[Federal Register Volume 61, Number 57 (Friday, March 22, 1996)]
[Notices]
[Pages 11878-11896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6991]
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DEPARTMENT OF LABOR
[Application No. D-09410, et al.]
Proposed Exemptions; RREEF USA Fund-I (The Trust)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) the name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
RREEF USA Fund-I (The Trust) Located in San Francisco, California
[Application No. D-09410]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the restrictions of sections 406(a), 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) (A) through (E) of
the Code, shall not apply to the proposed receipt by RREEF America
L.L.C., the investment manager of the Trust (the Manager), of a certain
performance compensation fee (the Performance Fee) in connection with
the liquidation of the Trust, provided that the following conditions
are satisfied:
[[Page 11879]]
(a) The terms and the payment of the Performance Fee shall be
approved in writing, through approval of an amendment to the Group
Trust Agreement (the Group Trust Agreement), by independent fiduciaries
of the plans that participate in the Trust (the Participating Plans);
(b) The terms of the Performance Fee shall be at least as favorable
to the Participating Plans as those obtainable in an arm's-length
transaction between unrelated parties;
(c) The total fees paid to the Manager by the Participating Plans
that have invested in the Trust, shall constitute no more than
reasonable compensation;
(d) The Performance Fee will be payable only when all of the assets
of the Trust have been completely liquidated;
(e) The Performance Fee received by the Manager will be based on
distributions, adjusted for inflation and present value, and will be
calculated using two real hurdle rates of return (the Hurdle Rates).
The Performance Fee will equal 10% after the Participating Plans have
earned a 5% real return on the initial value of their investment and
20% after the Participating Plans have earned an 8% real return on the
initial value of their investment;
(f) In the event of the Manager's resignation or termination as the
investment manager to the Trust, the Investment Management Agreement
would also terminate 1 and the Manager will not receive a
Performance Fee.
\1\ Unless termination was in bad faith wherein the Manager may
seek legal recourse.
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(g) The Manager or its affiliates shall maintain, for a period of
six years, the records necessary to enable the persons described in
paragraph (2) of this Section (g) to determine whether the conditions
of this exemption have been met, except that:
(1)(a) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Manager or
its affiliates, the records are lost or destroyed prior to the end of
the six year period; and (b) no party in interest, other than the
Manager, shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act or the taxes imposed by section 4975
(a) and (b) of the Code if the records are not maintained or are not
available for the examinations required from (2) below.
(2)(a) Except as provided in paragraph (3) and notwithstanding any
provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (1) of this Part (g) shall be unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of a Participating Plan or any duly authorized
employee or representative of such fiduciary;
(iii) Any contributing employer to a Participating Plan or any duly
authorized employee or representative of such employer; and
(iv) Any participant or beneficiary of a Participating Plan or any
duly authorized employee or representative of such participant or
beneficiary.
(3) None of the persons described above in paragraph (2)(a)(ii)-
(iv) shall be authorized to examine the trade secrets of the Manager
and its affiliates or any commercial or financial information which is
privileged or confidential.
Effective Date: If granted this exemption will be effective as of
January 1, 1993.
Summary of Facts and Representations
1. The assets of the Trust consist of direct or indirect 2
ownership interests in commercial or industrial real property (the
Properties). Currently, there are six Properties held by the Trust
which are located in California, Pennsylvania, New Jersey, New York and
Illinois. The Trust is a closed-end real estate tax-exempt group trust
organized in 1979 in the State of California pursuant to the IRS
Revenue Ruling 81-100. The Trust was organized to allow the
Participating Plans to pool their assets to purchase income-producing
real property for investment. The Trust was created and is operated in
accordance with the terms of the Group Trust Agreement dated September
7, 1979, with certain amendments thereto (the Amendments). Initially,
the Trust provided for a ten year holding period of the Properties with
additional extensions of two years if consented to by more than sixty
percent of outstanding beneficiaries. The end of the initial holding
period of the Trust was 12/31/92. As of December 31, 1992, the net
asset value of the Trust was $325,040 million. It is represented that
this figure was based on the most recent independent annual appraisals
obtained prior to December 31, 1992, and it is also the ``base'' amount
against which the Manager's asset management fee (the Base Fee) is
determined, as discussed further in paragraph 5 below.
\2\ Several of the real properties of the Trust are held
indirectly through wholly owned Code section 501(c)(2) or 501(c)(25)
corporations.
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2. The Participating Plans are seven large ERISA plans (including
one or more master or group trusts holding assets of multiple ERISA
plans) and one governmental plan (as defined in section 3(32) of
ERISA), each with assets in excess of $1 billion.
3. RREEF America L.L.C. is the investment manager to the Trust (the
Manager) and the trustees of the Trust are principals and officers of
the Manager (the Trustees), (the Manager and the Trustees,
collectively; the Fiduciaries). The Trustees and the Manager have
entered into an Investment Management Agreement, also dated September
7, 1979. Pursuant to that Investment Management Agreement, the Manager
has the authority to acquire and dispose of any and all properties on
behalf of the Trust; perform day-to-day investment and administrative
operations of the Trust; and prepare the financial and other reports as
provided in the Group Trust Agreement. The Investment Management
Agreement is terminable by the Trustees or by a vote or written consent
of the Participating Plans holding sixty percent of the outstanding
units in the Trust at any time upon not less than sixty days written
notice.
4. Pursuant to the Group Trust Agreement, the Trust was scheduled
to terminate on December 31, 1992, whereupon an orderly liquidation of
the Trust was to begin as soon as practicable. On September 11, 1991,
the Participating Plans' representatives and the Fiduciaries held a
conference to discuss the pending expiration of the Trust and
liquidation of its assets. Due to a downturn in the real estate market,
the Participating Plans' representatives proposed to the Fiduciaries
that the Trust's liquidation period (the Liquidation Period) be
extended for a period of up to six years to avoid ``fire sale'' prices.
This extension of the Liquidation Period also involved restructuring of
the fees payable to the Manager so as to provide further incentives to
maximize sales prices while liquidating the Trust's real estate assets
as soon as practicable. Accordingly, as of December 31, 1992, subject
to the unanimous consent of the Participating Plans, the Trustees
adopted Amendment #7 to the Group Trust Agreement in order to: (1)
Extend the period for liquidating the Trust's real property assets up
to six years from its scheduled expiration date; (2) reduce the annual
Base Fee payable to the Manager during the Liquidation Period as
discussed more fully below; (3) add a performance component (the
Performance Fee) to the Base Fee.
5. Until December 31, 1992, the annual investment management fee
(the Base Fee) under the Group Trust
[[Page 11880]]
Agreement remained at 1% of the net asset value of the Trust as of the
preceding December 31 (based on annual independent appraisals), and was
payable 1/12th monthly in advance.
However, effective January 1, 1993, pursuant to the unanimous
consent of the Participating Plans, and conditioned upon the grant of
this proposed exemption, the Base Fee was reduced from 1% to .45% of
``the adjusted December 31, 1992, net asset value of the Trust'', also
payable 1/12th monthly in advance. The ``adjusted December 31, 1992 net
asset value of the Trust'' is the net asset value determined pursuant
to the most recent independent appraisals of the Trust's properties at
or before December 31, 1992. The net asset value is the base amount on
which the Base Fee is determined, and it can be reduced (not increased)
at the time the Base Fee is calculated to reflect any subsequent
material changes in the value of the Trust's properties as evidenced by
the Manager's subsequent quarterly internal appraisals. The net asset
value and any subsequent reductions to it, if required by the Manager's
internal appraisals, will be used by the Manager solely for the
determination of the Base Fee. With respect to the Liquidation Period,
the Participating Plans determined that continuing to obtain annual
appraisals by independent qualified appraisers was too costly and
inconsistent with their goal of maximizing their returns. It is
represented, however, that the Manager will obtain independent
appraisals every three years, and will compare them to the Manager's
quarterly internal appraisals.
6. The Performance Fee was proposed by the Participating Plans as
an incentive for the Manager to liquidate the assets of the Trust as
quickly as possible while achieving the best possible sales prices for
the Trust's assets. However, in the event this proposed exemption is
not granted, the Base Fee will be calculated on the basis of .60% of
the adjusted December 31, 1992 net asset value of the Trust; this
resulting increase in the Base Fee will be payable retroactive from
January 1, 1993 (without interest); and no Performance Fee will be
paid.
7. For the purpose of the Performance Fee, the initial value of the
Trust's assets is based on the greater of the Trust's value on December
31, 1991 or December 31, 1992. The Performance Fee will reflect all
gains and losses of the Trust with respect to the Properties 3 and
will be calculated as a cash flow fee with two real (inflation-
adjusted) hurdle rates of 5% and 8% (the Hurdle Rates) of the initial
value of the Trust's assets. It is represented that the payment of the
Performance Fee to the Manager is dependent upon distribution to the
Participating Plans' of such initial value plus interest at the real
Hurdle Rates.
The Performance Fee is calculated with respect to the cash flow.
The applicant represents that prior to the Trust's liquidation, cash
flow is all cash actually distributed by the Trust to the Participating
Plans, either from operations or capital events. The major sources of
cash are rents, interest or dividends on invested reserves, and
proceeds of sale, net of all expenses. Upon the liquidation of the
Trust, cash flow means all cash available for distribution to the
Participating Plans after payment of (or reservation for) all remaining
liabilities of the Trust, but before the payment of the Performance
Fee.
8. The Performance Fee is payable to the Manager in cash as of the
date the last real property asset in the Trust is liquidated and the
Trust is fully terminated. The calculation of the Performance Fee is
accomplished by converting the annual distributions to the
Participating Plans into 1993 dollars (January 1, 1993 is the effective
date of the addition of the Performance Fee component to the fees paid
by the Trust to the Manager). The annual distributions include, among
other things, proceeds from capital events and rents. First, the annual
distributions are discounted for inflation using the CPI index. Second,
the inflation adjusted annual distributions are discounted to the
present value using appropriate discount rates of 5% or 8%, which are
identical to the Hurdle Rates to arrive at the discounted distributions
(the Discounted Distributions). The amounts by which the Discounted
Distributions exceed the initial value of the Trust as of January 1,
1993 are then calculated (the Excess Distributions).
For purposes of the Performance Fee calculation, these Excess
Distributions are converted into the current value (i.e., value during
the year when the Manager is paid the Performance Fee). This conversion
is calculated as follows. The Excess Distributions are divided first by
the inflation CPI index for the year when the Performance Fee is paid,
and second, they are divided by the appropriate 5% or 8% discount
rates. The result is current excess distributions (Current Excess
Distributions).
The Performance Fee paid to the Manager is ten percent (10%) of the
Current Excess Distributions when the Participating Plans earn a 5%
real Hurdle Rate on the initial value of their investment in the Trust
and until the Participating Plans earn an 8% real Hurdle Rate return on
the initial value of their investment in the Trust. When the
Participating Plans earn an 8% real Hurdle Rate return on the initial
value of their investment in the Trust, the Performance Fee paid to the
Manager is twenty percent (20%) of the Current Excess Distributions in
the 8% real Hurdle Rate context after they have been reduced by 10%
Performance Fee amount.
9. In this regard, the applicant submitted a numerical example of
how the Performance Fee will work under certain assumptions if the
inflation rate is 4% annually. Under these assumptions the Trust holds
a single real property with an initial value of $100,000 as of December
31, 1992, and this property generates distributable (before fees) cash
flow of $10,000 a year for three years. At the end of the third year
the property is sold for $110,000.
At a 5% real Hurdle Rate, the Discounted Distributions are as
follows:
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Year 1 Year 2 Year 3 Total
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Nominal $........................ $10,000+ $10,000+ $120,000= $140,000
CPI.............................. *.9615= *.9246= *.8890= ...........
Discount......................... $9,615 $9,246 $106,680 ...........
5% Discount...................... *.9524 *.9070 *.8638 ...........
Adjusted $....................... $9,157+ $8,386+ $92,150= $109,693
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[[Page 11881]]
\3\ By definition, all gains and losses with respect to the
Properties will be realized prior to calculation of the Performance
Fee, i.e., there will be no unrealized gains or losses.
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The present value of the Excess Distributions, at a 5% real Hurdle
Rate, is $109,693-$100,000=$9,693. Converting the Excess Distributions
to current value, the excess is $12,622. This is calculated as follows:
9,693/.8890=10,903 then 10,903/.8638=$12,622 (the Current Excess
Distributions).
At an 8% real Hurdle Rate, the Discounted Distributions are as
follows:
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Year 1 Year 2 Year 3 Total
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Nominal $........................ $10,000+ $10,000+ $120,000= $140,000
CPI.............................. *.9615= *.9246= *.8890= ...........
Discount......................... $9,615 $9,246 $106,680 ...........
8% Discount...................... *.9259 *.8573 *.7938 ...........
Adjusted $....................... $8,903+ $7,927+ $84,683= $101,513
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The present value of the Excess Distributions at an 8% real Hurdle
Rate, is $101,513-$100,00=$1,513. Converting the Excess Distributions
to current value, the excess is $2,144. This is calculated as follows:
1,513/.8890=1701.9 then 1701.9/.7938=$2,144 (Current Excess
Distributions).
For Current Excess Distributions above the 5% real Hurdle Rate and
until the 8% Hurdle Rate, the Performance Fee is 10%:
$12,622-$2,144=$10,478 * 10%=$1,048
This fee payment reduces the remaining amount available for
distribution. Accordingly, after subtracting the 10% fee, the remaining
Current Excess Distributions are subject to a 20% Performance Fee:
$2,144-$1,048=$1,096 * 20%=$219
As such, in this example the total Performance Fee paid is $1,048
+$219=$1,267.
The applicant represents that the cash flow will not be reinvested
and the Performance Fee would not be determined and paid until all of
the Trust's assets have been liquidated and the Trust is terminated.
10. In the event that the Manager is terminated 4 or resigns
with respect to the Trust, the Manager will not receive a Performance
Fee, and the Investment Management Agreement, including all obligations
of the Trustees to continue to compensate the Manager thereunder, would
also terminate. If, however, the Manager is terminated in bad faith,
the Manager may seek legal recourse. Also, whether a replacement
investment manager would receive a performance fee is dependent solely
upon whether a performance fee was negotiated as part of the investment
management agreement of the replacement manager.
\4\ The Manager can be terminated by the Trustees, or by a vote
or written consent of the Participating Plans holding sixty percent
(60%) of the outstanding units in the Trust at any time upon not
less than sixty days written notice.
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11. The applicant represents that the interests of the
Participating Plans are fully aligned by the Performance Fee because
the Performance Fee is calculated as a ``share'' in all distributions
after the Plans have received the initial value of their investment
plus earnings at the designated real Hurdle Rates. Furthermore, the
Performance Fee will reflect all gains and losses of the Trust with
respect to the Properties and will be payable only at a pre-established
point, i.e., the liquidation of all of the Trust's Properties. It is
also represented that the Manager cannot use its discretion to
accelerate sales to benefit itself without equally benefitting the
Participating Plans, and the Manager cannot use its discretion over the
timing of sales to the detriment of the Participating Plans without
causing itself a similar detriment. If the Trust distributes a real
return of at least 5%, the Manager would receive 10% of all
distributions in excess of a 5% real return until the Participating
Plans have received a real return of at least 8%. If the Trust
distributes a real return of at least 8%, the Manager would receive 20%
of all distributions in excess of an 8% real return. It is represented
that the Performance Fee component will allow the Manager to
potentially offset some or all of the reduction in the Base Fee and to
provide other incentives to maximize the value and dispose of the
Properties. If the Trust is completely liquidated earlier than the six
year period, the Performance Fee will become payable at that time. The
applicant also represents that making the payment of the Performance
Fee contingent upon the complete liquidation of the Trust would prevent
the Fiduciaries from causing the Trust to acquire assets with a view
toward increasing the Performance Fee (e.g., by increasing risk).
12. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) The terms and the payment of the Performance Fee shall be
approved in writing, through an amendment to the Group Trust Agreement,
by independent fiduciaries of the Participating Plans;
(b) The terms of the Performance Fee shall be at least as favorable
to the Participating Plans as those obtainable in an arm's-length
transaction between unrelated parties;
(c) The total fees paid to the Manager by the Participating Plans
that have invested in the Trust, shall constitute no more than
reasonable compensation;
(d) The Performance Fee will be payable only when all of the assets
of the Trust have been completely liquidated;
(e) The Performance Fee received by the Manager will be based on
distributions, adjusted for inflation and present value, and will be
calculated using two real Hurdle Rates of return. The Performance Fee
will equal 10% after the Participating Plans have earned a 5% real
return on the initial value of their investment and 20% after the
Participating Plans have earned an 8% real return on the initial value
of their investment;
(f) In the event of the Manager's resignation or termination as the
investment manager to the Trust, the Investment Management Agreement
would also terminate and the Manager will not receive a Performance
Fee. However, if the Manager is terminated in bad faith, the Manager
may seek legal recourse;
(g) The Performance Fee is a one-time payment to the Manager upon
complete liquidation of the Trust within six years and upon final
distribution of its assets; and
(h) The Participating Plans have proposed the Performance Fee as
being in their interest because it would encourage the goal of the
Participating
[[Page 11882]]
Plans to liquidate the Properties as quickly as practicable while
maximizing their sales prices.
Notice to Interested Persons
Those persons who may be interested in the pendency of this
exemption include the fiduciaries who are responsible for directing the
investment of the Participating Plans' assets in the Trust. The
applicant represents that it proposes to notify the interested persons
within ten (10) days of the publication of the notice of the proposed
exemption in the Federal Register. Such notice will contain a copy of
the notice of the proposed exemption published in the Federal Register
and a statement advising interested persons of their right to comment
and to request a hearing on the proposed exemption. Accordingly,
comments and hearing requests on the proposed exemption are due forty
(40) days after the date of publication of this proposed exemption in
the Federal Register.
For Further Information Contact: Ekaterina A. Uzlyan, U.S.
Department of Labor, telephone (202) 219-8883. (This is not a toll-free
number.)
PaineWebber Incorporated (PaineWebber) Located in New York, NY
[Application No. D-09818]
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, August 10, 1990).5
\5\ For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, 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, effective August 18, 1995, to the purchase
or redemption of shares by an employee benefit plan, an individual
retirement account (the IRA) or a retirement plan for a self-employed
individual (the Keogh Plan) (collectively referred to herein as the
Plans) in the PaineWebber Managed Accounts Services Portfolio Trust
(the Trust) established in connection with such Plans' participation in
the PaineWebber PACE Program (the PACE Program).
In addition, 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, effective August 18, 1995, to (a) the provision, by PaineWebber
Managed Accounts Services (PMAS), a division of PaineWebber, of asset
allocation and related services to an independent fiduciary of a Plan
(the Independent Fiduciary) or to a directing participant (the
Directing Participant) in a Plan that is covered under the provisions
of section 404(c) of the Act (the Section 404(c) Plan), which may
result in the selection by the Independent Fiduciary or the Directing
Participant of portfolios of the Trust (the Portfolios) in the PACE
Program for the investment of Plan assets; and (b) the provision of
investment management services by Mitchell Hutchins Asset Management,
Inc. (Mitchell Hutchins) to the PACE Money Market Investments Portfolio
of the Trust.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II. General Conditions
(a) The participation of each Plan in the PACE Program is approved
by an Independent Fiduciary or, if applicable, Directing Participant.
(b) As to each Plan, the total fees paid to PMAS and its affiliates
constitute no more than reasonable compensation and do not include the
receipt of fees pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the '40 Act) by PMAS and its affiliates in connection with the
transactions.
(c) No Plan pays 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 remain
at least as favorable to an investing Plan as those obtainable in an
arm's length transaction with an unrelated party.
(e) PMAS provides written documentation to an Independent Fiduciary
or a Directing Participant of its recommendations or evaluations based
upon objective criteria.
(f) Any recommendation or evaluation made by PMAS to an Independent
Fiduciary or Directing Participant is implemented only at the express
direction of such fiduciary or participant.
(g) PMAS provides investment advice in writing to an Independent
Fiduciary or Directing Participant with respect to all available
Portfolios.
(h) With the exception of the PACE Money Market Investments
Portfolio, any sub-adviser (the Sub-Adviser) appointed by Mitchell
Hutchins to exercise investment discretion with respect to a Portfolio
is independent of PaineWebber and its affiliates.
(i) The quarterly fee that is paid by a Plan to PMAS for asset
allocation and related services rendered to such Plan under the PACE
Program (i.e., the outside fee) is offset by such amount as is
necessary to assure that Mitchell Hutchins retains 20 basis points as a
management fee from any Portfolio (with the exception of the PACE Money
Market Investments Portfolio from which Mitchell Hutchins retains an
investment management fee of 15 basis points) containing investments
attributable to the Plan investor. However, the quarterly fee of 20
basis points that is paid to Mitchell Hutchins for administrative
services is retained by Mitchell Hutchins and is not offset against the
outside fee.
(j) With respect to its participation in the PACE Program prior to
purchasing Trust shares,
(1) Each Independent Fiduciary receives the following written or
oral disclosures from PaineWebber:
(A) A copy of the prospectus (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 PaineWebber, PMAS, Mitchell Hutchins and
their affiliates; the compensation paid to such entities; any
additional information explaining the risks of investing in the Trust;
and sufficient and understandable disclosures relating to rebalancing
of investor accounts.
(B) Upon written or oral request to PaineWebber, 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) An investor questionnaire.
(D) A written analysis of PMAS's asset allocation decision and
recommendation of specific Portfolios.
(E) A copy of the agreement between PMAS and such Plan relating to
participation in the PACE Program.
(F) Upon written request to Mitchell Hutchins, a copy of the
respective investment advisory agreement between Mitchell Hutchins and
the Sub-Advisers.
[[Page 11883]]
(G) Copies of the proposed exemption and grant notice describing
the exemptive relief provided herein.
(2) In the case of a Section 404(c) Plan, the Independent Fiduciary
will--
(A) Make copies of the foregoing documents available to Directing
Participants.
(B) Allow Directing Participants to interact with PaineWebber
Investment Executives and receive information relative to the services
offered under the PACE Program, including the rebalancing feature, and
the operation and objectives of the Portfolios.
(3) If accepted as an investor in the PACE Program, an Independent
Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing to PMAS, prior to purchasing Trust shares that such fiduciary
has received copies of the documents described in paragraph (j)(1) of
this Section II.
(4) With respect to a Section 404(c) Plan, written acknowledgement
of the receipt of such documents is provided by the Independent
Fiduciary (i.e., the Plan administrator, trustee, investment manager or
named fiduciary, as the recordholder of Trust shares). Such Independent
Fiduciary will be required to represent in writing to PMAS that such
fiduciary is--
(A) Independent of PaineWebber and its affiliates;
(B) Knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and;
(C) Able to make an informed decision concerning participation in
the PACE Program.
(5) 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 Fiduciary is required to
acknowledge, in writing, receipt of such documents and represent to
PMAS that such fiduciary is--
(A) Independent of PMAS and its affiliates;
(B) Capable of making an independent decision regarding the
investment of Plan assets;
(C) Knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto; and
(D) Able to make an informed decision concerning participation in
the PACE Program.
(k) As applicable, subsequent to its participation in the PACE
Program, each Independent Fiduciary receives the following written or
oral disclosures with respect to its ongoing participation in the PACE
Program:
(1) Written confirmations of each purchase or redemption
transaction by the Plan with respect to a Portfolio.
(2) Telephone quotations from PaineWebber of such Plan's account
balance.
(3) A monthly statement of account from PaineWebber specifying the
net asset value of the Plan's investment in such account. Such
statement is also anticipated to include cash flow and transaction
activity during the month, unrealized gains or losses on Portfolio
shares held; and a summary of total earnings and capital returns on the
Plan's PACE Portfolio for the month and year-to-date.
(4) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid
by each Portfolio.
(5) A written quarterly monitoring report that includes a record of
the Plan's PACE Program portfolio for the quarter and since inception,
showing the rates of return relative to comparative market indices
(illustrated in a manner that reflects the effect of any fees for
participation in the PACE Program actually incurred during the period);
an investment outlook summary containing market commentary; and the
Plan's actual PACE Program portfolio with a breakdown, in both dollars
and percentages, of the holdings in each portfolio. The quarterly
monitoring report will also contain 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.
(6) A statement, furnished at least quarterly or annually,
specifying--
(A) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to PaineWebber and its affiliates;
(B) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to unrelated brokerage firms;
(C) The average brokerage commissions per share by the Trust to
brokers affiliated with PaineWebber, expressed as cents per share; and
(D) The average brokerage commissions per share by the Trust to
brokers unrelated to PaineWebber and its affiliates, expressed as cents
per share for any year in which brokerage commissions are paid to
PaineWebber by the Trust Portfolios in which a Plan's assets are
invested.
(7) Periodic meetings with a PaineWebber Investment Executive by
Independent Fiduciaries to discuss the quarterly monitoring report or
any other questions that may arise.
(l) In the case of a Section 404(c) Plan where the Independent
Fiduciary has established an omnibus account in the name of the Plan
(the Undisclosed Account) with PaineWebber, the information noted above
in subparagraphs (k)(1) through (k)(7) of this Section II may be
provided directly by PaineWebber to the Directing Participants or to
the Independent Fiduciary for dissemination to the Directing
Participants, depending upon the arrangement negotiated by the
Independent Fiduciary with PMAS.
(m) If previously authorized in writing by the Independent
Fiduciary, the Plan investor's account is automatically rebalanced on a
periodic basis to the asset allocation previously prescribed by the
Plan or participant, as applicable, if the quarterly screening reveals
that one or more Portfolio allocations deviates from the allocation
prescribed by the investor by the agreed-upon formula threshold.
(n) The books and records of the Trust are audited annually by
independent, certified public accountants and all investors receive
copies of an audited financial report no later than 60 days after the
close of each Trust fiscal year.
(o) PaineWebber maintains, for a period of six years, the records
necessary to enable the persons described in paragraph (p) of this
Section II 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 PaineWebber
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 PaineWebber 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 (p)(1) of this Section II below.
(p)(1) Except as provided in subparagraph (p)(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 (o) of
this Section II are unconditionally available at their customary
location during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service (the Service) or the
Securities and Exchange Commission (the SEC);
[[Page 11884]]
(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.
(p)(2) None of the persons described above in paragraphs (p)(1)(B)-
(p)(1)(D) of this paragraph (p) are authorized to examine the trade
secrets of PaineWebber or Mitchell Hutchins or commercial or financial
information which is privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``PaineWebber'' means PaineWebber Incorporated and any
affiliate of PaineWebber, as defined in paragraph (b) of this Section
III.
(b) An ``affiliate'' of PaineWebber includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with PaineWebber.
(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.
(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 ``Independent Fiduciary'' means a Plan fiduciary which
is independent of PaineWebber and its affiliates and is either
(1) A Plan administrator, trustee, investment manager 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) An employee, officer or director of PaineWebber and/or its
affiliates covered by an IRA not subject to Title I of the Act;
(5) A trustee, Plan administrator, 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
(e) The term ``Directing Participant'' means a participant in a
Plan covered under the provisions of section 404(c) of the Act, who is
permitted under the terms of the Plan to direct, and who elects to so
direct, the investment of the assets of his or her account in such
Plan.
(f) The term ``Plan'' means a pension plan described in 29 CFR
2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, a plan
described in section 4975(e)(1) of the Code, and in the case of a
Section 404(c) Plan, the individual account of a Directing Participant.
Effective Date: If granted, this proposed exemption will be
effective as of August 18, 1995.
Summary of Facts and Representations
1. The parties to the transactions are as follows:
(a) Paine Webber Group (Paine Webber Group), located in New York,
New York, is the parent of PaineWebber.
Paine Webber Group is one of the leading full-line securities firms
servicing institutions, governments and individual investors in the
United States and throughout the world. Paine Webber Group conducts its
businesses in part through PMAS, a division of PaineWebber and Mitchell
Hutchins, a wholly owned subsidiary of PaineWebber. Paine Webber Group
is a member of all principal securities and commodities exchanges in
the United States and the National Association of Securities Dealers,
Inc. In addition, it holds memberships or associate memberships on
several principal foreign securities and commodities exchanges.
Although Paine Webber Group is not an operating company and, as such,
maintains no assets under management, as of September 30, 1994, Paine
Webber Group and its subsidiaries rendered investment advisory services
with respect to $36.1 billion in assets.
(b) PaineWebber, whose principal executive offices are located in
New York, New York, provides investment advisory services to
individuals, banks, thrift institutions, investment companies, pension
and profit sharing plans, trusts, estates, charitable organizations,
corporations and other business and government entities. PaineWebber is
also responsible for securities underwriting, investment and merchant
banking services and securities and commodities trading as principal
and agent. PaineWebber serves as the dealer of Trust shares described
herein.
(c) PMAS, located in Weehawken, New Jersey is responsible for
individual investor account management and investor consulting
services. PMAS provides such services to the investors involved in
various PaineWebber investment programs by providing asset allocation
recommendations and related services with respect to their investments.
PMAS provides investment consulting and advisory services to more than
40,000 accounts, with account sizes ranging from institutional accounts
in excess of $650 million in assets to individual accounts with
$100,000 minimum investments. PMAS provides investors in the Trust with
asset allocation recommendations and related services with respect to
investments in the Trust Portfolios.
(d) Mitchell Hutchins, which is located in New York, New York, is a
registered investment adviser under the Investment Adviser's Act of
1940 (the Advisers Act) and a wholly owned subsidiary of PaineWebber.
Mitchell Hutchins provides investment advisory and asset management
services to investors and develops and distributes investment products,
including mutual funds and limited partnerships. Mitchell Hutchins also
provides financial services to over $24.8 billion in client assets
representing twenty-eight investment companies with fifty-five separate
portfolios. Mitchell Hutchins is providing investment management and
administrative services with respect to the Trust and investment
advisory services with respect to one of the Trust's Portfolios.
(e) State Street Bank and Trust Company (State Street), located in
North Quincy, Massachusetts, serves as the custodian of assets for the
Trust. State Street is not affiliated with PaineWebber and its
affiliates. It provides a full array of integrated banking products,
focusing on servicing financial assets (i.e., asset custody, cash
management, securities lending, multi-currency accounting and foreign
exchange), managing assets and commercial lending. As of September 30,
1994, State Street rendered custodian services with respect to
approximately $1.6 trillion in assets and provided investment
management services to approximately $155 billion in assets.
(f) PFPC, Inc. (PFPC), a subsidiary of PNC Bank, National
Association, and whose principal address is in Wilmington, Delaware,
serves as the Trust's transfer and dividend disbursing agent. PFPC is
not affiliated with PaineWebber and its affiliates. PFPC provides a
complete range of mutual fund administration and accounting services to
a diverse product base of domestic and international investment
portfolios. PFPC is also one of the nation's leading providers of
transfer and shareholder servicing services to mutual funds and asset
management accounts. As of September 30, 1994, PFPC rendered accounting
and administration services to over 400
[[Page 11885]]
mutual funds and provided transfer agency, dividend disbursing and/or
shareholder servicing services with respect to more than 3.1 million
shareholder accounts.
2. The Trust is a no load, open-end, diversified management
investment company registered under the '40 Act. The Trust was
organized as a Delaware business trust on September 9, 1994 and it has
an indefinite duration. As of November 6, 1995, the Trust had $184
million in net assets. The Trust presently consists of twelve different
portfolios which will pay dividends to investors. The composition of
the Portfolios will cover a spectrum of investments ranging from
foreign and U.S. Government-related securities to equity and debt
securities issued by foreign and domestic corporations. Although a
Portfolio of the Trust is permitted to invest its assets in securities
issued by PaineWebber and/or its affiliates, the percentage of that
Portfolio's net assets invested in such securities will never exceed
one percent. With the exception of the PACE Money Market Investments
Portfolio, shares in each of the Portfolios are being initially offered
to the public at a net asset value of $10 per share. Shares in the PACE
Money Market Investments Portfolio are being initially offered to the
public at a net asset value of $1.00 per share.
3. Mitchell Hutchins serves as the distributor of Trust shares and
PaineWebber serves as the dealer with respect to shares of the
Portfolios.6 Such shares are being offered by PaineWebber at no
load, to participants in the PACE Program. The PACE Program is an
investment service pursuant to which PMAS provides participants in the
PACE Program with asset allocation recommendations and related services
with respect to the Portfolios based on an evaluation of an investor's
investment objectives and risk tolerances. As stated above, State
Street will serve as the custodian of each Portfolio's assets and PFPC
serves as the Portfolio's transfer and dividend disbursing agent.
\6\ As distributor or principal underwriter for the Trust,
Mitchell Hutchins will use its best efforts, consistent with its
other businesses, to sell shares of the Portfolios. Pursuant to a
separate dealer agreement with Mitchell Hutchins, PaineWebber will
sell Trust shares to investors. However, neither Mitchell Hutchins
nor PaineWebber will receive any compensation for their services as
distributor or dealer of Trust shares. According to the applicants,
Mitchell Hutchins and PaineWebber may be regarded as having an
indirect economic incentive by virtue of the fact that Mitchell
Hutchins and PaineWebber will be paid for the services they provide
to the Trust in their respective capacities as investment manager
and administrator of the Trust (Mitchell Hutchins) and as the
provider of asset allocation and related services (PaineWebber,
through PMAS).
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To participate in the PACE Program, each investor must open a
brokerage account with PaineWebber.7 The minimum initial
investment in the PACE Program is $10,000.
\7\ According to the Statement of Additional Information that
accompanies the Prospectus for the PACE Program, shares in the Trust
are not certificated for reasons of economy and convenience.
However, PFPC maintains a record of each investor's ownership of
shares. Although Trust shares are transferable and accord voting
rights to their owners, they do not confer pre-emptive rights (i.e.,
the privilege of a shareholder to maintain a proportionate share of
ownership of a company by purchasing a proportionate share of any
new stock issues). PaineWebber represents that in the context of an
open-end investment company that continuously issues and redeems
shares, a pre-emptive right would make the normal operations of the
Trust impossible.
As for voting rights, PaineWebber states that they are accorded
to recordholders of Trust shares. PaineWebber notes that a
recordholder of Trust shares may determine to seek the submission of
proxies by Plan participants and vote Trust shares accordingly. In
the case of individual account plans such as Section 404(c) Plans,
PaineWebber believes that most Plans will pass the vote through to
Directing Participants on a pro-rata basis.
---------------------------------------------------------------------------
Although PaineWebber anticipates that investors in the Trust will
initially consist of institutions and individuals, it is proposed that
prospective investors will include Plans for which PaineWebber may or
may not currently maintain investment accounts. A majority of these
Plans may be IRAs or Keogh Plans. In addition, it is proposed that
Plans for which PaineWebber or an affiliate serves as a prototype
sponsor and/or a nondiscretionary trustee or custodian be permitted to
invest in the Trust.8
\8\ The Department notes that the general standards of fiduciary
conduct promulgated under the Act would apply to the participation
in the PACE Program by an Independent Fiduciary. Section 404 of the
Act requires that a fiduciary discharge his duties respecting a plan
solely in the interest of the plan's participants and beneficiaries
and in a prudent fashion. Accordingly, an Independent Fiduciary must
act prudently with respect to the decision to enter into the PACE
Program with PMAS as well as with respect to the negotiation of
services that will be performed thereunder and the compensation that
will be paid to PaineWebber and its affiliates. The Department
expects that an Independent Fiduciary, prior to entering into the
PACE Program, to understand fully all aspects of such arrangement
following disclosure by PMAS of all relevant information.
---------------------------------------------------------------------------
The applicants represent that the initial purchase of shares in the
Trust by a Plan participating in the PACE Program may give rise to a
prohibited transaction where PaineWebber, or an affiliate thereof, is a
party in interest with respect to the Plan. PaineWebber also
acknowledges that a prohibited transaction could arise upon a
subsequent purchase or redemption of shares in the Trust by a
participating Plan inasmuch as the party in interest relationship
between PaineWebber and the Plan may have been established at that
point.
Accordingly, the applicants have requested retroactive exemptive
relief from the Department with respect to the purchase and redemption
of shares in the Trust by a Plan participating in the PACE Program
where PaineWebber does not (a) sponsor the Plan (other than as
prototype sponsor) or (b) have discretionary authority over such Plan's
assets.9 No commissions or fees will be paid by a Plan with
respect to the sale and redemption transactions or a Plan's exchange of
shares in a Portfolio for shares of another Portfolio. If granted, the
proposed exemption will be effective as of August 18, 1995.
\9\ PaineWebber represents that to the extent employee benefit
plans that are maintained by PaineWebber purchase or redeem shares
in the Trust, such transactions will meet the provisions of
Prohibited Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8,
1977). PaineWebber further represents that, although the exemptive
relief proposed above would not permit PaineWebber or an affiliate
(while serving as a Plan fiduciary with discretionary authority over
the management of a Plan's assets) to invest those assets over which
it exercises discretionary authority in Trust shares, a purchase or
redemption of Trust shares under such circumstances would be
permissible if made in compliance with the terms and conditions of
PTE 77-4 (42 FR 18732, April 8, 1977). The Department expresses no
opinion herein as to whether such transactions will comply with the
terms and conditions of PTEs 77-3 and 77-4.
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4. Overall responsibility for the management and supervision of the
Trust and the Portfolios rests with the Trust's Board of Trustees (the
Trustees). The Trustees will approve all significant agreements
involving the Trust and the persons and companies that provide services
to the Trust and the Portfolios.
5. Mitchell Hutchins also serves as the investment manager to each
Portfolio. Under its investment management and administration agreement
with the Trust, Mitchell Hutchins will provide certain investment
management and administrative services to the Trust and the Portfolios
that, in part, involve calculating each Portfolio's net asset value
10 and, with the exception of the PACE Money Market Investments
Portfolio (for which Mitchell Hutchins will exercise investment
discretion), making recommendations to the Board of Trustees of the
Trust regarding (a) the
[[Page 11886]]
investment policies of each Portfolio and (b) the selection and
retention of the Sub-Advisers who will exercise investment discretion
with respect to the assets of each Portfolio.\11\
\10\ The net asset value of each Portfolio's shares, except for
the PACE Money Market Investments Portfolio, fluctuates and is
determined as of the close of regular trading on the New York Stock
Exchange (the NYSE) (currently, 4:00 p.m. Eastern Time) each
business day. The net asset value of shares in the PACE Money Market
Investments Portfolio is determined as of 12:00 p.m. each business
day. Each Portfolio's net asset value per share is determined by
dividing the value of the securities held by the Portfolio plus any
cash or other assets minus all liabilities by the total number of
Portfolio shares outstanding.
\11\ Subject to the supervision and direction of the Trustees,
Mitchell Hutchins will provide to the Trust investment management
evaluation services principally by performing initial review on
prospective Sub-Advisers for each Portfolio and thereafter
monitoring each Sub-Adviser's performance. In evaluating prospective
Sub-Advisers, Mitchell Hutchins will consider, among other factors,
each Sub-Adviser's level of expertise, consistency of performance
and investment discipline or philosophy. Mitchell Hutchins will have
the responsibility for communicating performance expectations and
evaluations to the Sub-Advisers and ultimately recommending to the
Trustees whether a Sub-Adviser's contract should be continued.
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The Sub-Advisers will provide discretionary advisory services with
respect to the investment of the assets of the respective Portfolios
(other than the PACE Money Market Investments Portfolio) on the basis
of their performance in their respective areas of expertise in asset
management. With the exception of the PACE Money Market Investments
Portfolio which will be advised by Mitchell Hutchins, PaineWebber
represents that all of the Sub-Advisers, will be independent of, and
will remain independent of PaineWebber and/or its affiliates. The Sub-
Advisers will be registered investment advisers under the Advisers Act
and maintain their principal executive offices in various regions of
the United States.
The administrative services for which Mitchell Hutchins will be
responsible include the following: (a) supervising all aspects of the
operations of the Trust and each Portfolio (e.g., oversight of transfer
agency, custodial, legal and accounting services; (b) providing the
Trust and each Portfolio with corporate, administrative and clerical
personnel as well as maintaining books and records for the Trust and
each Portfolio; (c) arranging for the periodic preparation, updating,
filing and dissemination of the Trust's Registration Statement, proxy
materials, tax returns and required reports to each Portfolio's
shareholders and the SEC, as well as other federal or state regulatory
authorities; (d) providing the Trust and each Portfolio with, and
obtaining for it, office space, equipment and services; (e) providing
the Trustees with economic and investment analyses and reports, and
making available to the Trustees, upon request, any economic,
statistical and investment services. These administrative services do
not include any management services that might be performed by Mitchell
Hutchins. As noted in Representations 17 and 18, Mitchell Hutchins is
separately compensated for management services rendered to the Trust.
6. Through the PACE Program, PMAS is providing a Plan investor with
non-binding, asset allocation recommendations with respect to such
investor's investments in the Portfolios. In order to make these
evaluations, PMAS will furnish copies of an investor questionnaire,
designed to elicit information about the specific investment needs,
objectives and expectations of the investor, to an Independent
Fiduciary of a Title I Plan that does not permit individually-directed
investments, to an Independent Fiduciary of an IRA or a Keogh Plan, or
to a Directing Participant of a Section 404(c) Plan. Although the
contents of the questionnaire may vary somewhat depending upon the type
of Plan investing in the PACE Program, for a particular Plan, the same
questionnaire will be given to each participant.
In the case of a Section 404(c) Plan where an Independent Fiduciary
has established an Undisclosed Account with PaineWebber in the name of
the Plan, PMAS will provide investor questionnaires to each Directing
Participant through PaineWebber Investment Executives (who are
registered representatives of PaineWebber), via the Plan's benefits
personnel or independent recordkeeper (the Recordkeeper), or by other
means requested by the Independent Fiduciary. The applicants recognize
that Section 404(c) Plans typically employ a Recordkeeper to assist the
Independent Fiduciary with maintaining Plan-related data which is used
to generate benefit status reports, regulatory compliance reports and
participant- and Plan-level investment performance reports. Therefore,
the Undisclosed Account arrangement is intended to coordinate with the
functions traditionally provided to Section 404(c) Plans by their
Recordkeepers.12
\12\ The applicants wish to emphasize that the PACE Program can
currently be provided to participants in Section 404(c) Plans on
either an Undisclosed Account or a disclosed account (the Disclosed
Account) basis (i.e., where the Independent Fiduciary opens a
separate PACE Program account with PaineWebber for each Directing
Participant). In this regard, the applicants note that PaineWebber
presently offers the PACE Program on a Disclosed Account arrangement
to IRAs and Keogh Plans. However, for other Section 404(c) Plans
such as those that are covered under the provisions of section
401(k) of the Code, PaineWebber prefers not to establish Disclosed
Accounts for individual participants because of servicing and other
administrative matters typically undertaken by such Plans'
Recordkeepers. The applicants note that from the participant's
perspective, there is no difference in the nature of the services
provided under the PACE Program regardless of whether the
participant's investment is held through a ``Disclosed'' or
``Undisclosed'' Account arrangement. The applicants state that these
designations are primarily internal distinctions relating to whether
the participant's name appears in the account set-up and reflects
differences in the applicable sub-accounting functions.
Notwithstanding the above, the Department wishes to point out
that, regardless of the arrangement negotiated with PaineWebber, an
Independent Fiduciary of a Section 404(c) Plan has the
responsibility to disseminate all information it receives to each
Directing Participant investing in the PACE Program.
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7. Based upon data obtained from the investor questionnaire, PMAS
will evaluate the investor's risk tolerances and investment objectives.
PMAS will then recommend, in writing, an appropriate allocation of
assets among suitable Portfolios that conforms to these tolerances and
objectives.
PaineWebber represents that PMAS will not have any discretionary
authority or control with respect to the allocation of an investor's
assets among the Portfolios. In the case of an IRA or Keogh Plan,
PaineWebber represents that all of PMAS's recommendations and
evaluations will be presented to the Independent Fiduciary and will be
implemented only if accepted and acted upon by such fiduciary.
In the case of a Section 404(c) Plan, PaineWebber represents that
Directing Participants in such Plan will be presented with
recommendations and evaluations that are tailored to the responses
provided by that Directing Participant in his or her questionnaire.
PMAS's recommendations will be disseminated to Directing Particpants in
accordance with procedures established for the Plan.
After receipt of PMAS's initial recommendations, which may or may
not be adopted, the Independent Fiduciary or Directing Participant, as
applicable, will select the specific Portfolios. PMAS will continue to
recommend to Independent Fiduciaries or Directing Participants asset
allocations among the selected Portfolios.
8. Aside from the investor questionnaire, in order for a Plan to
participate in the PACE Program, PaineWebber or PMAS will provide an
Independent Fiduciary with a copy of the Trust Prospectus discussing
(a) the investment objectives of the Portfolios comprising the Trust,
(b) the policies employed to achieve these objectives, (c) the
corporate affiliation existing between PaineWebber, PMAS, Mitchell
Hutchins and their subsidiaries, and (d) the compensation paid to such
entities by the Trust and information explaining the risks attendant to
investing in the Trust. In addition, upon written or oral
[[Page 11887]]
request to PaineWebber, the Independent Fiduciary will be given a
Statement of Additional Information supplementing the Prospectus which
describes, in further detail, 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. Further, each
Independent Fiduciary will be given a copy of the investment advisory
agreement between PMAS and such Plan relating to participation in the
PACE Program, including copies of the notice of proposed exemption and
grant notice for the exemptive relief provided herein. Upon oral or
written request to the Trust, PaineWebber will also provide an
Independent Fiduciary with a copy of the respective investment advisory
agreements between Mitchell Hutchins and the Sub-Advisers.
In the case of a Section 404(c) Plan, depending on the arrangement
negotiated with the Independent Fiduciary, PaineWebber represents that
the Independent Fiduciary will make available copies of the foregoing
documents to Directing Participants.
In addition, Independent Fiduciaries and, if applicable, Directing
Participants, will receive introductory documentation regarding the
PACE Program in marketing materials and in other communications.
Further, depending upon the arrangement negotiated between PMAS and the
Independent Fiduciary, a PaineWebber Investment Executive will meet
with a Directing Participant, upon oral or written request, to discuss
the services offered under the PACE Program, including the rebalancing
feature described in Representation 12, as well as the operation and
objectives of the Portfolios.13
\13\ The Department is expressing no opinion as to whether the
information provided under the PACE Program is sufficient to enable
a Directing Participant to exercise independent control over assets
in his or her account as contemplated by section 404(c) of the Act.
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9. If accepted as an investor in the PACE Program, an Independent
Fiduciary will be required by PMAS to acknowledge, in writing, prior to
purchasing Trust shares, that such fiduciary has received copies of the
documents referred to in Representation 8. With respect to a Plan that
is covered by Title I of the Act (e.g., a defined contribution plan),
where investment decisions will be made by a trustee, investment
manager or a named fiduciary, PMAS will require that such Independent
Fiduciary acknowledge in writing receipt of such documents and
represent to PaineWebber that such fiduciary is (a) independent of
PaineWebber and its affiliates, (b) capable of making an independent
decision regarding the investment of Plan assets, (c) knowledgeable
with respect to the Plan in administrative matters and funding matters
related thereto, and (d) able to make an informed decision concerning
participation in the PACE Program.
With respect to a Section 404(c) Plan, written acknowledgement of
the receipt of such documents will be provided by the Independent
Fiduciary (i.e., the Plan administrator, trustee, investment manager or
named fiduciary, as the recordholder of Trust shares). Such Independent
Fiduciary will be required to represent, in writing, to PMAS that such
fiduciary is (a) independent of PaineWebber and its affiliates, (b)
knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and (c) able to make an informed
decision concerning participation in the PACE Program.
10. After the selection of specific Portfolios by an Independent
Fiduciary or a Directing Participant,14 PMAS will continue to
provide recommendations to such persons relating to asset allocations
among the selected Portfolios. However, with respect to a Section
404(c) Plan in which at least three Portfolios may be selected by the
Independent Fiduciary, PMAS's initial asset allocation recommendation
to Directing Participants will be limited to the suggested Portfolios
offered under the Plan. PMAS anticipates that it may also work with the
Independent Fiduciary of a Section 404(c) Plan to assist the fiduciary
in (a) identifying and drafting investment objectives, (b) selecting
suitable investment categories or actual Portfolios to be offered to
Directing Participants or (c) recommending appropriate long-term
investment allocations to a Directing Participant, if this individual
receives such advice.
\14\ In the case of a Section 404(c) Plan, PMAS will receive
electronically from the Recordkeeper each participant's investment
selections.
---------------------------------------------------------------------------
An Independent Fiduciary or a Directing Participant will be
permitted to change his or her investment allocation by specifying the
new allocation in writing or by other means authorized by the Plan
(e.g., by use of a kiosk). Although PaineWebber currently imposes no
limitation on the frequency with which an Independent Fiduciary or a
Directing Participant may change his or her prescribed asset
allocation, PaineWebber reserves the right to impose reasonable
limitations.
11. Depending on the arrangement negotiated with PMAS, PaineWebber
will provide each Independent Fiduciary with the following information:
(a) Written confirmations of each purchase and redemption of shares of
a Portfolio; (b) daily telephone quotations of such Plan's account
balance; (c) a monthly statement of account specifying the net asset
value of a Plan's assets that are invested in such account; and (d) a
quarterly, written investment performance monitoring report.
The monthly account statement will include, among other
information: (a) cash flow and transaction activity during the month,
including purchase, sale and exchange activity and dividends paid or
reinvested; (b) unrealized gains or losses on Portfolio shares held;
and (c) a summary of total earnings and capital returns on the Plan's
PACE Program Portfolio for the month and year-to-date. The quarterly
investment performance report will include, among other information,
the following: (a) a record of the performance of the Plan's PACE
Program portfolio for the quarter and since inception showing rates of
return relative to comparative market indices (illustrated in a manner
that reflects the effect of any fees for participation in the PACE
Program actually incurred during the period) 15; (b) an investment
outlook summary containing market commentary; and (c) the Plan's actual
PACE Program portfolio with a breakdown, in both dollars and
percentages, of the holdings in each Portfolio. In addition, to the
extent required by the arrangement negotiated with the Independent
Fiduciary, the quarterly performance monitoring report will (a) contain
an analysis and an evaluation of a Plan investor's account to assist
the investor to ascertain whether the investment objectives are being
met, and (b) recommend, from time to time, changes in Portfolio
allocations. The quarterly performance monitoring report is described
in the summary of the PACE Program contained in the Trust Prospectus.
\15\ The comparative index is a blended index of the individual
Portfolio indices that are weighted by the allocation percentages
corresponding to those holdings that make up the investor's total
investment in the PACE Program.
---------------------------------------------------------------------------
With respect to a Section 404(c) Plan, the quarterly investment
performance report transmitted to the Independent Fiduciary will
include the following aggregate information relative to the Undisclosed
Account as well as market commentary: (a) a record of the performance
of the Plan's assets and rates of return as compared to several
[[Page 11888]]
appropriate market indices (illustrated in a manner that reflects the
effect of any fees for participation in the PACE Program actually
incurred during the period); and (b) the Plan's actual investment
portfolio with a breakdown of investments made in each Portfolio. As to
each Directing Participant, PMAS will provide information to be
contained in the quarterly performance monitoring report to such
participants.
In addition, on both a quarterly and annual basis, commencing with
the first quarterly report due after this notice of proposed exemption
is issued, PaineWebber will provide, as applicable, an Independent
Fiduciary or a Directing Participant with written disclosures of (a)
the total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to PaineWebber and its affiliates; (b) the
total, expressed in dollars, of each Portfolio's brokerage commissions
that are paid to unrelated brokerage firms; (c) the average brokerage
commissions per share by the Trust to brokers affiliated with the
PaineWebber, expressed as cents per share; and (d) the average
brokerage commissions per share by the Trust to brokers unrelated to
the PaineWebber and its affiliates, expressed as cents per share for
any year in which brokerage commissions are paid to PaineWebber by the
Trust Portfolios in which a Plan's assets are invested.
Further, the Independent Fiduciary or Directing Participant, as
applicable, will have access to a PaineWebber Investment Executive for
the discussion of the quarterly performance monitoring reports, the
rebalancing feature described below in Representation 12 or any
questions that may arise.
12. Depending on the arrangement negotiated with PMAS, for any
investor who so directs PMAS, the investor's Trust holdings will be
automatically rebalanced on a periodic basis to maintain the investor's
designated allocation among the Portfolios. PMAS will receive no
additional compensation to provide this service. At both the
Independent Fiduciary and Directing Participant levels, the rebalancing
election will be made in writing or in any manner permitted by the Plan
(e.g., in the case of a Section 404(c) Plan, electronic transmission by
the Recordkeeper to PMAS of the Directing Participant's election). The
election will be accompanied by a disclosure that is designed to
provide the Independent Fiduciary and the Directing Participant, as
applicable, with an understanding of the rebalancing feature.
Disclosure of the rebalancing feature is included in the Prospectus for
the PACE Program which will be provided to each Independent Fiduciary
and Directing Participant.
It is currently anticipated that screening will be performed
quarterly with respect to the PACE Program accounts for which the
investor has elected the rebalancing service and that rebalancing will
be performed for each such account where any Portfolio allocation
deviates from the allocation prescribed by the investor by the agreed-
upon uniform threshold.16 The threshold for triggering rebalancing
is a percentage (presently, 2\1/2\ percent) that has been established
by PaineWebber and is applied uniformly to all accounts subject to
rebalancing. If PaineWebber were, in the future, to determine that this
uniform threshold should be changed, PMAS would notify all investors
(including Independent Fiduciaries and Directing Participants) who had
elected the rebalancing feature. Then, in order to continue to provide
this service, PMAS would need to obtain the consent of each such
investor.
\16\ Currently, with regard to investors who have elected the
rebalancing feature, rebalancing is effected by an automated,
mechanical system that, as to each account: (a) Calculates the
current allocation for each Portfolio based on the quarter-end net
asset value; (b) compares the current allocation for each Portfolio
with the allocation prescribed by the investor; (c) identifies for
rebalancing all accounts with one or more Portfolios whose current
allocation deviates by the agreed-upon threshold from the allocation
prescribed by the investor; and (d) for each account which has been
identified for rebalancing pursuant to (a)-(c), (1) calculates the
dollar difference between the current allocation and the allocation
prescribed by the investor, (2) reduces each Portfolio whose current
allocation exceeds the allocation prescribed by the investor by an
amount equal to the dollar difference between the two allocations,
and (3) increases each Portfolio whose current allocation is less
than the allocation prescribed by the investor by an amount equal to
the dollar difference between the two allocations. This rebalancing
is accomplished by automatically exchanging, in the order of the
Portfolio's respective CUSIP numbers, a dollar-equivalent number of
shares of each Portfolio to be reduced for the corresponding number
of shares of a Portfolio to be increased until the current
allocation is equal to the allocation prescribed by the investor.
Valuation of the Portfolios is done as of the close of regular
trading on the NYSE each business day.
---------------------------------------------------------------------------
The applicants note that rebalancing is a feature that an investor
chooses to apply indefinitely until the investor notifies PaineWebber
that it wishes to have this service discontinued. After rebalancing has
been discontinued, an investor may reactivate the rebalancing service
by notifying PaineWebber in writing.
13. PaineWebber notes that not all of the services described above
will be provided to every Plan. The services that will be provided will
depend on what is decided upon by the Independent Fiduciary. Assuming
the Independent Fiduciary requests a reduction in the level of
services, there will be no corresponding reduction in the fee that the
fiduciary pays PMAS. This is due to the bundled nature of the services
provided in the PACE Program. For example, if the Independent Fiduciary
were to limit the number of Portfolios available as investment options
for its Plan participants, this might be deemed a reduction in the
services available under the PACE Program that would not result in any
reduction in the applicable Program fee. Similarly, under the PACE
Program, an Independent Fiduciary of a Section 404(c) Plan may decide
for its own reasons not to make the automatic rebalancing service
available to Directing Participants. Under such circumstances, PMAS
will not reduce its fees to reflect the absence of the provision of
rebalancing services to the Plan. Further, under the particular
arrangement which it has negotiated with PMAS, the Independent
Fiduciary may or may not request PaineWebber Investment Executives to
make presentations or be available to meet with Directing Participants.
Thus, an Independent Fiduciary may choose all, some or none of the
PACE Program's optional services. If an Independent Fiduciary selects
all of these services, the Plan will incur no greater an annual fee
than had that Independent Fiduciary selected some or none of these
services. The absence of a reduction in fees in the event not all
services are requested is an issue that should be considered by the
Independent Fiduciary.17 Nonetheless, the Applicants represent
that the reduction in the types of services provided will not cause the
fees paid to PaineWebber by a Plan under the PACE Program to violate
section 408(b)(2) of the Act.
\17\ In this regard, the Department emphasizes that it expects
the Independent Fiduciary to consider prudently the relationship of
the fees to be paid by the Plan to the level of services to be
provided by PaineWebber. In response to the Department's concern
over this matter, PaineWebber represents that it will amend the
Trust Prospectus to include the following statement: ``Investors who
are fiduciaries or otherwise, in the process of making investment
decisions with respect to Plans, should consider, in a prudent
manner, the relationship of the fees to be paid by the Plan along
with the level of services provided by PaineWebber.''
---------------------------------------------------------------------------
14. Plans wishing to redeem their Trust shares may communicate
their requests in writing or by telephone to PMAS. Redemption requests
received in proper form prior to the close of trading on the NYSE will
be effected at the net asset value per share determined on that day.
Redemption requests received after
[[Page 11889]]
the close of regular trading on the NYSE will be effected at the net
asset value at the close of business of the next day, except on
weekends or holidays when the NYSE is closed. A Portfolio will be
required to transmit redemption proceeds for credit to an investor's
account with PaineWebber within 5 business days after receipt of the
redemption request.18 In the case of an IRA or Keogh Plan
investor, PaineWebber will not hold redemption proceeds as free credit
balances and will, in the absence of receiving investment instructions,
place all such assets in a money market fund (other than the PACE Money
Market Investments Portfolio) that may be affiliated with
PaineWebber.19 In the case of Plans that are covered by Title I of
the Act, the redemption proceeds will be invested by PaineWebber in
accordance with the investment directions of the Independent Fiduciary
responsible for the management of the Plan's assets. With respect to a
Section 404(c) Plan, the treatment of such investment will depend upon
the arrangement for participant investment instructions selected by the
Plan sponsor. In the event that the Independent Fiduciary does not give
other investment directions, such assets will be swept into a no-load
money market fund that may be affiliated with PaineWebber. No brokerage
charge or commission is charged to the participant for this service.
\18\ PaineWebber will provide clearance (on a fully disclosed
basis), settlement and other back office services to other broker-
dealers.
\19\ The applicants are not requesting, nor is the Department
proposing, exemptive relief with respect to the investment, by
PaineWebber, of redemption proceeds in an affiliated money market
fund where the Plan investor has not given investment instructions.
The applicants represent that to the extent PaineWebber is
considered a fiduciary, such investments will comply with the terms
and conditions of PTE 77-4. However, the Department expresses no
opinion herein on whether such transactions are covered by this
class exemption.
---------------------------------------------------------------------------
Due to the high costs of maintaining small PACE Program (Plan)
accounts, the Trust may redeem all Trust shares held in a PACE Program
account in which the Trust shares have a current value of $7,500 or
less after the investor has been given at least thirty days in which to
purchase additional Trust shares to increase the value of the account
to more than the $7,500 amount. Proceeds of an involuntary redemption
will be deposited in the investor's brokerage account unless
PaineWebber is otherwise instructed.20
\20\ The thirty day limit does not restrict a Plan's ability to
redeem its interest in the Trust. The thirty day notice period is
provided to give a Plan an opportunity to increase the value of the
assets in its Plan account with PaineWebber to an amount in excess
of $7,500. If desired, the Plan may still follow the redemption
guidelines described above.
---------------------------------------------------------------------------
15. Through the PACE Program, shares of a Portfolio may be
exchanged by an investor for shares of another Portfolio at their
respective net asset values and without the payment of an exchange fee.
However, Portfolio shares are not exchangeable with shares of other
PaineWebber group of funds or portfolio families.
With respect to brokerage transactions that are entered into under
the PACE Program for a Portfolio, such transactions may be executed
through PaineWebber and other affiliated broker-dealers, if in the
judgment of Mitchell Hutchins or the Sub-Adviser, as applicable, the
use of such broker-dealer is likely to result in price and execution at
least as favorable, and at a commission charge comparable to those of
other qualified broker-dealers.
16. Each Portfolio will bear its own expenses, which generally
include all costs that are not specifically borne by PaineWebber,
Mitchell Hutchins or the Sub-Advisers. Included among a Portfolio's
expenses will be costs incurred in connection with the Portfolio's
organization, investment management and administration fees, fees for
necessary professional and brokerage services, fees for any pricing
service, the costs of regulatory compliance and costs associated with
maintaining the Trust's legal existence and shareholder relations. No
Portfolio, however, will impose sales charges on purchases, reinvested
dividends, deferred sales charges, redemption fees; nor will any
Portfolio incur distribution expenses. Investment management fees
payable to Mitchell Hutchins and the Sub-Advisers will be disclosed in
the Trust Prospectus.
17. As to each Plan, the total fees that are paid to PMAS and its
affiliates will constitute no more than reasonable compensation.21
In this regard, for its services under the PACE Program, PMAS charges
an investor a quarterly fee for asset allocation and related services.
This ``outside fee,'' will not be more than 1.50 percent on an annual
basis of the maximum annual value of the assets in the investor's PACE
Program account. Such fee may be paid either from the assets in the
account or by separate check. A smaller outside fee may be charged
depending on such factors as the size of the PACE Program account
(e.g., PACE Program accounts in excess of $100,000), the number of Plan
participants or the number of PACE Program accounts. The outside fee is
charged directly to an investor and is neither affected by the
allocation of assets among the Portfolios nor by whether an investor
follows or ignores PMAS's advice.22 In the case of Plans, the
outside fee may be paid by the Plan or the Plan sponsor or, in the case
of IRAs only, the fee may be paid by the IRA owner directly.
\21\ The applicants represent that PMAS and its affiliates will
not receive 12b-1 Fees in connection with the transactions.
\22\ PaineWebber represents that the outside fee will not be
imposed on the accounts of the Paine Webber Group and its
subsidiaries, including PaineWebber, PMAS, Mitchell Hutchins or
their subsidiaries, accounts of their immediate families and IRAs
and certain employee pension benefit plans for these persons. The
applicants state that this fee will be waived to encourage employees
to invest in PaineWebber, although PaineWebber reserves the right to
impose such fees. However, with respect to IRAs or Plans maintained
by PaineWebber or its affiliates for their employees, the applicants
assert that such waiver would be required by PTE 77-3.
---------------------------------------------------------------------------
For Plan investors, the outside fee will be payable in full within
five business days (or such other period as may be required under
applicable law or regulation) after the trade date for the initial
investment in the Portfolios and will be based on the value of assets
in the PACE Program on the trade date of the initial investment. The
initial fee payment will cover the period from the initial investment
trade date through the last calendar day of the subsequent calendar
quarter, and the fee will be pro-rated accordingly. Thereafter, the
quarterly fee will cover the period from the first calendar day through
the last calendar day of the current calendar quarter. The quarterly
fee will be based on the value of assets in the PACE Program measured
as of the last calendar day of the previous quarter, and will be
payable on the fifth business day of the current quarter.
If additional funds are invested in the Portfolios during any
quarter, the applicable fee, pro-rated for the number of calendar days
then remaining in the quarter and covering the amount of such
additional funds, shall be charged and be payable five business days
later. In the case of redemptions during a quarter, the fee shall be
reduced accordingly, pro-rated for the number of calendar days then
remaining in the quarter. If the 'net fee increase or decrease to an
investor for additional purchases and/or redemptions during any one
quarter is less than $20, the fee increase or decrease will be waived.
In addition, for investment management and administrative services
provided to the Trust, Mitchell Hutchins will be paid, from each
Portfolio, a fee which is computed daily and paid monthly at an annual
rate ranging from .35 percent to 1.10 percent,
[[Page 11890]]
of which the management fee component ranges from .15 percent to .90
percent on an annual basis, of each Portfolio's average daily net
assets depending upon the Portfolio's objective.23 From these
management fees, Mitchell Hutchins will compensate the applicable Sub-
Adviser. This ``inside fee,'' which is the difference between the
individual Portfolio's total management fee and the fee paid by
Mitchell Hutchins to the Sub-Adviser, will vary from the annual rate of
.15 percent to .40 percent depending on the Portfolio. With the
exception of the PACE Money Market Investments Portfolio from which
Mitchell Hutchins is paid a management fee of 15 basis points, Mitchell
Hutchins is retaining 20 basis points as a management fee from each
remaining single Portfolio on investment assets attributable to the
Plans. Pursuant to Transfer Agency and Service Agreements with the
Trust, PFPC and State Street will be paid annual fees of $350,000 and
$650,000, respectively, for transfer agent and custodial services.
\23\ The fees payable to Mitchell Hutchins under its investment
management and administration agreement with the Trust are comprised
of two components. One component is for administrative services
provided to each Portfolio at the annual rate of .20 percent of each
Portfolio's net assets. The second component is for investment
management and related services provided to each Portfolio. The
annualized fee range here is from .15 percent to .90 percent of the
Portfolio's average daily net assets.
---------------------------------------------------------------------------
18. The management fees that are paid at the Portfolio level to
Mitchell Hutchins and the Sub-Advisers are set forth in the following
table. For purposes of the table, Mitchell Hutchins and a Sub-Adviser
are referred to as ``MH'' and ``SA,'' respectively. As noted in the
table, the sum of the management fees retained by Mitchell Hutchins and
the Sub-Adviser with respect to a Portfolio will equal the total
management fee paid by that Portfolio.
------------------------------------------------------------------------
MH
management SA retained MH retained
Portfolio fee fee fee
(percent) (percent) (percent)
------------------------------------------------------------------------
PACE Money Market Investments.... .15 .00 .15
PACE Government Securities Fixed
Income Investments.............. .50 .25 .25
PACE Intermediate Fixed Income
Investments..................... .40 .20 .20
PACE Strategic Fixed Income
Investments..................... .50 .25 .25
PACE Municipal Fixed Income
Investments..................... .40 .20 .20
PACE Global Fixed Income
Investments..................... .60 .35 .25
PACE Large Company Value Equity
Investments..................... .60 .30 .30
PACE Large Company Growth Equity
Investments..................... .60 .30 .30
PACE Small/Medium Company Value
Equity Investments.............. .60 .30 .30
PACE Small/Medium Company Growth
Equity Investments.............. .60 .30 .30
PACE International Equity
Investments..................... .70 .40 .30
PACE International Emerging
Markets Investments............. .90 .50 .40
------------------------------------------------------------------------
PMAS is offsetting, quarterly, against the outside fee such amounts
as is necessary to ensure that Mitchell Hutchins retains no more than
20 basis points as a management fee from any Portfolio on investment
assets attributable to any Plan.24
\24\ PaineWebber asserts that it chose 20 basis points as the
maximum net fee retained for management services rendered to the
Portfolios because this amount represents the lowest percentage
management fee charged by PaineWebber among the Portfolios
(excluding the PACE Money Market Investments Portfolio for which a
fee of 15 basis points will be charged).
---------------------------------------------------------------------------
The administrative services fee payable to Mitchell Hutchins is not
being offset against the outside fee. Instead, that fee is being
retained by Mitchell Hutchins.
19. The following example demonstrates the operation of the fee
offset mechanism, the calculation of the net inside fee, and the
calculation of the total of a Plan investor's net outside fee and share
of the investment management fees paid by the Portfolios in a given
calendar quarter or year:
Assume that as of September 30, 1995, the net asset value of
Trust Portfolio shares held by a Plan investor was $1,000.
Investment assets attributable to the Plan were distributed among
five Trust Portfolios: (1) PACE Money Market Investments in which
the Plan made a $50 investment and from which Mitchell Hutchins
would retain an inside fee of .15 percent; (2) PACE Intermediate
Fixed Income Investments in which the Plan made a $200 investment
and from which Mitchell Hutchins would retain an inside fee of .20
percent; (3) PACE Large Company Value Equity Investments in which
the Plan made a $250 investment and Mitchell Hutchins would retain
an inside fee of .30 percent; (4) PACE Small/Medium Company Growth
Equity Investments in which the Plan made a $250 investment and
Mitchell Hutchins would be entitled to receive an inside fee of .30
percent; and (5) PACE International Equity Investments in which the
Plan made a $250 investment and Mitchell Hutchins would be entitled
to receive an inside fee of .30 percent.
Assume that the Plan investor pays an outside fee of 1.50
percent so that the total outside fee for the calendar quarter
October 1 through December 31, prior to the fee offset, would be as
follows:
----------------------------------------------------------------------------------------------------------------
Maximum
Portfolio Amount outside Outside
invested quarterly fee quarterly fee
----------------------------------------------------------------------------------------------------------------
PACE Money Market Investments...................................... $50 1.50% (.25) $0.1875
PACE Intermediate Fixed Income Investments......................... 200 1.50% (.25) .7500
PACE Large Company Value Equity Investments........................ 250 1.50% (.25) .9375
PACE Small/Medium Company Growth Equity Investments................ 250 1.50% (.25) .9375
PACE International Equity Investments.............................. 250 1.50% (.25) .9375
Total Outside Fee Per Quarter.................................. 1,000 .............. 3.7500
----------------------------------------------------------------------------------------------------------------
Under the proposed fee offset, the outside fee charged to the
Plan must be reduced by a Reduction Factor to ensure that Mitchell
Hutchins retains an inside fee of no more than 20 basis points from
each of the Portfolios on investment assets attributable to
[[Page 11891]]
the Plan. The following table shows the Reduction Factor as applied
to each of the Portfolios comprising the Trust:
------------------------------------------------------------------------
MH retained Maximum MH Reduction
Portfolio fee fee factor
(percent) (percent) (percent)
------------------------------------------------------------------------
PACE Money Market Investments.... .15 .15 .00
PACE Government Securities Fixed
Income Investments.............. .25 .20 .05
PACE Intermediate Fixed Income
Investments..................... .20 .20 .00
PACE Strategic Fixed Income
Investments..................... .25 .20 .05
PACE Municipal Fixed Income
Investments..................... .20 .20 .00
PACE Global Fixed Income
Investments..................... .25 .20 .05
PACE Large Company Value Equity
Investments..................... .30 .20 .10
PACE Large Company Growth Equity
Investments..................... .30 .20 .10
PACE Small/Medium Company Value
Equity Investments.............. .30 .20 .10
PACE Small/Medium Company Growth
Equity Investments.............. .30 .20 .10
PACE International Equity
Investments..................... .30 .20 .10
PACE International Emerging
Markets Investments............. .40 .20 .20
------------------------------------------------------------------------
Under the proposed fee offset, a Reduction Factor of .10 percent
is applied against the quarterly outside fee with respect to the
value of Plan assets that have been invested in PACE Large Company
Value Equity Investments, PACE Small/Medium Company Growth Equity
Investments and PACE International Equity Investments. As noted
above, the PACE Money Market Investments Portfolio and the PACE
Intermediate Fixed Income Investments Portfolio do not require the
application of a Reduction Factor because the management fee
retained by Mitchell Hutchins for managing these Portfolios does not
exceed 20 basis points. Therefore, the quarterly offset for the plan
investor is computed as follows:
(.25) [($250).10% + ($250).10% + ($250).10%] = $0.1875 or $.19.
In the foregoing example, if the Plan investor elects to receive
an invoice directly, the Plan investor would be mailed a statement
for its PACE Program account on or about October 15, 1995. This
statement would show the outside fee to be charged for the calendar
quarter October 1 through December 31, as adjusted by subtracting
the quarterly offset from the quarterly outside fee as determined
above. The net quarterly outside fee that would be paid to PMAS
would be determined as follows:
$3.75 - $.19 = $3.56.
The Plan investor that elects to receive an invoice directly
would be asked to pay the outside fee for that quarter within 30
days of the date on which the statement was mailed (e.g., November
15, 1995). If the outside fee were not paid by that date, PMAS would
debit the account of the Plan investor (as with other investors) for
the amount of the outside fee (pursuant to the authorization
contained in the PACE Program Investment Advisory Agreement, and as
described in the PACE Program Description appended to the
Prospectus).25 A Plan investor that elects to have the outside
fee debited from its account would receive, in November, a statement
as of October 31 reflecting the outside fee and the quarterly offset
therefrom.
\25\ PaineWebber explains that the foregoing example illustrates
the fact that Plan investors will get the benefit of the fee offset
contemporaneously upon the payment of the outside fee. Because the
inside fee is paid monthly and the fee offset is computed quarterly,
the applicants also explain that PMAS does not receive the benefit
of a ``float'' as a result of such calculations because the fee
offset will always be realized no later than the time that the
outside fee is paid. Since the inside fee is paid at the end of each
calendar month, the applicants further explain that Plan investors
will realize the full benefit of the offset before the time that the
inside fee is paid for the second and third months of the calendar
quarter.
---------------------------------------------------------------------------
Assuming the Plan investor's investment in and allocation among
the Portfolios remains constant throughout the quarter, (a) the Plan
investor's fees for the quarter for asset allocation and related
services provided by PMAS (net outside fee) and (b) the fees paid by
the Portfolios for investment management services provided by
Mitchell Hutchins (inside fee) would be as follows:
$3.56 (net outside fee)+(.25) [($50+$200+$250+$250+$250).20%]
(administrative services fee)+(.25) [($50).15% + ($200).20% + ($250
+ $250 + $250).30%] (inside fee) = $4.74.
Assuming the Plan investor's investment in and allocation among
the Portfolios remains constant throughout the year, the total net
outside fee and inside fee borne by the Plan investor for the year
would be as follows:
4(($4.74) = $18.96 or 1.89% per $1,000 invested.
20. PaineWebber notes that a potential conflict may exist by reason
of the variance in retained inside fees between the different
Portfolios. For example, Mitchell Hutchins will retain a lower inside
fee with respect to assets invested in the PACE Money Market
Investments Portfolio than all other Portfolios. PaineWebber recognizes
that this factor could result in the recommendation of a higher fee-
generating Portfolio to an investing Plan. Nonetheless, PMAS will be
subject to and intends to comply fully with the standards of fiduciary
duty that require that it act solely in the best interest of the Plan
when making investment recommendations.
21. The books of the Trust will be audited annually by independent,
certified public accountants selected by the Trustees and approved by
the investors. All investors will receive copies of an audited
financial report no later than sixty days after the close of each Trust
fiscal year. All Trust financial statements will be prepared in
accordance with generally accepted accounting principles and relevant
provisions of the federal securities laws. The books and financial
records of the Trust will be open for inspection by any investor,
including the Department, the Service and SEC, at all times during
regular business hours.
22. In summary, it is represented that the transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) The investment of a Plan's assets in the PACE Program will be
made and approved by a Plan fiduciary or participant that is
independent of PaineWebber and its affiliates such that the Independent
Fiduciary or Directing Participant will maintain complete discretion
with respect to participating in the PACE Program.
(b) An Independent Fiduciary or Directing Participant will have
full discretion to redeem his or her shares in the Trust.
(c) No Plan will pay a fee or commission by reason of the
acquisition or redemption of shares in the Trust and PMAS nor will its
affiliates receive 12b-1 Fees in connection with the transactions.
(d) Prior to making an investment in the PACE Program, each
Independent Fiduciary or Directing Participant will receive offering
materials and disclosures from PMAS which disclose all material facts
concerning the purpose, fees, structure, operation, risks and
participation in the PACE Program.
(e) PMAS will provide written documentation to an Independent
Fiduciary or Directing Participant of its
[[Page 11892]]
recommendations or evaluations based upon objective criteria.
(f) With the exception of Mitchell Hutchins which will manage the
PACE Money Market Investments Portfolio, any Sub- Adviser appointed to
exercise investment discretion over a Portfolio will always be
independent of PaineWebber and its and its affiliates.
(g) The quarterly investment advisory fee that is paid by a Plan to
PMAS for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that Mitchell Hutchins
retains 20 basis points from any Portfolio (with the exception of the
PACE Money Market Investments Portfolio) on investment assets
attributable to the Plan investor. However, the quarterly fee paid to
Mitchell Hutchins for administrative services will be retained by
Mitchell Hutchins and will not be offset against the outside fee.
(h) Each participating Plan will receive copies of the Trust's
semi-annual and annual report which will include financial statements
for the Trust that have been prepared by independent, certified public
accountants and investment management fees paid by each Portfolio.
(i) On a quarterly and annual basis, PaineWebber will provide
written disclosures to an Independent Fiduciary or, if applicable,
Directing Participant, with respect to (1) the total, expressed in
dollars, of each Portfolio's brokerage commissions that are paid to
PaineWebber and its affiliates; (2) the total, expressed in dollars, of
each Portfolio's brokerage commissions that are paid to unrelated
brokerage firms; (3) the average brokerage commissions per share by the
Trust to brokers affiliated with the PaineWebber, expressed as cents
per share; and (4) the average brokerage commissions per share by the
Trust to brokers unrelated to the PaineWebber and its affiliates,
expressed as cents per share for any year in which brokerage
commissions are paid to PaineWebber by the Trust Portfolios in which a
Plan's assets are invested.
For Further Information Contact: Ms. Jan D. Broady of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Herzog, Heine, Geduld, Inc., Located in New York, New York
[Application No. D-10018]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code, shall not apply to the
extension of credit between Herzog, Heine, Geduld, Inc. (HHG) and
various individual retirement accounts for which HHG serves as passive
trustee or custodian (the HHG IRA or HHG IRAs) resulting from the
proposed in-kind transfer to HHG IRAs at the direction of the owners of
such HHG IRAs of certain senior subordinated notes (the Notes) issued
by HHG, and thereafter the holding of such Notes by the HHG IRAs;
provided that: (1) officers, directors, and employees in HHG who are
also owners of HHG IRAs do not participate in the proposed
transactions; (2) the owners of the HHG IRAs have exclusive
responsibility and control over the investment of the assets of such
accounts; (3) HHG has no discretionary authority or control with
respect to the investment of the assets of the HHG IRAs involved in the
proposed transactions, nor does HHG render investment advice (within
the meaning of 29 CFR 2510.3-21(c)) with respect to those assets; (4) a
separate accounting of the assets in the HHG IRAs, including the Notes
which have been acquired by such accounts, will be maintained by HHG;
(5) the value of the Notes in each HHG IRA will at no time exceed 25
percent (25%) of the value of the assets of each HHG IRA; (6) the HHG
IRAs will pay no fees or commissions in connection with the
transactions; and (7) the combined total of all fees received by HHG
for the provision of services to the HHG IRAs is not in excess of
``reasonable compensation'' within the meaning of section 4975(d)(2) of
the Code.\26\
\26\ Pursuant to 29 CFR 2510.3-2(d), the HHG IRAs are not within
the jurisdiction of Title I of the Act. However, there is
jurisdiction under Title II of the Act, pursuant to section 4975 of
the Code.
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Summary of Facts and Representations
1. HHG is a full service broker/dealer, registered with the
Securities and Exchange Commission under the Securities Exchange Act of
1934. HHG also provides fully disclosed clearing services to other
broker/dealers. HHG is a member of the New York Stock Exchange (NYSE)
and is a leading market maker in NASDAQ and over-the-counter
securities. As of September 29, 1995, HHG had total liabilities of
$746.1 million, shareholders' equity of $107.5 million and $31.9
million in liabilities subordinated to the claims of general creditors.
2. It is represented that HHG has for many years offered individual
retirement accounts to its customers. In this regard, HHG has been
approved, since February 11, 1982, by the Internal Revenue Service to
serve as a passive trustee or custodian for individual retirement
accounts, Keoghs, and custodial accounts established under section
403(b)(7) of the Code. In its capacity as a custodian, HHG is a
disqualified person with respect to the HHG IRAs, pursuant to section
4975(e)(2) of the Code.
It is represented that HHG has considerable experience in dealing
with individual retirement accounts that contain investments of all
types, including debt instruments. As of January 25, 1995, HHG
maintained approximately 8,000 individual retirement accounts for its
customers representing approximately $365 million dollars in assets.
3. In 1992 and 1993, HHG issued the Notes which are the subject of
this proposed exemption in minimum face amounts on each of the Notes of
$250,000. The Notes issued in 1992 pay interest quarterly at the annual
rate of 11 percent (11%) on an aggregate principal amount of
$7,500,000. The Notes issued in 1993 pay interest quarterly at the
annual rate of 10 percent (10%) on an aggregate principal amount of
$7,500,000. It is represented, as of February 19, 1996, that HHG had
made all interest payments to the holders of the Notes. The Notes were
issued for a term of five (5) years each. In this regard, the maturity
date for the Notes issued in 1992 is January 1, 1997, and the maturity
date for the Notes issued in 1993, is April 1, 1998. The Notes will pay
principal in a balloon payment at maturity. The Notes are described as
Senior Subordinated Notes of HHG. In this regard, the Notes are
unsecured, rank equally with all other outstanding subordinated debt of
HHG, and are subordinate to any senior claim of present or future
creditors of HHG. A senior claim is defined as any present or future
obligation of HHG, except those obligations which are the subject of
subordination agreements.
The Notes were only offered for sale to investors who met the
``accredited investor'' net worth and income standards described in
Regulation D, promulgated under the Securities Act of 1933.\27\ It is
represented that the Notes
[[Page 11893]]
were acquired by all investors at face value, and were purchased in the
same manner and on the same terms by all investors. It is represented
that potential investors in the Notes received certain disclosures
prior to making the investment. Such disclosures included, among other
things, an outline of the nature of the Notes, a description of the
risk factors involved in investing in the Notes, and detailed financial
disclosures about HHG. It is represented that each investor
acknowledged receipt of these disclosures in writing. In addition, it
is represented that prior to acquiring the Notes, each purchaser
certified in writing that the ``accredited investor'' net worth and
income standards had been satisfied.
\27\ In general, the ``accredited investor'' net worth and
income standards described in Regulation D promulgated under the
Securities Act of 1933 provide that an ``accredited investor'' is
one of the following: (a) an individual with a net worth (or joint
net worth with a spouse) in excess of $1,000,000; (b) an individual
who had an individual income in excess of $200,000 in each of the
two most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years, and has a reasonable
expectation of reaching the same income level in the current year;
or (c) a trust with total assets in excess of $5,000,000.
---------------------------------------------------------------------------
It is represented that the entirety of the Notes has been issued
and are being held by individual investors and by individual retirement
accounts unrelated to HHG. In this regard, approximately 90 percent
(90%) of the Notes were sold to customers other than owners of
individual retirement accounts, and at least 50 percent (50%) of the
Notes are held by persons independent of HHG and/or the HHG IRAs.
There is no public trading market for the Notes. The Notes are not
registered under the Securities Act of 1933, because the Notes are
issued to ``accredited investors;'' and therefore, are exempt from
registration, pursuant to an exemption described in section 4(2) and/or
section 3(b) of the Securities Act of 1933 and by Regulation D. The
Notes may not be sold or transferred, except in a transaction exempt
from the registration requirements of federal and state securities
laws. In addition, the Notes may not be sold or transferred, unless HHG
is furnished with a satisfactory opinion of counsel to the effect that
an exemption from the registration requirements of federal and state
securities laws is available. Further, any proposed sale to another
member of the NYSE is subject to a right of first refusal by HHG.
4. In 1992 and 1993 when the Notes were issued, HHG offered them
for purchase by certain of its customers. However, the owners of HHG
IRAs who met the ``accredited investor'' standards were not permitted
to acquire the Notes, because HHG believed that prohibited transactions
would arise, if the owners of such accounts were to direct HHG, the
custodian of such HHG IRAs, to purchase the Notes on behalf of the HHG
IRAs with funds from such HHG IRAs. Instead, HHG suggested that the
owners of HHG IRAs who were interested in purchasing the Notes for
their accounts set up other individual retirement accounts with other
custodians or trustees (the Non-HHG IRAs or the Non-HHG IRA) and then
arrange for these Non-HHG IRAs to purchase the Notes. Accordingly, it
is represented that some owners of HHG IRAs transferred funds from
their HHG IRAs into Non-HHG IRAs at other brokerage firms or banks and
directed the trustees or custodians of such Non-HHG IRAs to purchase
the Notes.\28\
\28\ The Department expresses no opinion herein, as to whether
the prohibited transactions provisions, as set forth in section 4975
of the Code, have been violated in connection with the purchase of
the Notes by the Non-HHG IRAs at the direction of the owners of such
accounts who are also officers, directors, or employees of HHG and
the subsequent holding of the Notes in such Non-HHG IRAs by trustees
or custodians other than HHG. The Department notes that the proposed
relief is limited to the transactions described herein, and no
relief has been provided in connection with the acquisition and
holding of the Notes by the Non-HHG IRAs.
---------------------------------------------------------------------------
HHG believes that the HHG IRAs which transferred funds from their
HHG IRAs to Non-HHG IRAS in order to purchase the Notes contained
assets with an aggregate fair market value of $4,400,000. It is
estimated that for the average owner of a Non-HHG IRA the Notes
constituted less than 30 percent (30%) of the total assets of such
owner's account.
5. HHG seeks to permit the acquisition and holding of the Notes by
the HHG IRAs. In order to accomplish this goal, the owners of the Non-
HHG IRAs would transfer assets that include the Notes from the Non-HHG
IRAs into the HHG IRAs. It is anticipated that the Notes would be
transferred in kind at the direction of the owners of the Non-HHG IRAs
from the current trustee of the Non-HHG IRAs to HHG. It is represented
that such transfers will be direct custodian to custodian transfers. In
this regard, each holder of a Non-HHG IRA who wishes to transfer the
assets in such account to the custodianship of HHG will complete and
sign a customer account transfer form, and direct that the assets be
transferred in kind from the former custodian of the Non-HHG IRA to
HHG.
6. HHG believes the transactions described in the paragraph above
may be prohibited, pursuant to section 4975(c) of the Code in that such
transactions may result in a direct or indirect lending of money or
other extension of credit between a plan and a disqualified person with
respect to such plan. Accordingly, HHG seeks exemptive relief from the
prohibited transaction provisions, as set forth in section 4975(c)(1)
(A) through (D) of the Code.
7. It is represented that the proposed transactions would be in the
interest of the affected HHG IRAs, in that owners of the HHG IRAs would
not need, solely for the purpose of acquiring and holding the Notes, to
incur the additional custodial fees and other expenses related to
maintaining the Non-HHG IRAs. In this regard, it is represented that
HHG charges for an HHG IRA a custodial fee of $25 annually,\29\ which
HHG maintains is considerable less than the amount charged by trustees
or custodians of the Non-HHG IRAs which currently hold the Notes.
\29\ The Department, herein, expresses no opinion as to whether
the provision of services by HHG to the HHG IRAs and the
compensation received therefor satisfies the terms and conditions of
the statutory exemption, as set forth in section 4975(d)(2) of the
Code. To the extent that such provision of services to the HHG IRAs
by HHG does not satisfy the requirements of section 4975(d)(2) of
the Code, the Department, herein, is offering no relief.
---------------------------------------------------------------------------
8. It is represented that the proposed transactions would be
protective of the rights of participants in the HHG IRAs and their
beneficiaries, in that the percentage of the assets of the HHG IRAs
involved in the Notes will at no time exceed 25 percent (25%) of the
value of the assets of such accounts.
Further, it is represented that HHG has no discretion to direct any
investment of any HHG IRA which will be involved in the proposed
transactions. Under the terms of the HHG IRAs, the owners of such
accounts, as fiduciaries, have exclusive responsibility for and control
over the investment of the assets of such accounts. In this regard, it
is represented that the owners of the Non-HHG IRAs which purchased the
Notes are sophisticated investors who, in most cases, are long standing
customers of HHG and are familiar with the firm. It is represented that
the owners of the Non-HHG IRAs made the original decision to purchase
the Notes with the assets in the Non-HHG IRAs, and, if the proposed
exemption is granted, the same individuals who are also the owners of
the HHG IRAs will make the decision to transfer all or a portion of the
assets in the Non-HHG IRA, including the Notes, into an HHG IRA. It is
estimated, as of the date of the application, that eleven (11)
participants and beneficiaries may be affected by the requested
exemption, as they may be
[[Page 11894]]
given the opportunity to transfer Notes from Non-HHG IRAs to HHG IRAs,
but will not be obligated to make such a transfer. Of these eleven
(11), two individuals are officers of HHG who are employed in the
securities trading department of HHG. Under the terms of this proposed
exemption, officers, directors and employees of HHG who are also owners
of HHG IRAs will not be permitted to participate in the proposed
transactions.
9. It is represented that the requested exemption is
administratively feasible in that HHG already maintains an individual
retirement program, is approved by the IRS to serve as a custodian for
individual retirement accounts, and has experience dealing with such
accounts. HHG believes that the owners of HHG IRAs would prefer to hold
their investments in the Notes in HHG IRA custodial accounts, because
it would be less expensive and would be administratively less awkward
for both HHG and the owners of the HHG IRAs. In this regard, it is
represented that HHG will maintain a separate accounting of all of the
holdings in the HHG IRAs, including the Notes that may be acquired, for
each owner of an HHG IRA. Further, it is represented that the HHG IRAs
will not pay commissions as a result of the transfer of the Notes into
the custodianship of HHG.
10. In summary, HHG, the applicant, represents that the proposed
transactions meet the statutory criteria of section 4975(c)(2) of the
Code because:
(a) officers, directors, or employees in HHG who are also owners of
HHG IRAs will not be permitted to participate in the proposed
transactions;
(b) the owners of the HHG IRAs have exclusive responsibility and
control over the investment of the assets of such accounts;
(c) HHG has no discretionary authority or control with respect to
the investment of the assets of the HHG IRAs to be involved in the
proposed transaction, nor does HHG render investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
(d) a separate accounting of the assets in the HHG IRAs, including
the Notes which have been acquired by such accounts, will be maintained
by HHG;
(e) the percentage of the assets of the HHG IRAs involved in the
Notes will at no time exceed 25 percent (25%) of the value of the
assets of such accounts;
(f) the HHG IRAs will pay no fees or commissions in connection with
the transactions;
(g) the combined total of all fees received by HHG for the
provision of services to the HHG IRAs are not in excess of ``reasonable
compensation'' within the meaning of section 4975(d)(2) of the Code;
and
(h) the owners of the HHG IRAs will avoid the administrative burden
and expense of maintaining the Non-HHG IRAs.
For Further Information Contact: Angelena C. Le Blanc of the Department
(202) 219-8883. (This is not a toll-free number.)
Pierre W. Mornell, M.D., A Sole Proprietorship, Defined Benefit Plan
(the Plan) Located in Mill Valley, California
[Application No. D-10170]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 C.F.R. Part 2570, Subpart B (55 F.R. 32836,
32847, August 10, 1990). If the exemption is granted the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to
the proposed sale of certain unimproved real property located in Mill
Valley, California (the Property) by the Plan to Pierre W. Mornell and
Linda C. Mornell, parties in interest with respect to the Plan;
provided that the following conditions are satisfied:
(A) All terms and conditions of the transaction are no less
favorable to the Plan than those which the Plan could obtain in an
arm's-length transaction with an unrelated party;
(B) The Plan receives a cash purchase price for the Property in the
amount of the fair market value of the Property; and
(C) The Plan does not incur any expenses or suffer any loss with
respect to the transaction.
Summary of Facts and Representations
1. The Plan is a defined benefit pension plan with one participant
and total assets of $287,585 as of November 1, 1995. The Plan is
sponsored by the medical practice of Pierre W. Mornell, M.D. (Dr.
Mornell), which is a sole proprietorship (the Employer) located in Mill
Valley, California. The Plan's sole participant is Dr. Mornell, who
also serves as the Plan's trustee and administrator.30
\30\ Since Dr. Mornell is the sole proprietor and the only
participant in the Plan, there is no jurisdiction under Title I of
the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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2. The Property is a vacant parcel of 3,420 square feet of land
located in Mill Valley, California at 19 Park Avenue, zoned for multi-
family residential development. Dr. Mornell represents that the
Property was purchased by the Plan in 1989 from parties unrelated to
himself, his medical practice, and his spouse, and that the terms and
conditions of that transaction were negotiated at arm's length with the
sellers. The Plan paid a purchase price of $225,000, of which $90,000
was represented by a five-year promissory note (the Note) payable to
the seller, secured by a first deed of trust on the Property, due on or
before August 1, 1994. Dr. Mornell represents that the Note was timely
paid in full by the Plan.
3. Dr. Mornell represents that as Plan trustee he caused the Plan
to purchase the Property in 1989, and to invest a large percentage of
the Plan's assets therein, for a variety of reasons, summarized as
follows: During 1989, the value of real estate in the market in which
the Property is situated was appreciating rapidly, and Dr. Mornell
believed that the Property's value would continue to appreciate after
purchase by the Plan. The Property is situated adjacent to a corner lot
along a main thoroughfare in an affluent suburban community, and Dr.
Mornell, as trustee, represents that he believed that the risk of a
significant decline in the Property's value was small, due to these
factors. Dr. Mornell notes that he was and is the sole participant in
the Plan, and was aware that he would be the only person who would be
adversely affected if the Property did not prove to be a favorable
investment. Dr. Mornell represents that it had been his intention that
the Property be developed by the construction of income-producing
improvements thereon, but the value of the Property ceased to
appreciate. Instead, Dr. Mornell represents that the Property's value
commenced to decline before any improvements had been added to the
Property, and the Property has never produced any income of any kind.
Since the Property has proven to be an unfavorable investment, Dr.
Mornell desires that the Plan divest of the Property and reinvest in
other, more diversified assets with more potential for favorable
return. Accordingly, Dr. Mornell and his spouse, Linda C. Mornell
(together, the Mornells) propose to purchase the Property from the Plan
and are requesting an exemption to permit this transaction under the
terms and conditions described herein.
4. It is proposed that the Mornells will make a single cash payment
to the Plan for the Property in the amount of no less than the fair
market value of the
[[Page 11895]]
Property, and in no event less than $215,000. The Property has been
appraised by T.B. Combs (Combs), a professional real estate appraiser
in Mill Valley, California. Combs represents that as of October 15,
1996, the Property had a fair market value of $215,000. The Plan will
not incur any expenses related to the transaction. Dr. Mornell
represents that the proposed transaction is in the best interests and
protective of the Plan because it will enable the Plan to dispose of an
non-income-producing asset and will receive a cash purchase price
representing the Property's fair market value, which can be reinvested
in more diverse assets with better prospects for favorable returns.
5. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 4975(c)(2) of the Code
for the following reasons: (a) The Plan, in which Dr. Mornell is the
sole participant, will receive cash for the Property for reinvestment
in more diverse assets; (b) The purchase price will be the fair market
value of the Property as determined by Combs' appraisal; (c) the Plan
will not incur any expenses related to the proposed transaction; and
(d) Dr. Mornell is the only participant affected by the transaction,
and he desires that the transaction be consummated.
Notice to Interested Persons
Since Dr. Mornell is the only Plan participant to be affected by
the proposed transaction, the Department has determined that there is
no need to distribute the notice of proposed exemption to interested
persons. Comments and requests for a hearing are due within 30 days
from the date of publication of this notice of proposed exemption in
the Federal Register.
For Further Information Contact: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Gail L. Belt Self Employed Retirement Plan (the Plan) Located in
Vienna, Virginia
[Application No. D-10219]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the proposed sale of a parcel of real property (the Property) by the
Plan to Ms. Gail L. Belt, a disqualified person with respect to the
Plan for $115,000, provided the following conditions are satisfied: a)
the sale is a one-time transaction for cash; b) the Plan pays no
commissions or expenses in connection with the transaction; c) the Plan
receives not less than the greater of the fair market value of the
Property or its cost in acquiring the Property; d) the fair market
value of the Property has been determined by a qualified, independent
appraiser; and e) Ms. Belt is the only Plan participant to be affected
by the transaction, and she desires that the transaction be
consummated.31
31 Since Ms. Belt is the sole owner of the Plan sponsor and the
only participant in the Plan, there is no jurisdiction under Title I
of the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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Summary of Facts and Representations
1. Ms. Belt is a self-employed real estate agent in Northern
Virginia. Her primary business is facilitating the buying and selling
of residential real estate. She is a realtor for Coldwell Banker,
Stevens Realtors, located in Vienna, Virginia. Ms. Belt is the sole
trustee and sole participant in the Plan, which is a defined
contribution Plan with current assets of approximately $1,080,597.
2. In August, 1993, Ms. Belt, in her capacity as sole trustee for
the Plan, acquired the Property as a Plan investment. The Property was
purchased from Edward and Edith Schultz, parties unrelated to Ms. Belt
and the Plan, for a purchase price of $110,000. The Property consists
of an unimproved plot of land located at 1747 Lockerbie Lane, Vienna,
Virginia.
3. The Plan now wishes to sell the Property to Ms. Belt. The
applicant represents that the Property is not increasing in value in
the current real estate market, and the Plan has ongoing administrative
expenses for the Property. In addition, the Plan has been unable to
procure liability insurance to cover any possible injuries on the site.
Finally, the Plan would be disposing of an illiquid asset.
4. Mr. Douglas S. Waldron of Residential Appraisal Group, Inc., an
independent licensed residential real estate appraiser in Annandale,
Virginia, has appraised the Property as having a fair market value of
$115,000 as of February 5, 1996. The applicant represents that Ms. Belt
will pay this amount to the Plan since it exceeds the Plan's purchase
price for the Property, plus expenses.
5. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 4975(c)(2) of the Code
because: a) the sale is a one-time transaction for cash; b) the Plan
will pay no commissions or other expenses in connection with the
transaction; c) the Plan will receive the greater of its acquisition
price for the Property plus expenses, or the current fair market value
of the Property as determined by a qualified, independent appraiser;
and d) Ms. Belt is the sole participant in the Plan to be affected by
the transaction, and she desires that the transaction be consummated.
Notice to Interested Persons
Since Ms. Belt is the only Plan participant to be affected by the
proposed transaction, the Department has determined that there is no
need to distribute the notice of proposed exemption to interested
persons. Comments and requests for a hearing are due within 30 days
from the date of publication of this notice of proposed exemption in
the Federal Register.
For Further Information Contact: Gary H. Lefkowitz 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;
[[Page 11896]]
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 19th day of March, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 96-6991 Filed 3-21-96; 8:45 am]
BILLING CODE 4510-29-P