[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]
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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.
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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\
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\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.
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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.
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\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).
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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.
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\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.
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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.
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\4\ See the list of exemptions cited in Footnote 2.
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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.
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\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.
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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.
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\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.
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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\
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\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.
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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