[Federal Register Volume 62, Number 213 (Tuesday, November 4, 1997)]
[Notices]
[Pages 59744-59749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29175]
[[Page 59744]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 97-60; Exemption Application No. D-
10319]
Grant of Individual Exemptions; TCW Group, Inc., Trust Company of
the West, TCW Funds Management, Inc., TCW Galileo Funds, (Collectively;
TCW)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) transferred the authority of the Secretary of
the Treasury to issue exemptions of the type proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
TCW Group, Inc., Trust Company of the West, TCW Funds Management, Inc.,
TCW Galileo Funds, Inc. (Collectively; TCW), Located in Los Angeles,
California
[Prohibited Transaction Exemption 97-60; Exemption Application No. D-
10319]
Exemption
Section I. Covered Transactions
The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(l)(A) through (D) of the Code, shall not apply to
the acquisition or redemption of units (the Units) in the TCW Life
Cycle Trusts (the Trusts, as defined in Section III) by individual
account plans described in section 3(34) of the Act (the Plans),
including Plans sponsored by TCW, in connection with such Plans'
participation in the TCW Portfolio Solutions Program (the Program), and
the acquisition or redemption of shares (the Shares) in the TCW Galileo
Funds (the Funds, as defined in Section III) by the Trusts.
In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) and (F) of the Code, shall not apply
to the receipt of fees by TCW as a result of the provision of advice in
connection with the investment by the Plans in the Trusts, a Money
Market Fund, a Guaranteed Investment Contract (GIC) or similar
investment vehicle, under the Program.
This exemption is subject to the following conditions set forth
below in Section II.
Section II. General Conditions
A. The terms of each purchase or redemption of the Units in the
Trusts are at least as favorable to an investing Plan as those
obtainable in an arm's length transaction with an unrelated party.
B. The participation of a Plan in the Program will be expressly
authorized in writing by a fiduciary of the Plan who is independent of
TCW.1 With respect to the Plans sponsored by TCW, this
condition will be deemed satisfied for purposes of the purchase or
redemption of Units in the Trusts, if the purchase and redemption of
Shares in the Funds by the Trusts meets the conditions of Prohibited
Transaction Exemption (PTE) 77-3 (42 FR 18743, April 8, 1977).
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\1\ In the case of a Plan sponsored by TCW, such fiduciary need
not be independent of TCW.
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C. Participation in the Program will be limited to Plans which have
a minimum of $5,000,000 in plan assets as of the end of the most recent
plan year.
D. No Plan will pay a fee or commission by reason of the
acquisition or redemption of Units in the Trusts or Shares in the
Funds.
E. The price paid or received by the Plans for the Units in the
Trusts is the ``net asset value'' per Unit, at the time of the
transaction. The Trusts will buy and sell shares in the Funds on the
same basis as other shareholders.
F. The total fees paid to TCW and its affiliates by each Plan for
the provision of services in connection with its investment in the
Units of the Trusts under the Program does not exceed ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act. In
this regard, the total amount paid by a Trust to TCW or unaffiliated
third persons for services necessary to operate the Trusts, and for TCW
to provide what may be considered investment advice, will not exceed 1%
per annum of the average daily ``net asset value'' of the shares of the
Funds and cash held by such Trust.
G. TCW will not receive any fees from the Plans whose participants
(the Participants) receive recommendations concerning investment in a
Trust, nor from the Trusts in which the Plans invest. Notwithstanding
the foregoing, TCW will not be precluded from receiving: (i) fees from
the Funds which are paid by other investors in the Funds, and which are
permissible under the Investment Company Act of 1940, as amended (the
1940 Act); (ii) reimbursement for ``direct expenses'' within the
meaning of 29 CFR 2550.408c-2 in connection with the operation of the
Program; or (iii) reimbursement for direct expenses which TCW pays to
unaffiliated third persons for goods and services provided to the
Trusts and/or Plans under the Program.
H. Any investment advice given to the Participants by TCW under the
Program will be based on the responses provided by the Participants to
worksheet questions which are developed and designed by an independent
financial expert (the Financial Expert, as defined in Section III (F))
and the independent behavioral expert (the Behavioral Expert as defined
in Section III (G), collectively; the Experts).
[[Page 59745]]
I. Any investment advice given to the Participant will be
implemented only at the express direction of the Participant.
J. Under the Program, TCW will give investment advice to the
Participants that is limited to the Trusts, a Money Market Fund, a GIC
or a similar investment vehicle that may or may not be affiliated with
TCW.2
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\2\ TCW will not receive any fees or other compensation with
respect to recommendations regarding investments in an unrelated
Money Market Fund, GIC or similar investment vehicle.
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K. The compensation of neither Expert is affected by the decisions
made by the participants and beneficiaries regarding investment of the
assets of their accounts among the Trusts.
L. To the extent any assistance is provided by TCW, or unaffiliated
third persons, to the Participants in completing the worksheets and
questions designed by the Experts, such assistance is provided by
individuals whose compensation is not affected by the investment by the
participants and beneficiaries of the assets of their accounts among
the Trusts.
M. With respect to its participation in the Program, an independent
Plan fiduciary must receive, prior to the Plan's investment in any of
the Trusts, complete and detailed written information regarding the
Trusts and the Funds which will include, but may not be limited to:
(1) A description of the Program;
(2) The allocation of the Funds in each Trust specified by the
Financial Expert, and the basis upon which the Funds in each Trust will
be rebalanced so that the Funds' proportionate value in each Trust
equals that specified by the Financial Expert;
(3) Upon request by the Plan fiduciary, the current basis upon
which the asset allocation of the Trusts was derived;
(4) Full disclosure of all the expenses charged to the Trusts, and
how such expenses are allocated;
(5) Full disclosure of all the fees charged by the Funds, which may
be accomplished by providing the current prospectus for each of the
Funds comprising a Trust; and
(6) A copy of the proposed exemption and the final exemption, as
published in the Federal Register.
N. (1) Prior to investing in a Trust, each Participant will receive
full disclosures which will include, but may not be limited to:
(a) Disclosure regarding composition of the Trusts, and a
description of the underlying Funds;
(b) Upon request, a Participant will also receive a copy of the
Funds' prospectus 3; and
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\3\ TCW anticipates that most Plans which participate in the
Program will comply with section 404(c) of the Act. Section 404(c)
of the Act requires, in part, that specific disclosures be provided
by the Plans to the participants and beneficiaries. See 29 C.F.R.
2550.404c-1(b)(2)(i)(A) and (b)(2)(i)(B)(2)(iv) and (v).
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(c) The Participant can meet with a facilitator familiar with the
Program, or contact such a facilitator using a toll-free number.
(2) Subsequent to his participation in the Program, each
Participant will receive the following disclosures which will include,
but may not be limited to:
(a) Written confirmations of purchase and redemption transactions
for each Participant within 10 days of each such transaction;
(b) Telephone access to the quotations of the Participant's account
balance; and
(c) A periodic newsletter describing the Trusts' performance during
the preceding period, market conditions and economic outlook and, if
applicable, prospective changes in the asset allocation model and the
reasons for the change.
O. Each Plan fiduciary will receive the following written
disclosures with respect to its ongoing participation in the Program
which will include, but may not be limited to:
(1) A quantitative annual report which will include--
(a) Performance Summary for each Fund;
(b) Schedule of Investments for each Fund;
(c) Statements of Assets and Liabilities for each Fund;
(d) Statements of Operations for each Fund;
(e) Statements of Changes in Net Assets for each Fund;
(f) Notes to Financial Statements, which include but are not
limited to, primary investment objective of each Fund;
(g) The performance and rate of return achieved for each Trust and
the Funds in which the Trust is invested; and
(h) A breakdown of all expenses and fees at the Fund and Trust
levels.
P. (1) Except as provided in Section II (P)(2) below, the
independent Plan fiduciary will receive, at least 30 days advance
notice of any material change in the information described in Section
II (M)(2) or (3) regarding the composition of the Trusts or the basis
on which the Trusts' assets are rebalanced, and will receive at least
30 days advance notice of any material increase in expenses at the
Trust level described in Section II (M)(4);
(2) The Financial Expert will have the sole responsibility for
determining the materiality of any changes in the information in
Section II (M)(2) or (3). TCW will determine the materiality of any
changes described in Section II (M)(4) regarding the expenses charged
to the Trusts. For any changes in the information in Section II (M)(2)
or (3) which are not material, the independent Plan fiduciaries will be
notified within 10 days of such change. For any changes in the
information in Section II (M)(4) which are not material the independent
Plan fiduciary will be notified at least quarterly. Independent Plan
fiduciaries will be afforded, at all times, a reasonable opportunity to
terminate their Plans' participation in the Program as described in
Section II (Q)(2) below; and
(3) Under extraordinary circumstances outside the control of TCW,
the independent Plan fiduciary may not be provided advance notice by
TCW of material changes in the information listed in Section II (M)(2)
or (3) regarding the composition of the Trusts or the basis on which
the Trusts' assets are rebalanced. Under such circumstances, the Plan
fiduciaries will be notified within 10 days of any such change. The
Financial Expert will determine whether the circumstance is
extraordinary and if the change in the composition of the Trusts or in
the basis for rebalancing is material.
Q. (1) The Units in the Trusts will be redeemed by TCW, at no
charge. Redemption requests received in proper form prior to the close
of trading on the New York Stock Exchange (NYSE) will be affected at
the net asset value per Unit determined on that day. Redemption
requests received after the close of regular trading on the NYSE will
be effected at the net asset value at the close of business of the next
business day; and
(2) The Plans can redeem their Units in the Trusts on five business
days (or less) notice.
R. The Trusts permit participants and beneficiaries to purchase or
redeem an interest in the Trust on any day that the shares of the Funds
contained within the Trust can be purchased or redeemed. This paragraph
(R) does not preclude any Plan from restricting such purchases and
redemptions to a less frequent basis.
S. All transactions involving securities owned by the Funds will be
executed through brokers in which TCW has no interest and who are
unrelated to TCW. TCW will not receive any consideration from such
brokers in connection with their selection, or for effecting or
executing such transactions
[[Page 59746]]
other than research which will benefit the shareholders of the Funds,
including the Trusts. TCW brokerage practices will reasonably comply
with the requirements of section 28(e) of the Securities Exchange Act
of 1934.
T. (1) The independent fiduciaries of Plans participating in the
Program will receive full written disclosure, in a statement separate
from a Fund prospectus, of any proposed increases in the rates of
advisory or other fees charged by TCW to the Funds for services (or of
any material increase in expenses charged by TCW to the Funds or fees
charged by TCW for internal accounting services for the Funds) at least
30 days prior to the effective date of such increase, accompanied by a
termination form (the Termination Form, as described in (2) below) and
shall receive full written disclosure in a Fund prospectus, or
otherwise, of any such increases in the rate of fees charged by TCW to
the Funds; and
(2) The Termination Form shall provide an election to terminate
participation in the Program and shall contain instructions on the use
of the form that includes the following information: (a) the
authorization to participate in the Program is terminable at will by
the Plan, without penalty to the Plan, upon receipt by TCW of written
notice from the Plan; and (b) failure to return the Termination Form
will result in the continued authorization of the Plan's participation
in the Program, including investment in the Trusts.
U. TCW maintains, for a period of six years, the records necessary
to enable the persons described in paragraph (V) of this Section II to
determine whether the conditions of this exemption have been met,
including a record of each recommendation made to the participants and
beneficiaries, and their subsequent investment choices, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to the circumstances beyond the control of TCW and/or
its affiliates, the records are lost or destroyed prior to the end of
the six-year period; and
(2) no party in interest, other than TCW, shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act, or
to the taxes imposed by section 4975 (a) and (b) of the Code if the
records are not maintained or not available for examination as required
by paragraph (V)(1) of this Section II below.
V. (1) Except as provided in subparagraph (2) of this paragraph (V)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (U) of
this Section II are unconditionally available at their customary
location for examination during normal business hours by--
(a) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission,
(b) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary,
(c) Any contributing employer to any participating Plan, or any
duly authorized employee or representative of such employer, and
(d) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described in paragraphs (1)(b)-(d) of this
paragraph (V) shall be authorized to examine trade secrets of TCW, or
commercial or financial information which is privileged or
confidential.
Section III. Definitions
A. The term ``Trust'' or ``Trusts'' means a commingled trust or
trusts which satisfy the requirements of IRS Revenue Ruling 81-100,
1981-1 C.B. 326 which invest exclusively in one or more of the
portfolios of TCW Galileo Funds, Inc., cash or cash equivalents.
B. The term ``Fund'' or ``Funds'' means one or more of the
portfolios of TCW Galileo Funds, Inc., an open-end investment company
registered under the 1940 Act.
C. The term ``TCW'' means the TCW Group, Inc., and any affiliates
thereof as defined below in paragraph (D) of this Section III.
D. The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
E. The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
F. The term ``Financial Expert'' means Professor Jeffrey F. Jaffe,
Ph.D., or a successor Financial Expert. Less than 5 percent (5%) of
Professor Jaffe's gross income, for federal income tax purposes, in his
prior tax year, will be paid by TCW in the immediately subsequent tax
year. If the Financial Expert has any income which is not included in
the gross income (e.g., interest income which is exempt from federal
income taxes), such income may be added to his gross income for his
purpose. In the event TCW determines to replace Professor Jaffee or any
of his successors, TCW will send a letter to the Department 60 days
prior to such replacement. The letter will specify that the successor
Financial Expert has responsibilities, experience and independence
similar to those of Professor Jaffee. If the Department does not object
to the successor, the new appointment will become effective on the 60th
day after the Department receives such letter.
G. The term ``Behavioral Expert'' means Professor Shlomo Benartzi,
or a successor Behavioral Expert. In the event TCW determines to
replace Professor Benartzi or any of his successors, TCW will send a
letter to the Department 60 days prior to such replacement. The letter
will specify that the successor has responsibilities, experience and
independence similar to that of Professor Benartzi. If the Department
does not object to the successor, the new appointment will become
effective on the 60th day after the Department receives such letter.
H. The term ``net asset value'' of a Trust is defined to mean the
fair market value of shares in the Funds and cash and cash equivalents,
minus the accrued expenses of a Trust.
EFFECTIVE DATE: This exemption is effective as of August 1, 1997, the
date the notice of proposed exemption was published in the Federal
Register.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the notice of proposed exemption (the Notice) published on August 1,
1997 at 62 FR 41433.
Written Comments
The Department received two written comments with respect to the
Notice and no requests for a public hearing. The first comment was
filed by TCW and generally requests clarifications and modifications to
the Notice. Set forth below in paragraph 1 are the relevant points of
the TCW comment.
The second comment was filed by a representative of the 401(k)
Association. This comment generally raises issues about certain aspects
of the Notice, and was subsequently sent by the Department to TCW for
their response. Set forth below in paragraph 2 is a list of the issues
raised by the commenter (the Commenter) together with the responses to
those points by TCW.
[[Page 59747]]
1. Discussion of TCW's Comment
Section I of the Notice exempts, in relevant part, the provision of
advice, and the receipt of fees as a result thereof, in connection with
the investment by the Plans in the Trusts under the Program.
TCW states that the Notice makes clear in Condition J of Section II
of the General Conditions and in the Summary of Facts and
Representations (Summary) that, in addition to the Trusts, the Program
will also make available non-Trust investment vehicles, i.e., ``a Money
Market Fund, a Guaranteed Investment Contract (GIC) or a similar
investment vehicle that may or may not be affiliated with TCW.'' While
it is anticipated that the Program will normally produce a
recommendation for a single Trust, there could be instances in which a
non-Trust investment vehicle is recommended. TCW suggests that the last
part of the second paragraph of Section I of the Notice be modified to
take into account the potential investment by the Plans in the Trusts,
a Money Market Fund, a Guaranteed Investment Contract (GIC) or a
similar investment vehicle under the Program.
In addition, the Department has determined to modify the above-
referenced language in Section I in order to clarify that relief from
the prohibited transaction restrictions of section 406(b) of the Act is
provided only for the receipt of fees by TCW as a result of the
provision of advice by TCW to participants of plans who participate in
the Program. Nothing contained in this exemption provides relief from
the general standards of fiduciary conduct described in section 404 of
the Act for the investment advice provided to participants. Thus, TCW
remains fully responsible under the Act for its fiduciary actions. We
also note that the plan fiduciary (usually the employer/ sponsor) is
responsible under the Act for the decision to retain TCW, as well as
for periodically monitoring TCW's performance.
Therefore, the Department has modified the above language of
Section I of the final exemption to read as follows:
``In addition, the restrictions of section 406(b) of the Act and
the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(E) and (F) of the Code, shall not
apply to the receipt of fees by TCW as a result of the provision of
advice in connection with the investment by the Plans in the Trusts, a
Money Market Fund, a Guaranteed Investment Contract (GIC) or similar
investment vehicle, under the Program.''
TCW also suggests that a new sentence should be added at the end of
section 13 (Section) of the Summary. The new sentence should read:
``References to Trust or Trusts in this paragraph also encompass
the other investment options available under the Program.'' The
Department concurs with this comment.
2. TCW suggests that Condition C of Section II and Section 16(f) of
the Summary be modified to provide that the amount of plan assets
referred to in those provisions be measured, ``* * * as of the end of
the most recent plan year.''
The Department concurs with this comment and has modified Condition
C of Section II of the final exemption.
3. TCW requests clarification regarding Condition L of Section II.
Although Condition L of Section II is intended to preclude individuals
who provide assistance to Participants from receiving compensation
which is affected by the specific investments made by such Participants
among the Trusts, such individuals may receive enhanced compensation
based on the amount invested in the entire Program by all Participants,
or by the Participants which they or their teams assist.
4. TCW notes that Condition Q (1) of Section II should indicate
more clearly when the net asset value is measured for the purpose of
effecting redemption requests received after the close of regular
trading on the NYSE when NYSE is closed the next day. TCW suggests that
the last phrase in the third sentence in Condition Q(1) ``* * * except
on weekends or holidays when the NYSE is closed'' be deleted and that
the word ``business'' be inserted between the words ``next'' and
``day'' such that the phrase reads, in relevant part, ``* * * the close
of business of the next business day.''
The Department concurs with this comment and has modified Condition
Q (1) of Section II of the final exemption.
5. TCW also suggests that in the definition of ``net asset value''
contained in Paragraph H of Section III, the words ``and cash
equivalents'' should be added in the third line after the word
``cash'', such that the definition reads as follows:
``The term `net asset value' of a Trust is defined to mean the fair
market value of shares in the Funds and cash and cash equivalents,
minus the accrued expenses of a Trust.''
The same change should be made in the next-to-last sentence in
Section 4 of the Summary such that the sentence reads as follows:
``The Trusts trade at the net asset value of the amalgam of the
Funds in which they are invested, plus any cash and cash equivalents
they hold.''
The Department concurs with this comment and has modified Paragraph
H of Section III of the final exemption.
6. TCW represents that Continental Asset Management Corp.
referenced in Section 1 of the Summary is now named TCW Advisors Inc.
and still remains an SEC registered advisor.
7. TCW suggests that to be consistent with footnote 6 of the
Notice, the third sentence in Paragraph 2 of the Summary should begin
with ``It is anticipated that * * *'' such that the sentence should
read:
``It is anticipated that virtually all of the Plans participating
in the Program will be designed to comply with the provisions of
section 404(c) of the Act.'' The Department concurs with this comment.
Additionally, TCW comments that to more accurately reflect the
Worksheet process, the sixth and following sentences in Paragraph 2 of
the Summary should read as follows:
``The Worksheets consist of a series of questions designed to
assess the Participants' retirement needs and levels of risk tolerance,
including his or her current Plan and non-Plan investments, anticipated
future savings and retirement goals. Upon completion of the Worksheets,
a Participant's response will be analyzed and each Participant will
receive a written recommendation from TCW of an appropriate Trust (or
other investment vehicle under the Program) for investment. Matching
the Worksheet responses to projections of the risk and return
characteristics of portfolios available under the Program will allow
the selection of a portfolio consistent with that Participant's
retirement needs and risk tolerance.''
The Department concurs with this comment.
8. TCW suggests that to describe more accurately the quantitative
annual report to be provided by TCW to the Plan Fiduciaries, the second
sentence of the second paragraph in Paragraph 10 of the Summary should
read as follows:
``The annual report will enable the Plan Fiduciaries to determine
whether the Program has increased or maintained Plan participation, has
increased or maintained the level of Participants' investment or
deferrals under the Plan, or has achieved more appropriate asset
allocation for the investment of the Plan Participants' accounts.''
The Department concurs with this comment.
[[Page 59748]]
9. TCW also states that to make clear that approval by the
Financial Expert is necessary for the creation of any Separate Trust,
the word ``only'' should be inserted between the words ``utilized'' and
``if'' in the second sentence of subsection (b) of Paragraph 16 of the
Summary such that the modified sentence reads as follows:
``A Separate Trust may be utilized only if the Financial Expert
approves such modification.''
The Department concurs with this comment.
2. Discussion of the Second Comment
A. Independence of the Financial Expert
In this regard, the Commenter is concerned that TCW will have
little or no control over the results of investment recommendations
under the Program. Further, the Commenter suggests that Professor
Jaffe, the Financial Expert, will be insufficiently involved in the
Program due to the 5% overall limit on the amount of income derived
from TCW. In addition, the Commenter questions whether the Financial
expert will be assuming any personal responsibility for the provision
of advice. In response, TCW maintains that TCW will not control the
results of investment recommendation under the Program; rather, as
stated throughout the Notice and as a specific condition in Section II
of the Notice and this exemption, those recommendations will be based
on responses to the worksheet questions developed and designed by the
independent Experts.
As to Professor Jaffe, TCW responds that the 5% limit on his
compensation is designed to ensure that he does not depend too heavily
on TCW for compensation, but remains independent of TCW.
The Commenter further suggests that Professor Jaffe should not be
permitted to be contractually indemnified by TCW. TCW responds by
stating that if Professor Jaffe is so indemnified, it will not make him
any less independent of TCW. To the contrary, a contractual indemnity
would give him rights in dealing with TCW that he might otherwise lack.
Also, the amount of indemnification offered to Professor Jaffe by TCW
will not be dependent on the nature of the advice provided the
Participant. Further, as TCW points out, the Department recognizes that
even indemnities relating to breaches of statutory fiduciary duties are
permissible under the Act, provided that they are not paid from plan
assets, or do not attempt to induce a breach of fiduciary duty. (See 29
CFR section 2509.75-4). TCW also maintains that it has every incentive
to respect the professional independence of Professor Jaffe because he
is central to the operation of the Program, and intends to structure
any agreement with Professor Jaffe so as to ensure his independence.
The Commenter also raises similar questions regarding the
independence of persons who will do computer programming in connection
with the Program in as much as such programmers are hired by TCW. TCW
notes that the Commenter has misunderstood the role of the programmers.
The programmers will perform a ministerial function, i.e., to handle
the technical aspects of programming. The substantive aspects of the
computer programs will be controlled by the Financial Expert and the
Behavioral Expert. Therefore, TCW maintains that concerns about
compensation or indemnification of the programmers is misplaced. In any
event, TCW believes that preclusion of any indemnity of the programmers
would be inappropriate for the same reasons expressed as to Professor
Jaffe.
b. The Fee Arrangements
A second concern of the Commenter appears to be fee arrangements
associated with the Program. The Commenter appears to question the
reasonableness of the fee arrangements and what the Commenter refers to
as the 1% fee on a participant's account balance. TCW notes that there
is no such fee; rather, the 1% figure refers to a cap that limits the
amount of direct expenses payable from the Trusts for the services
necessary to operate the Program. The only fees that TCW will receive
are the normal fees charged for advisory services to the underlying
Funds. These fees are paid from the Funds and would affect Participants
investing in the Funds through the Program in exactly the same manner
as any other investor in the Funds.
There will be no fees paid to TCW by the Trusts or by any Plan for
advisory services or for any other services necessary for the operation
of the Program. The Commenter apparently misinterpreted a reference in
the Notice to a cap of 1% of a Trust's net asset value per annum on
amounts payable by a Trust for services necessary to operate the
Program. This cap is discussed in more detail in Section 19 of the
Summary in the Notice. As Section 19 states, these expenses will
include reimbursement to TCW for direct expense payments to third
parties unaffiliated with TCW. As stated in the last paragraph of
Section 18 of the Summary, to the extent that TCW itself receives
reimbursement of any expenses, it will be limited to reimbursement of
``direct expenses'' within the meaning of 29 CFR section 2550.408c-2.
In short, TCW will receive no fees in connection with the Program
other than normal advisory fees in connection with the mutual funds.
The 1% cap on direct expenses paid by the Trusts is a safeguard to
ensure that the Trusts do not pay excessive expenses; it is not
intended to, and would not, authorize any payment of fees to TCW from a
Trust. TCW expressly states that the Plan Participants' accounts will
not be charged fees by TCW in connection with the Program. Furthermore,
Plan Participants will have complete discretion whether to invest in
any Trusts and will be free to accept or reject any investment
recommendations made in connection with the Program.
c. Recommendations
To address his concerns, the Commenter recommends that the
following six specific recommendations be adopted in any final grant of
the exemption by the Department:
1. Require those individuals/entities that are providing the
advisory-related services to assume the liability exposure for the
services they are providing. Prohibit TCW or any other entity from
indemnifying them.
2. Limit the compensation that is paid for this service to a
maximum amount per participant, such as $250.00.
3. Require each participant to decide whether he/she wants this
additional service. The participant also should be able to discontinue
the service at any time.
4. Require an independent audit by one of the major auditing firms
at least annually of the process and the entities involved to certify
that there is in fact independence.
5. Require the submission to DOL of a signed disclosure form for
each employer that buys this service.
6. Require TCW to submit to DOL annually a confirmation that the
disclosure conditions have been satisfied. This notice should include a
list of all employers in the program, and it should be signed by the
CEO of the TCW Group.
In response to these recommendations, TCW maintains the following.
The first recommendation regarding indemnity has been addressed
above. TCW maintains that this recommendation is unnecessary and
unreasonable.
The second and third recommendations appear to be based on the
misunderstanding relating to the 1%
[[Page 59749]]
fee discussed above. TCW maintains that because there is no such fee,
there is no reason to change its form or limit it. A Participant is, as
noted above, already completely free to decide whether to begin or to
discontinue investments under the Program.
The last three recommendations do not appear to be otherwise
discussed in the comment letter. TCW's general response to these
recommendations is that they will likely add unnecessary expense to the
Program without any corresponding benefit. To the extent that these
recommendations arise from the Commenter's misunderstanding of the fee
arrangement and other aspects of the Program, they should be rejected
by the Department on that basis.
Specifically, it is not clear to TCW exactly how an auditing firm
would perform an audit to verify independence; as a practical matter,
because the independence of the Experts is central to the Program and
this exemption, TCW would have every incentive to ensure that
independence is maintained. Similarly, if the Department wishes to
audit the Program, or to monitor compliance with the conditions of the
exemption, it will exercise its statutory powers under section 504 of
the Act. Alternatively, the Department can access the relevant records
pursuant to Condition V of Section II of the Notice and of this
exemption. Imposing an additional requirement that the names of the
plan sponsors who have selected the Program be submitted to the
Department along with the signed disclosure forms may act as a
deterrent to the plan sponsors' selection of the Program. Furthermore,
TCW is fully committed to complying with the substantive disclosures
requirement contained in the Notice and in this exemption because such
a requirement will provide meaningful information to the Plan
Participants and fiduciaries. TCW states that imposing additional
requirements would be detrimental to the Program while offering no
additional protection to the Participants.
The Department has considered the comments and the responses set
forth by TCW and has determined that no modification of this exemption
is necessary regarding the points raised by the Commenter. With respect
to the recommendations of the Commenter, the Department notes that each
exemption is subject to the explicit condition that the material facts
and representations submitted in support of an application are true and
accurate. The exemption application contains the representations of the
applicant. Many such representations are reflected in the terms and
conditions of the exemption. These terms and conditions provide for the
independence of the Experts and the disclosures to be provided by TCW.
Thus, to the extent that TCW does not comply with the terms and
conditions of the exemption, the exemption would be void.
After giving full consideration to the entire record, including the
written comments, the Department has decided to grant the exemption
subject to the modifications or clarifications described above. The two
comment letters have been included as part of the public record of the
exemption application. The complete exemption file is available for
public inspection in the Public Disclosure Room of the Pension and
Benefits Administration, Room N-5638, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington DC 20210.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department
of Labor, telephone (202) 219-8883. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the exemptions does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional rules. Furthermore, the
fact that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application are true and complete and accurately describe all material
terms of the transaction which is the subject of the exemption. In the
case of continuing exemption transactions, if any of the material facts
or representations described in the application change after the
exemption is granted, the exemption will cease to apply as of the date
of such change. In the event of any such change, application for a new
exemption may be made to the Department.
Signed at Washington, D.C., this 30th day of October, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-29175 Filed 11-3-97; 8:45 am]
BILLING CODE 4510-29-P