[Federal Register Volume 62, Number 153 (Friday, August 8, 1997)]
[Notices]
[Pages 42830-42837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21003]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 97-41; Exemption Application No. D-
09988]


Class Exemption for Collective Investment Fund Conversion 
Transactions

AGENCY: Pension Welfare Benefits Administration, Department of Labor.

ACTION: Grant of class exemption.

-----------------------------------------------------------------------

SUMMARY: This document contains a final exemption from certain 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (the Act or ERISA) and from certain taxes imposed 
by the Internal Revenue Code of 1986 (the Code). The exemption permits 
an employee benefit plan (the Client Plan) to purchase shares of a 
registered investment company (the Fund), the investment adviser for 
which is a bank (the Bank) or plan adviser (the Plan Adviser) 
registered under the Investment Advisers Act of 1940 (the Advisers 
Act), that also serves as a fiduciary of the Client Plan, in exchange 
for plan assets transferred in-kind to the Fund from a collective 
investment fund (the CIF) maintained by the Bank or Plan Adviser, in 
connection with a complete withdrawal of a Client Plan's assets from 
the CIF. The exemption affects participants and beneficiaries of the 
Client Plans that are involved in such transactions as well as the Bank 
or Plan Adviser and the Fund.

EFFECTIVE DATE: Section I of this exemption is effective for 
transactions occurring from October 1, 1988 until August 8, 1997. 
Section II of the exemption is effective for transactions occurring 
after August 8, 1997.

FOR FURTHER INFORMATION CONTACT:
Ms. Jan D. Broady or Mr. E.F. Williams, Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Washington, DC 20210 at (202) 219-8881 or (202) 
219-8194, respectively, or Ms. Susan E. Rees, Plan Benefits Security 
Division, Office of the Solicitor, U.S. Department of Labor, 
Washington, DC 20210 at (202) 219-4600, ext. 105. (These are not toll-
free numbers.)

Paperwork Reduction Act Analysis

    Pursuant to the Paperwork Reduction Act of 1995 (PRA 95), Pub. L. 
104-13, 44 U.S.C. Chapter 35 and 5 CFR Part 1320, the information 
collection request (the ICR) in this class exemption was published for 
public comment on November 13, 1996 (61 FR 58224). No comments were 
received from the public regarding the ICR. However, as discussed 
below, because the Department of Labor (the Department) has modified 
the class exemption in response to suggestions by commenters, the 
estimated information collection burden has been adjusted (see 
RESPONDENTS AND PROPOSED FREQUENCY OF RESPONSE and ESTIMATED ANNUAL 
BURDEN, below). The Office of Management and Budget (OMB) has approved 
this ICR with the control number OMB 1210-0104, which expires on July 
31, 2000. Persons are not required to respond to this ICR unless it 
displays a currently valid OMB control number.
    Respondents and Proposed Frequency of Response: Following the 
publication on November 13, 1996 of the notice of proposed exemption 
(61 FR 58224), based upon one of the comments received, the Department 
determined to modify the final exemption to include relief for certain 
non-Bank Plan Advisers. Consequently, the Department has recalculated 
estimates of the information collection burden in the final exemption. 
Based upon this recalculation, the Department staff estimates that 
approximately 75 parties will seek to take advantage of the class 
exemption in any given year. The respondents will be banks, non-bank 
advisers, and trust companies acting as fiduciaries of plans investing 
in collective investment funds maintained by such entities.
    Estimated Annual Burden: The Department staff estimates the annual 
burden for preparing the materials required under the class exemption 
to be 1767 hours. The total annual burden cost (operating/maintenance) 
is estimated to be $221,247.

SUPPLEMENTARY INFORMATION: On November 13, 1996, the Department 
published a notice in the Federal Register (61 FR 58224) of the 
pendency of a proposed class exemption from the restrictions of 
sections 406(a) and 406 (b)(1) and (b)(2) of the Act and from the taxes 
imposed by section 4975 (a) and (b) of the Code by reason of section 
4975(c)(1) (A) through (E) of the Code.
    The Department proposed the class exemption in response to an 
application dated March 28, 1995 which was submitted on behalf of 
Federated Investors (Federated) pursuant to 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).\1\
---------------------------------------------------------------------------

    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. 1 (1996) generally transferred the authority of the Secretary 
of the Treasury to issue exemptions under section 4975(c)(2) of the 
Code to the Secretary of Labor.
    In the discussion of the exemption, references to specific 
provisions of the Act should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------

    The notice of pendency gave interested persons an opportunity to 
comment or request a public hearing on the proposal. In this regard, 
the Department received four comments, one of which contained a request 
for a public hearing. Upon consideration of the record as a whole, the 
Department

[[Page 42831]]

has determined to grant the proposed class exemption, subject to 
certain modifications suggested by the commenters. These modifications 
and the comments are discussed below.

I. Discussion of Comments

    A commenter requested certain specific modifications to the 
proposal in the following areas:
    1. Definition of the term ``Fund.'' The commenter noted that, with 
respect to the description of investment companies covered under the 
proposal, the term ``Fund'' at the beginning of section I and section 
II, and the definition of a ``Fund'' in section IV(e) of the proposal, 
all define a ``Fund'' as a diversified open-end management investment 
company registered under the Investment Company Act of 1940 (the 1940 
Act). According to the commenter, the 1940 Act does not by its terms 
require that an investment company subject to its provisions be 
diversified. In addition, Prohibited Transaction Exemption (PTE) 77-4 
(42 FR 18732, April 8, 1977), to which the subject class exemption 
relates, does not require that an open-end investment company be 
diversified. Therefore, for consistency with PTE 77-4, the commenter 
requests that the term ``diversified'' be deleted in the three 
paragraphs where it appears in the proposal. The Department concurs 
with this comment and, accordingly, has deleted references in the final 
exemption to the ``diversified'' status of the investment companies.
    2. Fee Disclosure Conditions. Sections I(e)(2) and II(e)(2) of the 
proposal require that Banks disclose, among other things, the fees to 
be charged to, or paid by, the Client Plan and the Funds to the Bank 
``* * * or any unrelated third party,'' including the nature and extent 
of any differential between the rates of the fees. The commenter stated 
that such disclosure is required in addition to the disclosure in the 
Fund prospectus required by sections I(e)(1) and II(e)(1) of the 
proposal. According to the commenter, this language differs, in part, 
from the wording of the parallel condition in PTE 77-4 and in the 
individual exemptions granted by the Department.\2\ As a result, the 
commenter urged the Department to delete the requirement that the Bank 
disclose fees charged to Client Plans by unrelated third parties in the 
final exemption. The commenter argued that: (a) the prospectuses for 
the Funds will disclose the identities of the third-party service 
providers to the Funds and the total level of fees paid to those 
providers, which should be sufficient to fully inform the Client Plan's 
Independent Fiduciary of the third-party fees paid by the Fund; and (b) 
the Bank would have no reason to know about the fees charged to the 
Client Plans by third parties outside the Funds or the arrangements 
under which such fees are paid, and as such may not be in a position to 
make such disclosures. Furthermore, the Bank would have no basis for 
disclosing the differential between the rates of fees by a third party, 
as required by this condition. Thus, the commenter requested that the 
Department clarify that the delivery of the prospectuses will satisfy 
the fee disclosure condition with regard to fees charged by third 
parties to the Funds. The Department concurs with the commenter and has 
determined to delete the phrase ``* * * or any unrelated third party'' 
from sections I(e)(2) and II(e)(2) of the exemption.
---------------------------------------------------------------------------

    \2\ See, for example, PTE 94-82 involving Marshall & Ilsley 
Trust Company (59 FR 62422, December 5, 1994); PTE 94-86 involving 
The Bank of California, N.A. (59 FR 65403, December 19, 1994); PTE 
95-33 involving Bank South, N.A. (60 FR 20773, April 27, 1995); PTE 
95-48 involving Mellon Bank, N.A. (60 FR 32995, June 26, 1995); PTE 
96-64 involving Society National Bank (61 FR 44081, August 27, 
1996); and PTE 96-74 involving Chicago Trust Company (61 FR 51464, 
October 2, 1996).
---------------------------------------------------------------------------

    One commenter requested that the exemptive relief contained in the 
proposal be modified to include in-kind transfers of plan assets to 
mutual funds in exchange for shares of the funds where an investment 
adviser registered under the Advisers Act is an investment manager or 
investment adviser to a Client Plan and also an investment adviser to 
the mutual fund. The commenter represented that many investment 
advisers may wish to convert all or a portion of their directly managed 
Client Plan portfolios (the Portfolios) into mutual funds. Under the 
modifications contemplated by the commenter, the investment adviser 
would have to comply with many of the same terms and conditions 
contained in the proposal, such as valuations of the securities in 
accordance with SEC Rule 17a-7 (Rule 17a-7).\3\ However, the conditions 
described in sections I(c) and II(c) of the proposal which generally 
require that the transferred assets constitute a Client Plan's pro rata 
portion of the assets held in the CIF would not be met under the 
commenter's suggested modification. According to the commenter, the 
proposed in-kind transfers to the mutual funds would be made with plan 
assets selected by the investment adviser and pro rata allocations of 
such assets would not be necessary. Lastly, the commenter requested 
that the Department hold a public hearing prior to any decision by the 
Department to issue the final exemption without expanding the proposal 
as requested.
---------------------------------------------------------------------------

    \3\ The commenter further represented that all disclosures and 
the form of independent fiduciary approval will be designed to meet 
the requirements of PTE 77-4.
---------------------------------------------------------------------------

    In this regard, the Department notes that the proposal was 
developed in response to the prohibited transaction issues raised by 
transactions involving the conversion of Bank collective investment 
funds. The conditions applicable to such CIF conversions have been 
developed based on the exemption application submitted by Federated on 
March 28, 1995. Accordingly, the Department does not believe that it 
has sufficient information regarding other types of in-kind transfers 
of plan assets involving investment advisers to make the findings 
necessary to grant exemptive relief. Moreover, the Department does not 
believe that a sufficient showing has been made that the conditions 
suggested by the commenter would adequately protect the interests of a 
plan's participants and beneficiaries involved in such transactions.
    However, the Department has decided to modify the final exemption 
to include relief for ``Plan Advisers'', provided that all of the terms 
and conditions of the final exemption are met. In this regard, the 
Department has added section IV(m) to the exemption to define Plan 
Adviser to mean any investment adviser registered under the Advisers 
Act of 1940, and any ``affiliate'' (as defined in section IV(b)) of 
such Plan Adviser. The Department also has modified the definition of 
the term ``collective investment fund'' under section IV(d) to include 
a common or collective trust fund or pooled investment fund maintained 
by a Plan Adviser for the collective investment of the assets 
attributable to two or more plans maintained by unrelated employers. 
The Department has defined the term ``unrelated employers'' in section 
IV(o) to mean persons which are not, directly or indirectly, 
affiliates, as defined in section IV(b)(1). Finally, references 
throughout the proposal to a ``Bank'' have been modified under the 
final exemption to also include references to a ``Plan Adviser.''
    With respect to the commenter's request for a public hearing on the 
proposal, the Department believes that the issues raised by the 
commenter relating to investment advisers generally appear to be 
outside the scope of the proposed exemption. In this regard, the 
Department notes that the proposed exemption requested by Federated 
related to the conversion of collective

[[Page 42832]]

funds by Banks. The safeguards and conditions developed under that 
proposal were designed to address the ERISA issues raised by those 
transactions that were the subject of exemptive relief. Accordingly, 
the Department has determined that no issues relating to the proposed 
exemption were identified that would require the convening of a hearing 
and has determined not to hold a public hearing. Of course, the 
Department would be prepared to consider individual exemptive relief 
upon proper demonstration that the findings can be made under section 
408(a) of the Act.
    Another commenter submitted a comment in general support of the 
exemption. However, the commenter noted that sections I(g) and II(g) of 
the proposal require that the Bank send confirmations, by regular mail, 
to the Independent Fiduciary of each Client Plan that purchases shares 
in connection with the in-kind transfer, no later than 105 days after 
the completion of each purchase. The commenter stated that some Banks 
have indicated that it is not uncommon to deliver such confirmations by 
personal delivery, rather than by mail. Therefore, the commenter has 
requested that the Department modify the final exemption to permit 
distributions of the confirmation statements by personal delivery, as 
well as delivery by any other means reasonably anticipated to ensure 
receipt by the Client Plan's Independent Fiduciary (e.g., private 
express courier or facsimile). Upon consideration of this comment, the 
Department has modified sections I(g) and II(g) to permit a Bank or 
Plan Adviser to deliver the information required under these sections 
by either regular mail or personal delivery. The Department has also 
prospectively modified section II(g) to permit the delivery of such 
information by facsimile or electronic mail. In this regard, the 
Department has modified section II(f) to require that the Independent 
Fiduciary, in connection with the dissemination of confirmation 
statements by either facsimile or electronic mail, specifically agree, 
at the time of the approval of the in-kind transfer, to the receipt of 
such statements in that form. In addition, the Department has defined 
the term ``personal delivery'' in section IV(p) to mean the delivery of 
the information described in sections I(g) and II(g) to an individual 
or individuals designated by the Client Plan to act on behalf of the 
Independent Fiduciary.
    A commenter noted that the proposal does not include exemptive 
relief for purchases of Fund shares by employee benefit plans that are 
sponsored by the Bank for its own employees. In this regard, the 
commenter suggested that issues related to providing such relief should 
be considered by the Department apart from the proposal in order not to 
delay the publication of the final exemption. The Department agrees 
with the commenter and intends to separately consider the issues 
arising in connection with transactions involving the purchase of Fund 
shares by plans sponsored by a Bank, or for that matter a Plan Adviser, 
for its own employees.
    A commenter noted that the second sentence of section II(c) of the 
proposal contains a mistaken cross-reference to section II(b). In this 
regard, section II(c) of the proposal provided that the transferred 
assets constitute the Client Plan's pro rata portion of such assets 
that were held by the CIF immediately prior to the transfer. The second 
sentence in section II(c) contained an exception to this general rule 
and provided that the allocation of fixed-income securities held by a 
CIF on the basis of each Client Plan's pro rata share of the aggregate 
value of such securities will not fail to meet the requirements of 
section II(b) if certain additional requirements are met. The 
Department concurs with the commenter and has revised the cross-
reference to section II(b) in the second sentence of section II(c) to 
refer back to the general rule under that section.
    The commenter also has requested a clarification of the disclosure 
requirements in section II(e) of the proposal. Section II(e)(5) 
requires that the Client Plan's Independent Fiduciary receive advance 
written notice concerning the identity of securities that will be 
valued in accordance with Securities and Exchange Commission (SEC) Rule 
17a-7(b)(4) and allocated pursuant to section II(c) of the proposal. 
The commenter noted that section II(e)(6) of the proposal also requires 
that information be provided about the identity of any fixed-income 
securities allocated pursuant to section II(c). The commenter believed 
that each of these requirements is intended to require disclosure of 
two different lists of securities, i.e., (a) securities valued based on 
dealer quotations or pricing services, and (b) fixed-income securities 
allocated between the CIF and the Fund on the basis of each Client 
Plan's pro rata share of the aggregate value of such securities. 
Nonetheless, the commenter believed that the references in both 
subsections to section II(c) may confuse the intended scope of the 
second requirement (as stated in section II(e)(6) of the proposal) 
which could be construed to cover all fixed-income securities involved 
in the in-kind transfer, even those not allocated on an aggregate value 
basis. In response to the comment, the Department has modified section 
II(e)(6) in the final exemption to require disclosure of any fixed-
income securities which are allocated on the basis of each Client 
Plan's pro rata share of the aggregate value of such securities.
    A commenter noted that section IV(a) of the proposal defines the 
term ``Bank'' to include any affiliate thereof as defined in section 
IV(b). However, the commenter further noted that sections IV(h) and 
IV(k) of the proposal also contain references to the Bank or an 
affiliate thereof. For purposes of clarity, the commenter requested 
that references in these sections to the term ``affiliate'' be deleted 
in order to avoid the anomalous result of such references being 
interpreted to include an affiliate of an affiliate of a Bank. The 
Department has adopted this suggestion and deleted references to an 
``affiliate'' of the Bank in sections IV(h) and IV(k) of the final 
exemption.

II. Description of the Exemption

    The class exemption consists of four sections. Section I provides 
conditional exemptive relief for transactions occurring from October 1, 
1988 until the date of the notice granting the final exemption is 
published in the Federal Register. Section II provides prospective 
relief for transactions which must meet certain additional conditions 
which are described below. Section III provides that a transaction that 
meets the applicable conditions of the exemption will be deemed a 
purchase by the Client Plan of shares of an open-end investment company 
registered under the 1940 Act for purposes of PTE 77-4. Accordingly, a 
Bank or Plan Adviser that complies with the terms of this exemption and 
with the terms of PTE 77-4 is able to receive investment management and 
investment advisory fees from the Fund and the Client Plan with respect 
to the plan's assets invested in shares of the Fund to the extent 
permitted under PTE 77-4. Section III also provides that compliance 
with the exemption will constitute compliance with paragraphs (a), (d) 
and (e) of section II of PTE 77-4. Finally, Section IV contains 
definitions for certain terms used in the exemption.
    Specifically, the class exemption set forth in Section I provides 
retroactive relief from the restrictions of sections 406(a) and 406 
(b)(1) and (b)(2) of the Act for the purchase of Fund shares by an 
employee benefit plan, where a Bank or Plan Adviser that serves as 
investment adviser to the Fund is also

[[Page 42833]]

a fiduciary with respect to the plan, in exchange for plan assets 
transferred in-kind to the Fund from a CIF maintained by the Bank or 
Plan Adviser. The exemption is generally similar to a number of 
individual exemptions that have been granted by the Department for such 
transactions, but the operative language of this exemption differs from 
that of the individual exemptions in two major respects.\4\ First, the 
operative language has been revised to make it more comprehensible to 
the user. Second, the operative language emphasizes that the class 
exemption does not provide relief for any prohibited transactions that 
may arise in connection with terminating a CIF, permitting certain 
plans to withdraw from a CIF that is not terminating, or liquidating or 
transferring any plan assets held by the CIF. Thus, the class exemption 
provides relief only for the purchase of Fund shares by a Client Plan 
in exchange for assets that are transferred in-kind from a CIF. 
Although the Department interprets the individual exemptions as being 
similarly limited in their scope, the language of the class exemption 
is intended to clarify this limitation.
---------------------------------------------------------------------------

    \4\ See the list of exemptions cited in Footnote 2.
---------------------------------------------------------------------------

    The Department believes that the scope of the class exemption is 
consistent with the applicant's request for relief based on the 
applicant's mistaken reliance on PTE 77-4. In addition, the Department 
notes that the class exemption defines the term ``Client Plan'' in 
section IV so as to exclude exemptive relief for purchases of Fund 
shares by plans sponsored by the Bank or a Plan Adviser for its own 
employees.
    The conditions applicable to the retroactive exemption set forth in 
Section I of the exemption are described below.
    Under section I(a) of the exemption, no sales commissions or other 
fees are paid by the Client Plan in connection with the transaction.
    Section I (b) and (c) of the exemption requires that the 
transferred assets be securities for which market quotations are 
readily available (or cash) and consist of the Client Plan's pro rata 
portion of all assets held by the CIF immediately prior to the 
transfer.\5\ Under section I(d), the Client Plan must have received 
shares of a Fund to which the CIF assets have been transferred that 
have a total net asset value that is equal to the value of the Client 
Plan's transferred assets on the date of the transfer. The value of any 
securities transferred in-kind will be based on the current market 
value of such assets, as determined in a single valuation for each 
asset, with all valuations performed in the same manner at the close of 
the same business day (defined in section IV(n) to mean a banking day 
as defined by federal or state banking regulations), in accordance with 
Rule 17a-7 of the 1940 Act (using sources independent of the Bank or 
Plan Adviser) and the procedures established by the Funds pursuant to 
Rule 17a-7 for the valuation of such assets. The same valuation must be 
used for each asset in determining the amount transferred from the CIF 
and the amount received by the Fund.
---------------------------------------------------------------------------

    \5\ The Department notes that the Bank or Plan Adviser retains 
ongoing responsibilities under ERISA's general standards of 
fiduciary conduct with respect to plans electing to remain as 
investors in the CIF and with respect to other aspects of the 
transfers. In this regard, the applicant represents that all 
nontransferable assets of a CIF are liquidated prior to an in-kind 
transfer with respect to a partial or a complete termination of the 
CIF. The applicant further notes that transferable assets of a CIF 
may consist of securities or a combination of cash and securities.
---------------------------------------------------------------------------

    Section I(e) provides that an Independent Fiduciary must receive 
advance written notice of the transaction, as well as the following 
written information concerning the Funds: (a) A current prospectus for 
each Fund in which a Client Plan is considering investing; (b) full and 
detailed written disclosure of the investment advisory and other fees 
charged to, or paid by, the Client Plan (and by such Fund) to the Bank 
or Plan Adviser, including the nature and extent of any differential 
between the rates of the fees; \6\ (c) the reasons why the Bank or Plan 
Adviser may consider an exchange of the Client Plan's CIF assets for 
investments in the Fund to be appropriate for the Client Plan; and (d) 
a statement describing whether there are any limitations applicable to 
the Bank or Plan Adviser with respect to which assets of the Client 
Plan may be invested in the Fund, and, if so, the nature of such 
limitations.
---------------------------------------------------------------------------

    \6\ The Department has clarified section II(e) to indicate that 
a Client Plan should receive disclosures which would allow it to 
compare the rates of CIF-level fees to the rates of Fund-level fees 
that are paid to the Bank or Plan Adviser.
---------------------------------------------------------------------------

    Moreover, under section I(f), the Independent Fiduciary gives prior 
approval in writing of each in-kind transfer of the Client Plan's CIF 
assets to a Fund in exchange for shares of the Fund, on the basis of 
the information disclosed to the Independent Fiduciary. In addition, 
section I(g) requires that the Independent Fiduciary receive written 
confirmation of the transaction no later than 105 days after the 
transaction, which may be sent by regular mail or personal delivery. 
This written confirmation must disclose the number of CIF units held by 
the Client Plan immediately before the transaction and the number of 
Fund shares held by the Client Plan immediately following the 
transaction, the related per unit and per share values, and the dollar 
amounts of the CIF units and the Fund shares involved in the 
transaction.
    Section I(h) requires that, for each Client Plan, the combined 
total of all fees received by the Bank or Plan Adviser for the 
provision of services to the Client Plan, and in connection with the 
provision of services to a Fund in which a Client Plan invests, must 
not exceed ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act. Finally, section I(i) provides that all dealings 
between a Client Plan and a Fund are on a basis no less favorable to 
the Client Plan than such dealings are with other shareholders of the 
Fund.
    On a prospective basis, Section II of the exemption requires that 
the transactions meet certain conditions in addition to those described 
in Section I of the exemption. These additional conditions are 
described below.
    Section II(c) provides an exception to the general requirement that 
the assets transferred in-kind to a Fund consist of the Client Plan's 
pro rata portion of each of the transferred assets of the CIF. This 
exception applies to certain investments in fixed-income securities. 
The fixed-income securities which are allocated between the CIF and the 
Fund must have the same coupon rates, maturities and credit ratings at 
the time of the transaction and cannot exceed one (1) percent of the 
aggregate assets held by the CIF as of each transfer. In this regard, 
section IV(j) defines the term ``fixed-income security'' as any 
interest-bearing or discounted government or corporate security with a 
face amount of $1,000 or more that obligates the issuer to pay the 
holder a specified sum of money, usually at specific intervals, and to 
repay the principal amount of the loan at maturity.
    Section II(e) of the exemption requires that the Independent 
Fiduciary receive advance written notice of the in-kind transfer and 
purchase of assets and full written disclosure of information 
concerning the Funds. Among the information provided to the Independent 
Fiduciary will include documentation relating to the identity of all 
securities that will be valued in accordance with Rule 17a-7(b)(4) of 
the

[[Page 42834]]

1940 Act \7\ and allocated on the basis of the Client Plan's pro rata 
portion under section II(c), and the identity of any fixed-income 
securities that will be allocated on the basis of each Client Plan's 
pro rata share of the aggregate value of such securities pursuant to 
section II(c).\8\
---------------------------------------------------------------------------

    \7\ Rule 17a-7(b)(4) describes the method for determining the 
current market price of securities that are not reported securities 
under Rule 11Aa3-1 (17 CFR 240.11Aa3-1), are not traded principally 
on an exchange and are not quoted in the NASDAQ system. 17 CFR 
270.17a-7(b)(4). Because the proper valuation of such securities may 
require more extensive inquiry than in the valuation of securities 
described in Rule 17a-7 (b)(1)-(b)(3), the Department believes that 
the Independent Fiduciary should receive advance notice that the 
transfer will entail such valuations.
    \8\ The Department is of the view that section II(c) requires 
that a Bank or Plan Adviser disclose, in the case of any fixed-
income securities allocated on the basis of aggregate value, the 
identity of all such securities.
---------------------------------------------------------------------------

    Under section II(f) of the exemption, the Independent Fiduciary 
must give the Bank or Plan Adviser prior written approval of the in-
kind transfer of the Client Plan's CIF assets to a Fund in exchange for 
shares of the Fund. Moreover, if the confirmation statements described 
in section II(g) are to be sent by facsimile or electronic mail, 
section II(f) requires that the Independent Fiduciary specifically 
approve the delivery of the confirmation statements in this manner.
    Section II(g) has been revised to specifically allow a Bank or Plan 
Adviser to send information confirming the in-kind transfer to the 
Independent Fiduciary of a Client Plan, by regular mail or personal 
delivery or, with the prior written approval of the Independent 
Fiduciary, by facsimile or electronic mail. However, in addition to the 
105 day distribution period for confirmation statements described in 
sections I(g) and II(g)(2) of the exemption, section II(g)(1) provides 
for another written confirmation to the Independent Fiduciary, not 
later than 30 days after the completion of the transaction, for 
securities that were valued in accordance with Rule 17a-7(b)(4). The 
additional confirmation must contain the following information: (a) the 
identity of each such security; (b) the current market price as of the 
date of the transaction of each such security involved in the 
transaction; and (c) the identity of each pricing service or market-
maker consulted in determining the value of such securities.
    Further, section II(h) requires the Bank or Plan Adviser to provide 
certain ongoing disclosures to the Independent Fiduciary of a Client 
Plan. Such written disclosures must include: (a) a copy of an updated 
prospectus for each Fund in which such plan has invested, which is to 
be provided at least on an annual basis; and (b) upon the request of 
the Independent Fiduciary, a report or statement (which may take the 
form of the most recent financial report, the current Statement of 
Additional Information, or some other written statement) containing a 
description of all fees paid by the Fund to the Bank or Plan Adviser. 
The purpose of this additional disclosure is to ensure that the 
Independent Fiduciary will continue to have the information necessary 
to effectively monitor the Fund investments made by the Client Plan.
    The Department wishes to note that the requirement under sections I 
and II of the exemption that all valuations of all plan assets 
transferred from a CIF to a Fund be determined in accordance with Rule 
17a-7 under the 1940 Act is designed to provide flexibility for future 
transactions. Thus, for example, if Rule 17a-7 is subsequently amended 
by the SEC to accommodate new pricing systems, Banks or Plan Advisers 
could take advantage of the amended Rule without having to request an 
amendment to the class exemption. However, the Department cautions that 
the exemption would not be available for transactions involving assets 
that are not valued by reference to sources independent of the Bank or 
Plan Adviser.
    Unlike the individual exemptions cited above, this class exemption 
does not grant relief for fees that the Bank or Plan Adviser may 
receive from the Fund as a result of the Client Plans' purchase of Fund 
shares. However, section III of this exemption provides that a purchase 
of Fund shares that complies with sections I and II will be deemed a 
purchase of shares of an open-end investment company for purposes of 
PTE 77-4, and in compliance with paragraphs (a), (d) and (e) of section 
II of that exemption. Compliance with all of the conditions of PTE 77-4 
would permit the Bank or Plan Adviser to receive investment advisory 
and similar fees from the Fund with respect to shares acquired by a 
Client Plan in accordance with this class exemption.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his duties with respect to the plan solely in the interests 
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) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, and based upon the entire record, the 
Department finds that the exemption is administratively feasible, in 
the interests of the plans and their participants and beneficiaries, 
and protective of the rights of participants and beneficiaries of such 
plans;
    (3) The exemption is applicable to a transaction only if the 
conditions specified in the class exemption are met; and
    (4) The exemption is supplemental to, and not in derogation of, any 
other provisions of the Code and the Act, 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.

Exemption

    Accordingly, the following exemption is granted under the authority 
of section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR Part 2570, Subpart B 
(55 FR 32836, 32847, August 10, 1990).

Section I. Retroactive Exemption for the Purchase of Fund Shares With 
Assets Transferred In-Kind From a CIF

    For the period from October 1, 1988 to August 8, 1997, the 
restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act 
and the taxes imposed by section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (E), shall not apply to the purchase by an 
employee benefit plan (the Client Plan) of shares of one or more open-
end management investment companies (the Fund or Funds) registered 
under the Investment Company Act of 1940, in exchange for assets of the 
Client Plan transferred in-kind to the Fund from a collective 
investment fund (the CIF) maintained by a bank (the Bank) or a plan 
adviser (the Plan Adviser), where the Bank or Plan Adviser is the

[[Page 42835]]

investment adviser to the Fund and also a fiduciary of the Client Plan. 
The transfer and purchase must be in connection with a complete 
withdrawal of the Client Plan's assets from the CIF, and the following 
conditions must be met:
    (a) No sales commissions or other fees are paid by the Client Plan 
in connection with the purchase of Fund shares.
    (b) All transferred assets are securities for which market 
quotations are readily available, or cash.
    (c) The transferred assets constitute the Client Plan's pro rata 
portion of all assets that were held by the CIF immediately prior to 
the transfer.
    (d) The Client Plan receives Fund shares that have a total net 
asset value equal to the value of the Client Plan's transferred assets 
on the date of the transfer, as determined with respect to securities, 
in a single valuation for each asset, with all valuations performed in 
the same manner, at the close of the same business day, in accordance 
with Securities and Exchange Commission Rule 17a-7 (using sources 
independent of the Bank or Plan Adviser and the Fund) and the 
procedures established by the Funds pursuant to Rule 17a-7.
    (e) An independent fiduciary with respect to the Client Plan (the 
Independent Fiduciary) receives advance written notice of an in-kind 
transfer and purchase of assets and full written disclosure of 
information concerning the Fund which includes the following:
    (1) A current prospectus for each Fund to which the CIF assets may 
be transferred;
    (2) A statement describing the fees to be charged to, or paid by, a 
Client Plan and the Funds to the Bank or Plan Adviser, including the 
nature and extent of any differential between the rates of the fees;
    (3) A statement of the reasons why the Bank or Plan Adviser may 
consider the transfer and purchase to be appropriate for the Client 
Plan; and
    (4) A statement of whether there are any limitations on the Bank or 
Plan Adviser with respect to which plan assets may be invested in 
shares of the Funds, and, if so, the nature of such limitations.
    (f) On the basis of the foregoing information, the Independent 
Fiduciary gives prior approval, in writing, for each purchase of Fund 
shares in exchange for the Client Plan's assets transferred from the 
CIF, consistent with the responsibilities, obligations and duties 
imposed on fiduciaries by Part 4 of Title I of the Act.
    (g) The Bank or Plan Adviser sends by regular mail or personal 
delivery to the Independent Fiduciary of each Client Plan that 
purchases Fund shares in connection with the in-kind transfer, no later 
than 105 days after completion of each purchase, a written confirmation 
of the transaction containing--
    (1) The number of CIF units held by the Client Plan immediately 
before the in-kind transfer, the related per unit value and the total 
dollar amount of such CIF units; and
    (2) The number of shares in the Funds that are held by the Client 
Plan immediately following the purchase, the related per share net 
asset value and the total dollar amount of such shares.
    (h) As to each Client Plan, the combined total of all fees received 
by the Bank or Plan Adviser for the provision of services to the Client 
Plan, and in connection with the provision of services to a Fund in 
which a Client Plan holds shares purchased in connection with the in-
kind transfer, is not in excess of ``reasonable compensation'' within 
the meaning of section 408(b)(2) of the Act.
    (i) All dealings in connection with the in-kind transfer and 
purchase between the Client Plan and a Fund are on a basis no less 
favorable to the Client Plan than dealings between the Fund and other 
shareholders.

Section II. Prospective Exemption for the Purchase of Fund Shares With 
Assets Transferred In-Kind From a CIF

    Effective after August 8, 1997, the restrictions of sections 406(a) 
and 406 (b)(1) and (b)(2) of the Act and the taxes imposed by section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to the purchase by an employee benefit plan 
(the Client Plan) of shares of one or more open-end management 
investment companies (the Fund or Funds) registered under the 
Investment Company Act of 1940, in exchange for assets of the Client 
Plan transferred in-kind to the Fund from a collective investment fund 
(the CIF) maintained by a bank (the Bank) or a plan adviser (the Plan 
Adviser), where the Bank or Plan Adviser is the investment adviser to 
the Fund and also a fiduciary of the Client Plan. The transfer and 
purchase must be in connection with a complete withdrawal of the Client 
Plan's assets from the CIF, and the following conditions must be met:
    (a) No sales commissions or other fees are paid by the Client Plan 
in connection with the purchase of Fund shares.
    (b) All transferred assets are securities for which market 
quotations are readily available, or cash.
    (c) The transferred assets constitute the Client Plan's pro rata 
portion of all assets that were held by the CIF immediately prior to 
the transfer. Notwithstanding the foregoing, the allocation of fixed-
income securities held by a CIF among Client Plans on the basis of each 
Client Plan's pro rata share of the aggregate value of such securities 
will not fail to meet the requirements of this subsection if:
    (1) The aggregate value of such securities does not exceed one (1) 
percent of the total value of the assets held by the CIF immediately 
prior to the transfer; and
    (2) Such securities have the same coupon rate and maturity, and at 
the time of the transfer, the same credit ratings from nationally 
recognized statistical rating agencies.
    (d) The Client Plan receives Fund shares that have a total net 
asset value equal to the value of the Client Plan's transferred assets 
on the date of the transfer, as determined with respect to securities, 
in a single valuation for each asset, with all valuations performed in 
the same manner, at the close of the same business day, in accordance 
with Securities and Exchange Commission Rule 17a-7 (using sources 
independent of the Bank or Plan Adviser and the Fund) and the 
procedures established by the Funds pursuant to Rule 17a-7.
    (e) An independent fiduciary with respect to the Client Plan (the 
Independent Fiduciary) receives advance written notice of the in-kind 
transfer and purchase of assets and full written disclosure of 
information concerning the Funds which includes the following:
    (1) A current prospectus for each Fund to which the CIF assets may 
be transferred;
    (2) A statement describing the fees to be charged to, or paid by, a 
Client Plan and the Funds to the Bank or Plan Adviser, including the 
nature and extent of any differential between the rates of the fees 
paid by the Fund and the rates of the fees paid by the Client Plan in 
connection with the Client Plan's investment in the CIF;
    (3) A statement of the reasons why the Bank or Plan Adviser may 
consider the transfer and purchase to be appropriate for the Client 
Plan;
    (4) A statement of whether there are any limitations on the Bank or 
Plan Adviser with respect to which plan assets may be invested in 
shares of the Funds, and, if so, the nature of such limitations;

[[Page 42836]]

    (5) The identity of all securities that will be valued in 
accordance with Rule 17a-7(b)(4) and allocated on the basis of the 
Client Plan's pro rata portion under section II(c); and
    (6) The identity of any fixed-income securities that will be 
allocated on the basis of each Client Plan's pro rata share of the 
aggregate value of such securities pursuant to section II(c).
    (f) On the basis of the foregoing information, the Independent 
Fiduciary gives prior approval, in writing, for each purchase of Fund 
shares in exchange for the Client Plan's assets transferred from the 
CIF, consistent with the responsibilities, obligations and duties 
imposed on fiduciaries by Part 4 of Title I of the Act. In addition, 
the Independent Fiduciary must give prior approval, in writing, for the 
receipt of confirmation statements described below in paragraph (g)(1) 
and (g)(2) by facsimile or electronic mail if the Independent Fiduciary 
elects to receive such statements in that form.
    (g) The Bank or Plan Adviser sends by regular mail or personal 
delivery or, if applicable, by facsimile or electronic mail to the 
Independent Fiduciary of each Client Plan that purchases Fund shares in 
connection with the in-kind transfer, the following information:
    (1) No later than 30 days after the completion of the purchase, a 
written confirmation which contains--
    (i) The identity of each transferred security that was valued for 
purposes of the purchase of Fund shares in accordance with Rule 17a-
7(b)(4);
    (ii) The current market price, as of the date of the in-kind 
transfer, of each such security involved in the purchase of Fund 
shares; and
    (iii) The identity of each pricing service or market-maker 
consulted in determining the current market price of such securities.
    (2) No later than 105 days after the completion of each purchase, a 
written confirmation which contains--
    (i) The number of CIF units held by the Client Plan immediately 
before the in-kind transfer, the related per unit value and the total 
dollar amount of such CIF units; and
    (ii) The number of shares in the Funds that are held by the Client 
Plan immediately following the purchase, the related per share net 
asset value and the total dollar amount of such shares.
    (h) With respect to each of the Funds in which the Client Plan 
continues to hold shares acquired in connection with the in-kind 
transfer, the Bank or Plan Adviser provides the Independent Fiduciary 
of the Client Plan with--
    (1) A copy of an updated prospectus of such Fund, at least 
annually; and
    (2) Upon request of the Independent Fiduciary, a report or 
statement (which may take the form of the most recent financial report, 
the current Statement of Additional Information, or some other written 
statement) containing a description of all fees paid by the Fund to the 
Bank or Plan Adviser.
    (i) As to each Client Plan, the combined total of all fees received 
by the Bank or Plan Adviser for the provision of services to the Client 
Plan, and in connection with the provision of services to a Fund in 
which a Client Plan holds shares acquired in connection with the in-
kind transfer, is not in excess of ``reasonable compensation'' within 
the meaning of section 408(b)(2) of the Act.
    (j) All dealings in connection with the in-kind transfer and 
purchase between the Client Plan and a Fund are on a basis no less 
favorable to the Client Plan than dealings between the Fund and other 
shareholders.

Section III. Availability of Prohibited Transaction Exemption (PTE) 77-
4

    Any purchase of Fund shares that complies with the conditions of 
either Section I or Section II of this class exemption shall be treated 
as a ``purchase or sale'' of shares of an open-end investment company 
for purposes of PTE 77-4 and shall be deemed to have satisfied 
paragraphs (a), (d) and (e) of section II of that exemption. 42 FR 
18732 (April 8, 1977).

Section IV. Definitions

    For purposes of this exemption:
    (a) The term ``Bank'' means a bank or trust company, and any 
affiliate thereof [as defined below in paragraph (b)(1)], which is 
supervised by a state or federal agency.
    (b) An ``affiliate'' of a person includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person.
    (2) Any officer, director, employee or relative of such person, or 
partner in any such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``collective investment fund'' or ``CIF'' means a 
common or collective trust fund or pooled investment fund maintained by 
a ``Bank'' as defined in paragraph (a) of this Section IV or by a 
``Plan Adviser'' as defined in paragraph (m) of this Section IV for the 
collective investment of the assets attributable to two or more plans 
maintained by unrelated employers.
    (e) The term ``Fund'' or ``Funds'' means any open-end management 
investment company or companies registered under the 1940 Act for which 
the Bank or Plan Adviser serves as an investment adviser, and may also 
serve as a custodian, shareholder servicing agent, transfer agent or 
provide some other secondary service (as defined below in paragraph (i) 
of this section).
    (f) The term ``net asset value'' means the amount calculated by 
dividing the value of all securities, determined by a method as set 
forth in a Fund's prospectus and Statement of Additional Information, 
and other assets belonging to each of the portfolios in such Fund, less 
the liabilities chargeable to each portfolio, by the number of 
outstanding shares.
    (g) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (h) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is independent of and unrelated to the Bank or Plan 
Adviser. For purposes of this exemption, the Independent Fiduciary will 
not be deemed to be independent of and unrelated to the Bank or Plan 
Adviser if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Bank or Plan Adviser;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of such fiduciary, is an officer, director, partner, employee 
of the Bank or Plan Adviser (or is a relative of such persons);
    (3) Such fiduciary, directly or indirectly receives any 
compensation or other consideration for his or her own personal account 
in connection with any transaction described in this exemption.
    If an officer, director, partner, employee of the Bank or Plan 
Adviser (or relative of such persons), is a director of such 
Independent Fiduciary, and if he or she abstains from participation in 
(i) the choice of the Client Plan's investment adviser, and (ii) the 
approval of any purchase or sale between the Client Plan and the Funds, 
as well as any transaction described in Sections I and II above, then 
paragraph (h)(2) of this Section IV shall not apply.

[[Page 42837]]

    (i) The term ``secondary service'' means a service provided by a 
Bank or Plan Adviser to a Fund other than investment management, 
investment advisory or similar services.
    (j) The term ``fixed-income security'' means any interest-bearing 
or discounted government or corporate security with a face amount of 
$1,000 or more that obligates the issues to pay the holder a specified 
sum of money, at specific intervals, and to repay the principal amount 
of the loan at maturity.
    (k) The term ``Client Plan'' means a pension plan described in 29 
CFR 2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, and 
a plan described in section 4975(e)(1) of the Code, but does not 
include an employee benefit plan established or maintained by the Bank 
or a Plan Adviser for its own employees.
    (l) The term ``security'' shall have the same meaning as defined in 
section 2(36) of the 1940 Act, as amended, 15 U.S.C. 80a-2(36) (1996).
    (m) The term ``Plan Adviser'' means an investment adviser 
registered under the Investment Advisers Act of 1940, and any 
``affiliate'' thereof [as defined above in paragraph (b)(1)].
    (n) The term ``business day'' means a banking day as defined by 
federal or state banking regulations.
    (o) The term ``unrelated employers'' means persons which are not, 
directly or indirectly, affiliates, as defined above in paragraph 
(b)(1).
    (p) The term ``personal delivery'' means delivery of the 
information described in sections I(g) and II(g) above to an individual 
or individuals designated by the Client Plan to act on behalf of the 
Independent Fiduciary.

    Signed at Washington, D.C., this 1st day of August, 1997.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare 
Benefits Administration, Department of Labor.
[FR Doc. 97-21003 Filed 8-7-97; 8:45 am]
BILLING CODE 4510-29-M