 18732, April 8, 1977), the Bank has
requested relief for the transactions described in Sections I and II.
Each of these transactions is discussed more fully herein. The proposed
exemption is conditioned on the satisfaction of certain requirements
and compliance with various general conditions which are also discussed
below. It is the Bank's express intention that the description of these
transactions and the conditions of the requested exemption with respect
to such transactions will be applicable uniformly to the current Funds
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
3. The Bank has maintained CIFs in which the Plans have invested in
accordance with requirements under Hawaiian banking law that apply to
CIFs. The Bank has decided to terminate all current 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: (a) A
copy of the prospectus which is updated annually; (b) 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); and (c) a semi-annual
report containing unaudited financial statements. In addition, at the
option of the Funds, the Plans may receive 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
net asset value 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
it may be appropriate for an individual Plan for which the Bank serves
as a fiduciary to transfer all or a pro rata share of its in-kind
assets 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, and would not involve the
transfer or exchange of the real estate holdings of such Plan. A Fund's
eligible investments are set forth in its prospectus. No brokerage
commission or other fees or expenses (other than customary transfer
charges paid to parties other than the Bank or its affiliates) 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, the Bank has requested
prospective relief for transactions which would involve: (a) 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 (b) 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.
The Bank maintains that the in-kind transfers 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: (a) Are consistent with the investment
objectives, policies, and restrictions of the corresponding portfolios
of such Fund, (b) satisfy the applicable requirements of the '40 Act
and the Code, and (c) have a readily ascertainable market value. In
addition, any assets that are transferred will be liquid and will not
be subject to restrictions on resale. 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, prior to
entering into an in-kind transfer, each affected Plan receives certain
disclosures from the Bank and approves such transaction in writing.
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 under the '40 Act, as amended from
time to time or any successor rule, regulation, or similar
pronouncement and the procedures established by the Funds pursuant to
Rule 17a-7 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 last business day
preceding the date of the Plan or CIF transfers determined on the basis
of reasonable inquiry from at least three sources that are broker-
dealers or pricing services independent of the Bank.
Further, the Bank represents that within 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 '34
Act), or those quoted on the NASDAQ system or for which the principal
market is an exchange.
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 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
[[Page 47603]]
number of CIF units held by each affected Plan immediately before the
conversion (and the related per unit value and 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 and the aggregate dollar value of the
shares received).
The Initial Exemption Transactions
4. The Bank has requested prospective exemptive relief, for the in-
kind transfer to the Bishop Street Funds. At the time of such in-kind
transfer, all of the assets of the three CIFs described above, which
are maintained by the Bank and in which the Plans hold interests, will
be transferred to the Bishop Street Funds which have investment
objectives and policies substantially identical to those of the CIFs.
At the same time, the three CIFs will be terminated and the assets of
each, then consisting of shares in portfolios of the Bishop Street
Funds, will be 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.
The Bank will provide to each affected Plan disclosures that
announce the termination of the CIFs, summarize the transaction and
otherwise comply with provisions of Section I of the exemption. Based
on these disclosures, the Second Fiduciary from each affected Plan will
approve in writing the transfer of the CIFs' assets to the
corresponding portfolios of the Bishop Street Funds in exchange for
shares of the Bishop Street Funds, and the receipt by the Bank of fees
for services to the Bishop Street Funds. The assets of Plans that do
not approve investment in the Bishop Street Funds will be 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 three CIFs will be
reviewed to confirm that such are appropriate investments for the
corresponding portfolios of the Bishop Street Funds into which such
assets will be transferred. If any of the assets of the three CIFs are
not appropriate for the Bishop Street Funds, the Bank intends to sell
such assets in the open market through an unaffiliated brokerage firm
prior to the transfer.
The assets transferred by the three CIFs to the Bishop Street Funds
will consist entirely of cash and marketable securities. For purposes
of the transfer in-kind, the value of the securities in each of the
three CIFs will be determined based on market values as of the close of
business on the last business date prior to the transfer (the CIF
Valuation Date). The values will be determined in a single valuation
using the valuation procedures described in Rule 17a-7 under the '40
Act. In this regard, the ``current market price'' for specific types of
CIF securities involved in the transaction will be determined as
follows:
a. If the security is 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 the CIF Valuation
Date; or if there are 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 '34 Act), 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 on the CIF Valuation Date; or if there is no reported
transaction 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 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 independent bid
and lowest 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
independent bid and lowest independent offer as of the close of
business on the CIF Valuation Date, determined on the basis of
reasonable inquiry. For securities in this category, the Bank
intends to obtain quotations from at least three sources that are
either broker-dealers or pricing services independent of and
unrelated to the Bank and, where more than one valid quotation is
available, use the average of the quotations to value the
securities, in conformance with interpretations by the SEC and
practice under Rule 17a-7.
The securities received by the corresponding portfolios of the
Bishop Street Funds will be valued by such portfolio for purposes of
the transfer in the same manner and on the same day as such securities
will be valued by the CIFs. The per share value of the shares of each
portfolio of the Bishop Street Funds issued to the CIFs will be based
on the corresponding portfolio's then current net asset value. As a
result of the proposed procedure, the Bank expects that the aggregate
value of the shares of the corresponding portfolio of the Bishop Street
Funds issued to the CIFs to be equal to the value of the assets (cash
and marketable securities) transferred to such portfolio as of the
opening of business on next business day following the CIF Valuation
Date. The Bank also expects the value of a Plan's investment in shares
of a corresponding portfolio of the Bishop Street Funds as of the
opening of business on the date of the transaction will be 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.
Not later than 30 business days after completion of the
transaction, the Bank will send by regular mail a written confirmation
of the transaction to each affected Plan. Such confirmation will
contain: (a) The identity of each security that is valued in accordance
with Rule 17a7(b)(4), as described above; (b) the price of each such
security for purposes of the transaction; and (c) the identity of each
pricing service or market maker consulted in determining the value of
such securities. In accordance with the conditions under Section I of
the proposed exemption, similar procedures will occur upon any future
in-kind exchanges between CIFs maintained by the Bank or Plans, and the
Funds.
Receipt of Fees From Funds
5. Under certain conditions, PTE 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.
Plan-level investment management, investment advisory, or fees for
similar services provided by the Bank are currently charged in the form
of a single asset-based investment management fee. There is also a
Plan-level trustee fee for basic administrative services provided by
the Bank as well as other specific service fees, such as a cash
``sweep'' fee. Currently, the annual investment management fee for
assets invested in the Pooled Equity Fund and the HR-10 Equity Fund is
0.60 percent of assets under management, based on the daily net asset
value of the fund. The fee for
[[Page 47604]]
assets invested in the Pooled Fixed Income Fund is 0.40 percent of
assets under management, based on the daily net asset value of the
fund. Plan-level fees are subject to annual minimums for administration
and management expressed as flat dollar amounts and administrative fees
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. Depending on the
terms 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.
Plan-level fees for investment management, investment advisory or
similar investment services will terminate immediately after the
execution of the subject transactions described herein.
As mentioned above, the Bank may receive Fund-level fees. Such
Fund-level fees can be divided into: (a) Fees paid to the Bank by a
Fund for investment management, investment advisory, or similar
services provided to such Fund, and (b) 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. The Bank is currently not paid any
fees in this category from the Bishop Street Funds. The current fee
arrangements between the Bank and the Bishop Street Funds provide for
the Bank to receive fees from the Bishop Street Funds only for acting
as investment adviser. This compensation paid to the Bank for
investment advisory services is in accordance with agreements between
the Bishop Street Funds and the Bank. In this regard, it is represented
that the Bishop Street Funds' Trustees and the shareholders of the
Bishop Street Funds approve the compensation that the Bank receives
from the Bishop Street Funds. Also, the Bishop Street Funds' Trustees
approve any changes in the compensation paid to the Bank for services
rendered to the Bishop Street Funds.
With respect to Plans managed by the Bank that are invested in the
Funds, although such Plans will no longer pay a Plan-level investment
management fee to the Bank, a Plan-level fee will continue to 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. These functions performed by the Bank on the Plan-level
are separate and distinct from those performed on the Fund-level by the
Bank.
\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.
---------------------------------------------------------------------------
The Bank will continue to receive Plan-level 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. Since
the Plan-level investment management fee for Plans investing in the
Funds will terminate, there will be no credit to the Plans their pro
rata share of the investment advisory fees paid at the Fund-level.
Instead, the only 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
retain fees for providing Secondary Services to the Funds.
The Bank believes that this proposed fee arrangement complies with
PTE 77-4. However, there is one difference from PTE 77-4 requested by
the Bank for which an exemption is required. In this regard, one of the
requirements of PTE 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
Bank proposes an alternative which the Bank believes provides the basic
safeguards for the Plans and is more efficient, cost effective, and
administratively feasible than those contained in PTE 77-4.
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 30 days in advance of the
implementation of such additional service or fee increase, to the
Second Fiduciary of 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. The Bank believes that notice provided 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 addition of a 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 Second Fiduciaries in an amendment of or supplement to the
Funds' prospectus or in the Funds' statement of additional information,
to the extent necessary to comply with SEC disclosure
requirements.11
\11\ An increase in the amount of a fee for an existing
Secondary Service (other than through an increase in the value of
the underlying assets in the Funds) or the imposition of a fee for a
newly-established Secondary Service shall be considered an increase
in the rate of such Secondary Fee. However, in the event a Secondary
Fee has already been described in writing to the Second Fiduciary
and the Second Fiduciary has provided authorization for the amount
of such Secondary Fee, and such fee was waived, no further action by
the Bank would be required in order for the Bank to receive such fee
at a later time. Thus, for example, no further disclosure would be
necessary if the Bank had received authorization for a fee for
custodial services from Plan investors and subsequently determined
to waive the fee for a period of time in order to attract new
investors but later charged the fee. However, reinstituting the fee
at an amount greater than previously disclosed would necessitate the
Bank providing notice of the fee increase and a Termination Form.
[[Page 47605]]
---------------------------------------------------------------------------
Authorization Requirements for the Second Fiduciary
6. The written notice of an additional service for which a fee is
charged or a fee increase, as described in Representation 5, 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 (l) of Section II, which expressly provide an election to
the Second Fiduciaries to terminate at will any prior authorizations
without penalty to the Plans. 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. Termination by any Plan of authorization to
invest in the Funds will be effected by the Bank redeeming the shares
of the Fund held by the affected Plan by the close of business on the
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 redemption cannot be executed within one business day, the Bank
shall have one additional business day to complete such redemption.
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
Equity Fund, the Bank receives from the Bishop Street Funds an annual
fee of 0.40 percent based on the Fund's average daily net assets. For
services provided to the High-Grade Income Fund, the Bank receives from
the Bishop Street Funds an annual fee of 0.25 percent, based on the
Fund's average daily net assets. The Bank proposes to allocate the
assets of the Plans among the portfolios offered of the Bishop Street
Funds and/or among any of the Funds under the terms of this proposed
exemption.
The impact of the change in fee structures resulting from the
exemptive transactions on the aggregate fees received by the Bank is
difficult to determine, according to the applicant, 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, usage by the Plans of separate services provided by the Bank
and the application of certain ``break points'' in the schedule of
Plan-level fees. Further, the Bank notes that Fund size, 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, the Bank
believes that, as to each individual Plan, the combined total of all
Plan-level and Fund-level fees received by it for the provision of
services to the Plans and to the Funds, respectively, is not in excess
of ``reasonable compensation'' within the meaning of section 408(b)(2)
of the Act.
Conditions for Exemption
7. If granted, this proposed exemption will be subject to the
satisfaction of certain general conditions that will further protect
the interests of the Plans. For example, 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. 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 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).
On the basis of the information disclosed, the Second Fiduciary
will authorize in writing the investment of assets of a Plan in shares
of the Funds in connection with the transactions set forth herein and
the compensation received by the Bank in connection with its services
to the Funds. Written authorization will extend to only those
investment portfolios of the Funds with respect to which the Plan has
received the written disclosures referred to above and which are
specifically mentioned in such disclosure described above. Having
obtained the authorization of the Second Fiduciary, the Bank will
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 invest assets of a Plan in any portfolio not specifically mentioned
in the written disclosure and authorization described above. For
example, if the written authorization of the Second Fiduciary covered
only one of the portfolios then existing, the Bank could only invest
the assets of such Plans in that one portfolio 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.
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
'40 Act 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
[[Page 47606]]
statement) which contains a description of all fees paid by the Fund.
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 '40 Act and
applicable rules of the SEC. However, 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 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.
The receipt of fees, as described above, is 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.
With respect to such purchases, (a) the Plans and other investors
will purchase or redeem shares in the Funds in accordance with standard
procedures described in the prospectus for each portfolio of the Funds;
(b) the Plans will pay no sales commissions or redemption fees in
connection with purchase or redemption of shares in the Funds by the
Plans; (c) the Bank will not purchase from or sell to any of the Plans
shares of any of the Funds; and (d) 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 redemption and will be the same price as
any other investor would have paid or received at that time. The value
of the Bishop Street Funds' shares and the value of each Bishop Street
Funds' 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 '40 Act. In the case of any money
market portfolio, the assets are valued based on the amortized cost
method authorized by SEC Rule 2a-7, in order to maintain a net asset
value of $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 redemptions by dividing the value of
all securities, determined by a method as set forth in the prospectus
for each Bishop Street Fund 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.
Purchases and redemptions 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.
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 the
Bishop Street Funds Money Market Fund or other short-term investment
vehicle selected by the Second Fiduciary on behalf of a Plan. The
automated cash ``sweep'' arrangement would not involve shares of any
non-money market portfolios.
After the Money Market Fund of the Bishop Street Funds has 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. The Bank has no discretion
with respect to the timing of the ``sweep'' either into or out of the
Bishop Street Funds. Under the automated ``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 case of
the Plans having positive balances in shares of the Money Market Fund.
In the case of a Plan having a negative cash balance, the system
automatically liquidates the Bishop Street Fund shares as necessary to
eliminate such negative balance.
Plans may terminate their participation in the automated cash
``sweep'' arrangement and withdraw at any time by notifying the Bank.
Such termination will be effected by the Bank redeeming the shares of
the Bishop Street Funds held by the Plan requesting termination by the
close of the business day following the date of receipt by the Bank,
either by mail, hand delivery, facsimile, or other available means of
written communication 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 redemption
of shares of such Plan cannot be executed within one business day, the
Bank would complete the redemption within one additional business day.
No fee, charge or penalty of any kind is charged in connection with
a termination by a Plan of participation in the automated cash ``sweep
arrangement'' in the Bishop Street Funds or in any of the Funds. The
Bank currently charges a Plan-level cash sweep fee for sweep services
in connection with the investment of cash balances in short-term
investment vehicles managed by unaffiliated entities. This fee will be
terminated for Plans that elect to use the Money Market Fund as their
cash management vehicle. The Bank does not charge separate or
additional fees to Plans in order to participate in the daily automated
cash ``sweep'' arrangement through the Bishop Street Funds, nor is such
additional compensation contemplated by the proposed exemption.12
\12\ The 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) of the Act (fees for
``ancillary services'') and under section 408(b)(8) of the Act
(investments in collective trust funds maintained by such bank) to
such ``sweep'' service arrangements.
[[Page 47607]]
---------------------------------------------------------------------------
8. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) Neither the Plans nor the CIFs 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 redemptions by the Plans of shares of the Funds, including
purchases and redemptions handled through daily automated cash
``sweep'' arrangements.
(b) The Plans or the CIFs 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 as of the close of business on the same day in accordance
with the procedures set forth in Rule 17a-7 under the '40 Act, as
amended from time to time or any successor rule, regulation or similar
pronouncement.
(c) Not later than 30 business days after completion of each in-
kind transfer of assets in exchange for shares of the Funds, the Plans
will receive written confirmation of the assets involved in the
exchange which were valued in accordance with Rule 17a-7(b)(4), the
price of such assets and the identity of the pricing service or market
maker consulted.
(d) No later than 90 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 will mail to the Second Fiduciary of each Plan, a written
confirmation of the number of CIF units held by each affected Plan
immediately before the conversion (and the related per unit value and
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 and the aggregate
dollar value of the shares received).
(e) The price that 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 for shares of the same class at
that time.
(f) Neither the Bank nor an affiliate, including any officer or
director will purchase from or sell to any of the Plans shares of any
of the Funds.
(g) As to each individual Plan, the combined total of all fees
received by the Bank for the provision of services to the Plan, and in
connection with the provision of services to any of the Funds in which
the Plan may invest, will not be in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(h) The Bank will not receive any 12b-1 Fees in connection with the
proposed transactions.
(i) Prior to investment by a Plan in any of the Funds, in
connection with transactions, the Second Fiduciary 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 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 will
authorize the transactions.
(m) The authorization by the Second Fiduciary will be terminable at
will without penalty to such Plans, and any such termination will be
effected by the close of the business day following the date of receipt
by the Bank, either by mail, hand delivery, facsimile or other
available means of written communication at the option of the Second
Fiduciary, of the Termination Form or any other written notice of
termination, unless due to circumstances beyond the control of the Bank
delay execution for no more than one additional business day.
(n) The Plans do not pay 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 will receive a written notice accompanied
by the Termination Form with instructions regarding the use of such
form, at least 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 addition of a Secondary Service for which a fee is
charged, or any increase in fees for Secondary Services that the Bank
provides to the Funds.
(p) All dealings between the Plans and any of the Funds will be on
a basis no less favorable to such Plans than dealings between the Funds
and other shareholders holding the same shares of the same class as the
Plans.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady 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 accurately describe all
material terms of
[[Page 47608]]
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 8th day of September, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-22753 Filed 9-12-95; 8:45 am]
BILLING CODE 4510-29-P
