[Federal Register Volume 59, Number 118 (Tuesday, June 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15006]


[[Page Unknown]]

[Federal Register: June 21, 1994]


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DEPARTMENT OF LABOR
[Prohibited Transaction Exemption 94-4S; Application Nos. D-9337 and D-
9415]

 

Smith Barney, Inc. (SBI), Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration.

ACTION: Grant of individual exemption to modify and replace prohibited 
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers, 
Inc. (Shearson Lehman).

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SUMMARY: This document contains an individual exemption which 
supersedes PTE 92-77 (57 FR 45833, October 5, 1992).1 This 
exemption permits the replacement of Shearson Lehman with an entity 
known as ``Smith Barney Inc.''2 It also allows SBI to adopt a 
daily-traded collective investment fund (the GIC Fund) for Plans 
investing in the Consulting Group Capital Markets Funds (the Trust). 
The exemption provides conditional relief that is identical to that 
provided by PTE 92-77 and it will affect participants and beneficiaries 
of, and fiduciaries with respect to, Plans participating in the Trust.

    \1\PTE 92-77 provides exemptive relief from section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of 
the Code, with respect to the purchase or redemption of shares in 
the Trust for TRAK Investments (which has been redesignated as the 
``Consulting Group Capital Markets Funds'' and is referred to herein 
as the Trust) by Plans investing therein. In addition, PTE 92-77 
provides exemptive relief from the restrictions of section 406 
(b)(1) and (b)(2) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(E) of the Code, with respect to the provision, by the 
Consulting Group of Shearson Lehman, of investment advisory services 
to an Independent Plan Fiduciary of a Plan participating in the TRAK 
Personalized Investment Advisory Service (the TRAK Program) which 
may result in such fiduciary's selection of a Portfolio in the TRAK 
Program for the investment of Plan assets.
    \2\Effective June 1, 1994, Smith Barney Shearson, Inc. (SBS) was 
renamed ``Smith Barney Inc.'' Hereinafter, SBS is referred to in 
this grant notice as either ``Smith Barney Inc.'' or ``SBI.''
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EFFECTIVE DATE: This exemption is effective July 31, 1993 for 
transactions that are covered by PTE 92-77. With respect to 
transactions involving the GIC Fund, the exemption is effective March 
29, 1994.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, telephone (202) 219-8881. (This is not a toll-free 
number.)

SUPPLEMENTARY INFORMATION: On March 29, 1994, the Department of Labor 
(the Department) published a notice of proposed exemption (the Notice) 
in the Federal Register (59 FR 14680) that would replace PTE 92-77. PTE 
92-77 provides an exemption from certain prohibited transaction 
restrictions of section 406 of the Employee Retirement Income Security 
Act of 1974 (the Act) and from the sanctions resulting from the 
application of section 4975 of the Internal Revenue Code of 1986 (the 
Code), as amended, by reason of section 4975(c)(1) of the Code. The 
proposed exemption was requested in an application filed by SBI 
pursuant to section 408(a) of the Act and section 4975(c)(2) of the 
Code, and in accordance with the procedures (the Procedures) set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Accordingly, this replacement exemption is 
being issued solely by the Department.
    The Notice gave interested persons an opportunity to comment on the 
proposed exemption and to request a public hearing. The only written 
comments submitted to the Department during the comment period were 
made by SBI. These comments expressed SBI's substantive concerns about 
the Notice and offered suggestions for clarifying certain language of 
the Notice. Discussed below are SBI's comments and the Department's 
responses thereto. Also discussed is a comment made by the Department.

SBI's Comments

    SBI notes that there is an ambiguity regarding the effective date 
of the GIC Fund. SBI represents that the Notice provides in the last 
paragraph under the heading ``Supplementary Information,'' that with 
respect to transactions involving the GIC Fund, the exemption ``would 
become effective as of the date of the grant of the notice of 
pendency.'' However, under the captions Effective Dates and Dates, SBI 
explains that the Notice states that the exemption will be effective 
``upon its grant,'' or ``as of the date the grant notice is 
published.'' Because it was the intention of the parties that the 
effective date for transactions involving the GIC Fund would be March 
29, 1994, the date of publication of the Notice in the Federal 
Register, SBI requests that the Department make the exemption 
retroactive to this date for the GIC Fund.
    The Department has considered SBI's comment and has made the 
requested modification.
    SBI wishes to modify the exemption in order that it may offer the 
GIC Fund to both fiduciary-directed Plans as well as Plans providing 
for participant-directed investments (the Section 404(c) Plans). The 
Department believes this comment has merit and that it would be 
potentially beneficial to participants and beneficiaries since it 
provides different types of Plans participating in the TRAK Program 
with the opportunity to invest in the GIC Fund.
    SBI explains that in the preamble to the Notice there is a 
statement to the effect that it will ``describe the GIC Fund in a 
prospectus (the Prospectus) and promotional materials that will be 
furnished to Section 404(c) Plan participants.'' SBI represents that 
interests in the GIC Fund are not subject to the registration and 
Prospectus delivery requirements of the Securities Act of 1933. Also, 
SBI points out that the conditions of PTE 92-77 require it to deliver 
copies of the Trust Prospectus only to the Plan administrator and not 
to the individual participants. Because it has no practical means of 
delivering Prospectuses or other disclosures to participants, SBI 
indicates that the responsibility for providing these materials to 
participants rests with the Plan administrator. In this regard, SBI 
represents that the disclosure information it will make available to 
all Plans proposing to invest in the GIC Fund will include copies of 
the Trust Prospectus and a separate description of the GIC Fund's 
investment objectives, policies and processes. SBI explains that its 
description of the GIC Fund will be designed to provide a participant 
with sufficient information in order that the participant can make an 
informed investment decision.
    The Department concurs with these comments.
    In addition to principal comments discussed above, SBI has made 
certain technical clarifications and updates to the Notice in the 
following areas:
    (1) General.
    a. Redesignations. SBI explains that effective December 31, 1993, 
Primerica Corporation changed its name to ``The Travelers Inc.'' and 
that effective May 9, 1994, the ``Trust for TRAK Investments'' was 
renamed ``Consulting Group Capital Markets Funds.'' Also effective June 
1, 1994, ``Smith Barney Shearson Inc.'' was renamed ``Smith Barney 
Inc.''
    (2) Supplementary Information.
    a. Asset Sale Transaction. SBI explains that the transaction by 
which Smith Barney Harris Upham & Company, Inc. (Smith Barney) acquired 
Shearson Lehman and its Asset Management Divisions was an asset sale 
and not a merger. Accordingly, SBI suggests that the fourth sentence of 
the third paragraph under the heading ``Supplementary Information,'' 
read as follows: ``As a result of the transaction, most of the assets 
and business of the Shearson divisions were transferred to Smith 
Barney, which was renamed `Smith Barney Shearson Inc.'''
    b. Fees Paid to Transfer Agent. SBI represents that in the seventh 
paragraph under the heading ``Supplementary Information,'' the Notice 
states that The Shareholder Services Group (TSSG), as transfer agent, 
will charge a fee of $8.50 to $9.50 per plan for its transfer agency 
services. While these are the current expected fee levels, SBI notes 
that such fees may increase or decrease in the future. Because TSSG is 
no longer an affiliate, SBI requests that the paragraph be amended to 
provide that TSSG as transfer agent will receive a reasonable fee for 
its services rather than specifying a precise dollar amount.
    (3) General Conditions.
    a. Written Disclosures. Section II(k)(1)(F) of the General 
Conditions of the Notice states that SBI will provide copies of PTE 92-
77 and documents pertaining to the proposed replacement exemption to 
each Plan participating in the TRAK Program. SBI wishes to clarify that 
the ``documents pertaining to the proposed replacement exemption'' 
refer to copies of the Notice and, when issued, the final exemption.
    The Department concurs with the above supplemental clarifications 
to the Notice that have been made by SBI and hereby incorporates these 
changes, as well as the substantive changes also described above, by 
reference into the Notice and, where applicable, into this final 
exemption.

Department's Comment

    Section III of the Notice, which is captioned ``Definitions,'' 
provides several meanings of the term ``Independent Plan Fiduciary'' in 
subparagraph (b). For purposes of the exemption, the term ``Independent 
Plan Fiduciary'' may include a Plan administrator, a participant in a 
Keogh Plan, an individual covered under a self-directed IRA or a 
trustee of a Title I Plan that does not permit participant-directed 
investments as contemplated under section 404(c) of the Act. However, 
due to an oversight, the definition does not extend to a participant in 
a Section 404(c) Plan. Because the TRAK Program is being marketed as an 
investment alternative to Section 404(c) Plans and the individual 
participant of such Plan makes the decision on whether to invest 
therein, the Department has amended the definition of the term 
``Independent Plan Fiduciary'' by providing a new subparagraph (b)(5) 
which includes a Section 404(c) Plan participant.
    Accordingly, after consideration of the entire exemption record, 
including the written comments, the Department has determined to grant 
the replacement exemption as modified herein.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, the Department has found that the exemption is 
administratively feasible, in the interest of the Plans and their 
participants and beneficiaries and protective of the rights of 
participants and beneficiaries of the Plans; and
    (3) The exemption is supplemental to, and not in derogation of, any 
other provisions of the Act and the Code, including statutory or 
administrative exemptions. Furthermore, the fact that a transaction is 
subject to an administrative or statutory exemption is not dispositive 
of whether the transaction is in fact a prohibited transaction.
    (4) In addition to transactions involving the GIC Fund, the 
exemption is applicable to the transactions previously described in PTE 
92-77 only if the conditions specified therein are met.

Exemption

    Under the authority of section 408(a) of the Act and section 
4975(c)(2) of the Code and in accordance with the Procedures cited 
above, the Department hereby replaces PTE 92-77 as follows:

Section I. Covered Transactions

    (a) The restrictions of section 406(a) of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1) (A) through (D) of the Code, shall not apply to 
the purchase or redemption of shares by Plans in the SBI-established 
Trust in connection with such Plans' participation in the TRAK 
Personalized Investment Advisory Service.
    (b) The restrictions of section 406(b) of the Act and the sanctions 
resulting from the application of section 4975 of the Code by reason of 
section 4975(c)(1) (E) and (F) of the Code, shall not apply to the 
provision, by the Consulting Group, of investment advisory services to 
an Independent Plan Fiduciary of a participating Plan which may result 
in such fiduciary's selection of a Portfolio in the TRAK Program for 
the investment of Plan assets.
    The exemption is subject to the following conditions that are set 
forth in Section II.

Section II. General Conditions

    (a) The participation of Plans in the TRAK Program will be approved 
by an Independent Plan Fiduciary. For purposes of this requirement, an 
employee, officer or director of SBI and/or its affiliates covered by 
an IRA not subject to Title I of the Act will be considered an 
Independent Plan Fiduciary with respect to such IRA.
    (b) The total fees paid to the Consulting Group and its affiliates 
will constitute no more than reasonable compensation.
    (c) No Plan will pay a fee or commission by reason of the 
acquisition or redemption of shares in the Trust.
    (d) The terms of each purchase or redemption of Trust shares shall 
remain at least as favorable to an investing Plan as those obtainable 
in an arm's length transaction with an unrelated party.
    (e) The Consulting Group will provide written documentation to an 
Independent Plan Fiduciary of its recommendations or evaluations based 
upon objective criteria.
    (f) Any recommendation or evaluation made by the Consulting Group 
to an Independent Plan Fiduciary will be implemented only at the 
express direction of such independent fiduciary.
    (g) The Consulting Group will generally give investment advice in 
writing to an Independent Plan Fiduciary with respect to all available 
Portfolios. However, in the case of a Section 404(c) Plan, the 
Consulting Group will provide investment advice that is limited to the 
Portfolios made available under the Plan.
    (h) Any Sub-Adviser that acts for the Trust to exercise investment 
discretion over a Portfolio will be independent of SBI and its 
affiliates.
    (i) Immediately following the acquisition by a Portfolio of any 
securities that are issued by SBI and/or its affiliates, the percentage 
of that Portfolio's net assets invested in such securities will not 
exceed one percent.
    (j) The quarterly investment advisory fee that is paid by a Plan to 
the Consulting Group for investment advisory services rendered to such 
Plan will be offset by such amount as is necessary to assure that the 
Consulting Group retains no more than 20 basis points from any 
Portfolio (with the exception of the Government Money Investments 
Portfolio and the GIC Fund Portfolio for which the Consulting Group and 
SBI Trust will retain no investment management fee) which contains 
investments attributable to the Plan investor.
    (k) With respect to its participation in the TRAK Program prior to 
purchasing Trust shares,
    (1) Each Plan will receive the following written or oral 
disclosures from the Consulting Group:
    (A) A copy of the Prospectus for the Trust discussing the 
investment objectives of the Portfolios comprising the Trust, the 
policies employed to achieve these objectives, the corporate 
affiliation existing between the Consulting Group, SBI and its 
subsidiaries and the compensation paid to such entities.3
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    \3\The fact that certain transactions and fee arrangements are 
the subject of an administrative exemption does not relieve the 
Independent Plan Fiduciary from the general fiduciary responsibility 
provisions of section 404 of the Act. In this regard, the Department 
expects the Independent Plan Fiduciary to consider carefully the 
totality of fees and expenses to be paid by the Plan including the 
fees paid directly to SBI or to other third parties and/or 
indirectly through the Trust to SBI.
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    (B) Upon written or oral request to SBI, a Statement of Additional 
Information supplementing the Prospectus which describes the types of 
securities and other instruments in which the Portfolios may invest, 
the investment policies and strategies that the Portfolios may utilize 
and certain risks attendant to those investments, policies and 
strategies.
    (C) A copy of the investment advisory agreement between the 
Consulting Group and such Plan relating to participation in the TRAK 
Program.
    (D) Upon written request of SBI, a copy of the respective 
investment advisory agreement between the Consulting Group and the Sub-
Advisers.
    (E) In the case of a Section 404(c) Plan, if required by the 
arrangement negotiated between the Consulting Group and the Plan, an 
explanation by an SBI Financial Consultant (the Financial Consultant) 
to eligible participants in such Plan, of the services offered under 
the TRAK Program and the operation and objectives of the Portfolios.
    (F) Copies of PTE 92-77 and documents pertaining to the replacement 
exemption.
    (2) If accepted as an investor in the TRAK Program, an Independent 
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in 
writing, prior to purchasing Trust shares that such fiduciary has 
received copies of the documents described above in subparagraph (k)(1) 
of this Section.
    (3) With respect to a Section 404(c) Plan, written acknowledgement 
of the receipt of such documents will be provided by the Independent 
Plan Fiduciary (i.e., the Plan administrator, trustee or named 
fiduciary, as the recordholder of Trust shares). Such Independent Plan 
Fiduciary will be required to represent in writing to SBI that such 
fiduciary is (a) independent of SBI and its affiliates and (b) 
knowledgeable with respect to the Plan in administrative matters and 
funding matters related thereto, and able to make an informed decision 
concerning participation in the TRAK Program.
    (4) With respect to a Plan that is covered under Title I of the 
Act, where investment decisions are made by a trustee, investment 
manager or a named fiduciary, such Independent Plan Fiduciary is 
required to acknowledge, in writing, receipt of such documents and 
represent to SBI that such fiduciary is (a) independent of SBI and its 
affiliates, (b) capable of making an independent decision regarding the 
investment of Plan assets and (c) knowledgeable with respect to the 
Plan in administrative matters and funding matters related thereto, and 
able to make an informed decision concerning participation in the TRAK 
Program.
    (l) Subsequent to its participation in the TRAK Program, each Plan 
receives the following written or oral disclosures with respect to its 
ongoing participation in the TRAK Program:
    (1) The Trust's semi-annual and annual report which will include 
financial statement for the Trust and investment management fees paid 
by each Portfolio.
    (2) A written quarterly monitoring statement containing an analysis 
and an evaluation of a Plan investor's account to ascertain whether the 
Plan's investment objectives have been met and recommending, if 
required, changes in Portfolio allocations.
    (3) If required by the arrangement negotiated between the 
Consulting Group and a Section 404(c) Plan, a quarterly, detailed 
investment performance monitoring report, in writing, provided to an 
Independent Plan Fiduciary of such Plan showing, Plan level asset 
allocations, Plan cash flow analysis and annualized risk adjusted rates 
of return for Plan investments. In addition, if required by such 
arrangement, Financial Consultants will meet periodically with 
Independent Plan Fiduciaries of Section 404(c) Plans to discuss the 
report as well as with eligible participants to review their accounts' 
performance.
    (4) If required by the arrangement negotiated between the 
Consulting Group and a Section 404(c) Plan, a quarterly participant 
performance monitoring report provided to a Plan participant which 
accompanies the participant's benefit statement and describes the 
investment performance of the Portfolios, the investment performance of 
the participant's individual investment in the TRAK Program, and gives 
market commentary and toll-free numbers that will enable the 
participant to obtain more information about the TRAK Program or to 
amend his or her investment allocations.
    (5) On a quarterly and annual basis, written disclosures to all 
Plans of the (a) percentage of each Portfolio's brokerage commissions 
that are paid to SBI and its affiliates and (b) the average brokerage 
commission per share paid by each Portfolio to SBI and its affiliates, 
as compared to the average brokerage commission per share paid by the 
Trust to brokers other than SBI and its affiliates, both expressed as 
cents per share.
    (m) SBI shall maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (n) of this 
Section to determine whether the conditions of this exemption have been 
met, except that (1) a prohibited transaction will not be considered to 
have occurred if, due to circumstances beyond the control of SBI and/or 
its affiliates, the records are lost or destroyed prior to the end of 
the six year period, and (2) no party in interest other than SBI shall 
be subject to the civil penalty that may be assessed under section 
502(i) of the Act, or to the taxes imposed by section 4975 (a) and (b) 
of the Code, if the records are not maintained, or are not available 
for examination as required by paragraph (n) below.
    (n)(1) Except as provided in section (2) of this paragraph and 
notwithstanding any provisions of subsections (a) (2) and (b) of 
section 504 of the Act, the records referred to in paragraph (m) of 
this Section shall be unconditionally available at their customary 
location during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Plan, or 
any duly authorized representative of such participant or beneficiary.
    (2) None of the persons described above in subparagraphs (B)-(D) of 
this paragraph (n) shall be authorized to examine the trade secrets of 
SBI or commercial or financial information which is privileged or 
confidential.

Section III. Definitions

    For purposes of this exemption:
    (a) An ``affiliate'' of SBI includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with SBI. (For purposes of this subsection, the term ``control'' means 
the power to exercise a controlling influence over the management or 
policies of a person other than an individual.)
    (2) Any officer, director or partner in such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director or a 5 percent partner or owner.
    (b) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is 
independent of SBI and its affiliates and is either
    (1) A Plan administrator, sponsor, trustee or named fiduciary, as 
the recordholder of Trust shares of a Section 404(c) Plan,
    (2) A participant in a Keogh Plan,
    (3) An individual covered under a self-directed IRA which invests 
in Trust shares,
    (4) A trustee, investment manager or named fiduciary responsible 
for investment decisions in the case of a Title I Plan that does not 
permit individual direction as contemplated by Section 404(c) of the 
Act, or
    (5) A participant in a Section 404(c) Plan.

Section IV. Effective Dates

    This exemption will be effective as of July 31, 1993, except for 
transactions involving the GIC Fund. The exemption will be effective 
March 29, 1994 with respect to the inclusion of the GIC Fund in the 
TRAK Program.
    The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
applications for exemption are true and complete and accurately 
describe all material terms of the transactions. In the case of 
continuing transactions, if any of the material facts or 
representations described in the applications change, the exemption 
will cease to apply as of the date of such change. In the event of any 
such change, an application for a new exemption must be made to the 
Department.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant PTE 92-77, refer to the 
proposed exemption and grant notice which are cited above.

    Signed at Washington, DC, this 16th day of June 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 94-15006 Filed 6-20-94; 8:45 am]
BILLING CODE 4510-29-P