[Federal Register Volume 63, Number 216 (Monday, November 9, 1998)]
[Notices]
[Pages 60391-60398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29964]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10574]


Notice of Proposed Individual Exemption to Amend Prohibited 
Transaction Exemption (PTE) 94-50 Involving Salomon Smith, Barney Inc. 
(Salomon Smith Barney) Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of 
Labor.

ACTION: Notice of proposed individual exemption to modify PTE 94-50.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed individual exemption 
which, if granted, would amend PTE 94-50 (59 FR 32024, June 21, 1994), 
an exemption granted to Smith Barney, Inc. (Smith Barney), the 
predecessor of Salomon Smith Barney. PTE 94-50 relates to the operation 
of the TRAK Personalized Investment Advisory Service product (the TRAK 
Program) and the Trust for TRAK Investments (subsequently renamed the 
Trust for Consulting Group Capital Markets Funds) (the Trust). If 
granted, the proposed exemption would affect participants and 
beneficiaries of and fiduciaries with respect to employee benefit plans 
(the Plans) participating in the TRAK Program.

EFFECTIVE DATE: If granted, the proposed amendments will be effective 
as of November 9, 1998.

DATES: Written comments and requests for a public hearing should be 
received by the Department on or before December 24, 1998.

ADDRESSES: All written comments and requests for a public hearing 
(preferably, three copies) should be sent to the Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, N.W., 
Washington, D.C. 20210, Attention: Application No. D-10574. The 
application pertaining to the proposed exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W., 
Washington, D.C. 20210.

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

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed exemption that would amend PTE 94-
50. PTE 94-50 provides an exemption from certain prohibited transaction 
restrictions of section 406 of the Employee Retirement Income Security 
Act of 1974 (the Act) and from the sanctions resulting from the 
application of section 4975 of the Internal Revenue Code of 1986 (the 
Code), as amended, by reason of section 4975(c)(1) of the Code. 
Specifically, PTE 94-50 provides exemptive relief from the restrictions 
of section 406(a) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, for the purchase or redemption 
of shares in the Trust by an employee benefit plan, an individual 
retirement account (the IRA), or a retirement plan for a self-employed 
individual (the Keogh Plan). PTE 94-50 also provides exemptive relief 
from 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, with respect to the 
provision, by the Consulting Group of Smith Barney (the Consulting 
Group), of investment advisory services to independent fiduciaries of 
participating Plans (the Independent Plan Fiduciaries) that might 
result in such fiduciary's selection of an investment portfolio (the 
Portfolio) under the TRAK Program for the investment of Plan 
assets.1
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    \1\ On October 5, 1992, the Department granted PTE 92-77 at 55 
FR 45833. PTE 92-77 permitted Shearson Lehman Brothers, Inc. 
(Shearson Lehman) to make the TRAK Program available to Plans that 
acquired shares in the Trust. In this regard, PTE 92-77 permitted 
Plans to purchase or redeem shares in the Trust and allowed the 
Consulting Group to provide investment advisory services to an 
Independent Fiduciary of a Plan which might result in such 
fiduciary's selection of a Portfolio in the TRAK Program for the 
investment of Plan assets.
    Subsequent to the granting of PTE 92-77, on July 31, 1993, Smith 
Barney acquired certain assets of Shearson Lehman associated with 
its retail business, including the TRAK Program, and applied for and 
received a new exemption (PTE 94-50) for the ongoing operation of 
the TRAK Program. Essentially, PTE 94-50 amended and replaced PTE 
92-77. However, because of certain material factual changes to the 
representations supporting PTE 92-77, the Department determined that 
the exemption was no longer effective for use by Smith Barney and 
its subsidiaries as of the date of the asset sale.

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[[Page 60392]]

    Besides the transactions described above, PTE 94-50 permitted Smith 
Barney to add a daily-traded collective investment fund (the GIC Fund) 
to the existing Fund Portfolios and to describe the various entities 
operating the GIC Fund. Further, PTE 94-50 replaced references to 
Shearson Lehman with references to Smith Barney. PTE 94-50 is effective 
as of July 31, 1993 for the transactions described in PTE 92-77 and 
effective as of March 29, 1994 with respect to transactions involving 
the GIC Fund.
    As of December 31, 1997, the TRAK Program held assets that were in 
excess of $8.4 billion. Of those assets, approximately $1.7 billion 
were held in 540, 401(k) Plan accounts and approximately 57,100 
employee benefit plan and IRA/Keogh-type accounts. At present, the 
Trust consists of 13 Portfolios that are managed by the Consulting 
Group and advised by one or more unaffiliated sub-advisers selected by 
Salomon Smith Barney.
    Salomon Smith Barney has informed the Department of certain 
changes, which are discussed below, to the facts underlying PTE 94-50. 
These modifications include (1) corporate mergers that have changed the 
names of the parties described in PTE 94-50 and would permit broader 
distribution of TRAK-related products, (2) the implementation of a 
recordkeeping reimbursement offset system (the Recordkeeping 
Reimbursement Offset Procedure) under the TRAK Program, and (3) the 
institution of an automated reallocation option (the Automatic 
Reallocation Option) under the TRAK Program for which Salomon Smith 
Barney has requested administrative exemptive relief from the 
Department.
    The proposed exemption has been requested in an application filed 
on behalf of Salomon Smith Barney 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). Effective December 31, 1978, section 102 of 
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978) 
transferred the authority of the Secretary of the Treasury to issue 
exemptions of the type requested to the Secretary of Labor. 
Accordingly, the proposed exemption is being issued solely by the 
Department.
    1. The Corporate Mergers. Salomon Smith Barney states that in 
November 1997, a subsidiary of the Travelers Group Inc. (the Travelers 
Group), the parent of Smith Barney, acquired all of the shares of 
Salomon Brothers, Inc. (Salomon). Subsequent to the acquisition, 
Salomon and Smith Barney were operated as separately-registered broker-
dealers and as sister corporations with a common parent. On September 
1, 1998, Salomon was merged with and into Smith Barney, with Smith 
Barney remaining as the surviving corporation. As a result of the 
merger, the corporate name of Smith Barney has been changed to 
``Salomon Smith Barney Inc.''
    Salomon Smith Barney also states that in April 1998, the Travelers 
Group and Citicorp Inc. (Citicorp) announced a stock merger whereby 
Citicorp would be merged with and into a subsidiary of the Travelers 
Group. As a result of the merger, the Travelers Group would become a 
bank holding company and change its name to ``Citigroup Inc.'' 
(Citigroup).
    Salomon Smith Barney represents that the purpose of the merger is 
to create more distribution channels for TRAK products. In this regard, 
registered broker-dealers associated with Citigroup will be permitted 
to market the TRAK Program under a different product name. However, 
Salomon Smith Barney explains that the terms and conditions of PTE 94-
50 and this amendment will be complied with by the parties involved.
    The merger, which occurred on October 8, 1998, required that the 
affected parties obtain approval from the Federal Reserve Board under 
the Bank Holding Company Act (the BHC Act). Under the BHC Act, the 
Federal Reserve Board does not authorize bank holding companies, such 
as Citigroup, to be affiliated with companies that organize, sponsor, 
control or distribute United States open-end mutual funds. As a bank 
holding company, Citigroup is required to engage an independent party 
to provide certain distribution services in connection with the 
marketing of mutual fund shares) for all United States, publicly-traded 
mutual funds for which any subsidiary of the Travelers Group/Citigroup 
acts as a distributor. Salomon Smith Barney notes that although the 
Funds participating in the TRAK Program will be affected by this 
change, no Plan will be required to pay distribution fees to the 
independent distributors.
    On October 15, 1998, Salomon Smith Barney was merged with and into 
Pendex Real Estate Corp. (Pendex), a shell corporation domiciled in New 
York. Pendex, the survivor of the merger, was then renamed ``Salomon 
Smith Barney Inc.'' Upon completion of this merger, Salomon Smith 
Barney became a New York corporation.
    2. Recordkeeping Reimbursement Offset Procedure. Salomon Smith 
Barney states that the Board of Trustees (the Board) of the Funds 
approved, but has not yet implemented, a recordkeeping reimbursement 
offset procedure under which a Plan participating in the TRAK Program 
would be permitted to reduce its investment fees and expenses. The 
reimbursement amount would be paid solely by the Funds as a means of 
being competitive with other mutual funds offering similar 
reimbursements to investors.
    In May 1998, the Board approved a recordkeeping reimbursement 
amount of $12.50 for each investment position held by a participant. 
(In other words, a participant holding positions in three different 
Funds would be eligible to receive a total annual reimbursement of 
$37.50). In addition, the Board resolved that after applying such 
reimbursement to recordkeeping expenses charged by recordkeepers of the 
Plans, any excess reimbursement amount would be applied to reduce other 
fees and expenses 2 payable by participating Plans, 
including, but not limited to, the Plan-level investment advisory fee 
payable to the Consulting Group for asset allocation recommendations 
(the Outside Fee), after the appropriate offset has been applied (the 
Net Outside Fee).3 If implemented, Salomon Smith Barney 
explains that the Funds would pay the appropriate reimbursement amount 
directly to the recordkeeper of the Plan. The affected Plan would then 
be required to pay only the balance of the fee, which is generally 
charged on a quarterly basis, after the excess reimbursement amount has 
been deducted.
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    \2\ In addition to annual recordkeeping fees (the Annual Fees) 
payable by a Plan participating in the TRAK Program, it is 
represented that a Plan might be required to pay recordkeeping fees 
associated with certain particular services (the Other Fees) such as 
initial plan set-up and conversion, preparation of annual filings, 
enrollment, special statement preparation and audit.
    \3\ Salomon Smith Barney is offsetting, quarterly, against the 
Outside Fee, such amount as is necessary to assure that the 
Consulting Group retains not more than 20 basis points (as an Inside 
Fee) from any Portfolio on investment assets attributable to any 
Plan.
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    The Recordkeeping Reimbursement Offset Procedure would work as 
follows:

    Assume that Plan A has $1 million in assets invested in the TRAK 
Program and 100 participants. Assume further that Plan A pays its 
recordkeeper $20 per participant per year in Annual Fees totaling 
$2,000 per year or

[[Page 60393]]

$500 per quarter and $12 per participant per year in Other Fees, 
totaling $1,200 per year or $300 per quarter. In addition, Plan A 
pays the Consulting Group a total annual net investment advisory fee 
(i.e., the Net Outside Fee) of $8,500.
    At the end of each calendar quarter, Plan A's recordkeeper will 
determine the actual number of Fund positions held by the Plan A 
participants and calculate the resulting reimbursement amount. If 
Plan A had 300 participant positions at the end of the quarter, the 
Plan's total recordkeeping reimbursement amount would be 300 x 
$3.125 (the annual amount of $12.50 divided by 4) or $937.50. That 
amount would be credited as follows:

           Application of Reimbursement to Recordkeeping Fees
Quarterly Portion of Annual Fees...........................      $500.00
Quarterly Portion of Other Fees............................       300.00
                                                            ------------
Total Quarterly Recordkeeping Fees.........................       800.00
Credit for Reimbursement...................................     (937.50)
Excess Reimbursement.......................................     (137.50)
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    Because the reimbursement amount exceeds the recordkeeping fees 
due for the quarter, the Plan does not owe any recordkeeping fee for 
that period. Therefore, the recordkeeper will not bill the Plan.

       Application of Excess Reimbursement to the Net Outside Fee
Quarterly Net Outside Fee..................................    $2,125.00
Excess Reimbursement.......................................     (137.50)
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    Total..................................................     1,987.50
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    The recordkeeper will advise the Consulting Group that it is 
entitled to bill the Plan for the $1,987.50 balance of its 
investment advisory fee (i.e., the Net Outside Fee).

    Upon participation in the TRAK Program, an Independent Plan 
Fiduciary selects a recordkeeper for the Plan, from a list of 
recordkeepers which maintain computer links to the Funds under the TRAK 
Program. Salomon Smith Barney states that of the 23 recordkeepers 
currently providing services to TRAK Program investors, only one, Smith 
Barney Plan Services, is an affiliate. Because the reimbursement rate 
and the timing of the offset of the excess reimbursement amount against 
fees will be the same regardless of the identity of the recordkeeper 
and the Independent Plan Fiduciary is responsible for the selection of 
this particular recordkeeper, Salomon Smith Barney believes its 
affiliation with Smith Barney Plan Services does not appear to present 
additional potential abuses under section 406(b)(1) or 406(b)(3) of the 
Act in its capacity as an investment adviser in recommending investment 
in the Funds to Independent Plan Fiduciaries.
    Salomon Smith Barney notes that the reasoning in the Frost National 
Bank Advisory Opinion (ERISA Advisory Opinion 97-15A, May 22, 1997) 
(the Frost Opinion), is relevant to this situation. Therefore, it has 
not requested administrative exemptive relief from the Department. 
Salomon Smith Barney explains that in the Frost Opinion, the bank 
offered a comprehensive program of administrative and investment 
services to Plan investors. Under this program, the Department opined 
that section 406(b)(1) and 406(b)(3) of the Act would not be violated 
if the bank received payments for services from mutual funds while 
recommending mutual fund investments to plans provided such payments 
were fully disclosed and then offset to reduce other plan expenses, 
with any excess payments made to the plans. Salomon Smith Barney 
further explains that in the Frost Opinion any benefit from payments 
made by the mutual funds benefitted the plans and not the bank.
    With respect to the TRAK Program, Salomon Smith Barney represents 
that the reimbursement rates adopted by the Funds will be fully 
disclosed to Independent Plan Fiduciaries and the offset of the excess 
reimbursement amount against a Plan's expenses will be accomplished in 
a manner to ensure that the Plans obtain the full benefit of the 
reimbursement to reduce their recordkeeping and other Plan expenses. 
Salomon Smith Barney submits that the reasoning in the Frost Opinion 
would apply equally to the proposed reimbursement of expenses under the 
TRAK Program. Therefore, Salomon Smith Barney does not believe any 
change in the scope of the exemption is necessary.4
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    \4\ In this proposed exemption, the Department expresses no 
opinion on whether the Frost Opinion is applicable to the 
recordkeeping reimbursement procedure described above. In this 
regard, the Department notes that, under the facts presented in the 
Frost Opinion, Frost would offset the fees received from the mutual 
funds on a dollar-for-dollar basis against the trustee fees that the 
plan was otherwise obligated to pay Frost.
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    3. The Automatic Reallocation Option. Salomon Smith Barney wishes 
to modify the TRAK Program to institute an automated reallocation 
feature whereby an Independent Plan Fiduciary could elect to have his 
or her current asset allocation adjusted automatically whenever the 
Consulting Group changes the recommended asset allocation model (the 
Allocation Model) followed by such Plan or participant.5 
Therefore, Salomon Smith Barney proposes to amend General Condition 
II(f) of PTE 94-50 which requires that any recommendation or evaluation 
offered by the Consulting Group be implemented only upon the express 
direction of the Independent Plan Fiduciary. With the exception of the 
requested changes to General Condition II(f) of PTE 94-50, all of the 
existing conditions of PTE 94-50 will continue to apply to the TRAK 
Program.
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    \5\ Salomon Smith Barney notes that the Automatic Reallocation 
Option is to be distinguished from ``rebalancing'' which occurs 
after the passage of time from the original allocation decision and 
changes a participant's investment mix to bring the actual 
allocation among investment alternatives back in line with the 
participant's original allocation choices. For example, Salomon 
Smith Barney states that a Plan participant receives a written 
quarterly review that sets forth information concerning the 
participant's investments and includes a chart comparing the 
original asset allocation recommendation and the actual percentage 
distribution of investments held in the portfolio. Salomon Smith 
Barney explains that under the chart is the following legend:
    TRAK is a non-discretionary investment advisory service. All 
investment decisions rest with you, the participant. Therefore, you 
are strongly urged to adhere to the Consulting Group's asset 
allocation recommendations. Please call your Financial Consultant 
should a change in allocation be warranted due to a significant 
difference between the portfolio originally recommended by the 
Consulting Group and your allocation or due to a change in your 
objectives.
    Salomon Smith Barney further explains that the Financial 
Consultant is expected to contact participants at least annually to 
encourage a comparison of the holdings in the portfolio against the 
Consulting Group's original recommendation. Barney proposes to amend 
General Condition II(f) of PTE 94-50 which requires that any 
recommendation or evaluation offered by the Consulting Group be 
implemented only upon the express direction of the Independent Plan 
Fiduciary. With the exception of the requested changes to General 
Condition II(f) of PTE 94-50, all of the existing conditions of PTE 
94-50 will continue to apply to the TRAK Program.
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    As noted above, General Condition II(f) of PTE 94-50 provides that 
any recommendation or evaluation by the Consulting Group to an 
Independent Plan Fiduciary will be implemented only at the express 
direction of such fiduciary. Accordingly, under the current exemption, 
whenever asset allocation advice is modified by the Consulting Group, 
Salomon Smith Barney states that its Financial Consultants are required 
to contact the Independent Plan Fiduciary of each Plan who has chosen 
the Allocation Model, and obtain such fiduciary's consent to 
modification of the asset allocation applied to the Plan's account.
    Salomon Smith Barney notes that many TRAK Program investors have 
expressly indicated that they expect reallocations to take place in the 
ordinary course of the provision of investment advisory services 
offered by the Consulting Group. However, these investors do not 
understand why they need to be contacted in each instance

[[Page 60394]]

for this purpose. In addition, Salomon Smith Barney explains that the 
case-by-case contact and reallocation involves delay in implementing 
the change at the client's express direction, putting similarly-
situated investors into the new Allocation Models at different times.
    To resolve these problems, Salomon Smith Barney proposes to offer 
TRAK Program investors an Automatic Reallocation Option. Because 
Salomon Smith Barney recognizes that the Automatic Reallocation Option 
is outside the scope of PTE 94-50, it requests a modification of the 
existing terms of PTE 94-50 to the extent necessary to allow it to 
offer this alternative to investors. If the exemptive relief is 
granted, Salomon Smith Barney represents that it will fully disclose 
the nature of the Automatic Reallocation Option to the Independent Plan 
Fiduciary of each existing client Plan in a written notice (the 
Announcement) and permit the fiduciary to elect the Automatic 
Reallocation Option by responding in writing. The Announcement will 
describe the intended operation of the Automatic Reallocation Option 
and how future changes to the Allocation Model selected on behalf of 
the Plan will be implemented. In order to implement the Automatic 
Reallocation Option for new TRAK Program investors, the Independent 
Plan Fiduciary will be required to check a box on the form of 
Investment Advisory contract with Salomon Smith Barney (or on a 
separate document designed for this purpose for those investors who 
have already executed such an agreement with Salomon Smith Barney). By 
checking the box, the Independent Plan Fiduciary will indicate its 
consent to and authorization of actions to be taken by Salomon Smith 
Barney to reallocate automatically the asset allocation in the Plan 
account whenever the Consulting Group modifies the particular asset 
allocation recommendation which the Plan or participant has chosen. 
Such election will continue in effect until revoked or terminated by 
the Plan, in writing.
    In operation, Salomon Smith Barney represents that the Automatic 
Reallocation Option will work as follows:
    (a) The Consulting Group will release a modified version of the 
Allocation Model for the Plan account based upon its amended 
recommendation.
    (b) On the day such modification is released, the Consulting Group 
will adjust the Plan account to fit the new Allocation Model and to 
reflect current market conditions.6 Such adjustments will be 
effected through a series of purchases and redemptions of Portfolio 
shares to increase or decrease the relative investment in the various 
Portfolios by the Plan account.
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    \6\ Salomon Smith Barney notes that there are 12 standard 
Allocation Models and that two similarly-situated Plan participants 
who receive the same recommendation from the Consulting Group will 
receive the same reallocation.
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    (c) The reallocation of the Plan account will be effected on the 
same business day as the release of the new Allocation Model by the 
Consulting Group, except to the extent market conditions and orderly 
purchase and redemption procedures may delay such processing. For 
purposes of calculating the percentage changes in its asset allocation 
recommendation underlying the Automatic Reallocation Option for a Plan 
investor's account, the Consulting Group will use the net asset values 
at the close of business on the preceding trading day. However, the 
execution of trades to give effect to the changed percentages will 
occur on the next trading day at the then-current net asset values.
    (d) Participants in the TRAK Program will receive trade 
confirmations of the reallocation transactions. In this regard, for all 
Plan investors other than Section 404(c) Plan accounts (i.e., 401(k) 
Plan accounts), Salomon Smith Barney will mail trade confirmations the 
next business day after the reallocation trades are executed. In the 
case of Section 404(c) Plan participants, notification will depend upon 
the notification provisions agreed to by the Plan recordkeeper.\7\ For 
example, if the recordkeeper notifies Section 404(c) Plan participants 
(i.e., Independent Plan Fiduciaries) in writing after each trade, such 
participants will be notified of reallocation transactions in this 
manner. If, however, the recordkeeper notifies Section 404(c) Plan 
participants of trading activity in a quarterly statement, the 
reallocation activity would be included there.
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    \7\ Under these circumstances, Salomon Smith Barney will advise 
the recordkeeper of the proposed reallocation of the account of a 
Section 404(c) Plan participant as soon as the Consulting Group has 
determined that a change to an asset allocation recommendation is 
going to be made. The communication may initially be made orally 
because the recordkeeper must then promptly modify its system to 
effect the necessary changes to a participant's account on the 
effective date of the new recommendation. The oral communication is 
customarily followed by a full written description of the changes 
within two business days of the verbal update.
    As noted above, a Section 404(c) Plan participant who has 
elected the Automatic Reallocation Option would receive a trade 
confirmation from the recordkeeper of the resulting changes to the 
positions in his or her account, if that is the notification 
procedure agreed to for the Plan. Also as noted above, transactions 
occurring upon automatic reallocation and the underlying 
recommendation changes will be disclosed in the ``Participant 
Quarterly Review.''
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    In addition to the trade confirmations which Salomon Smith Barney 
will provide to all Plan investors except Section 404(c) Plans, 
disclosure of the reallocation transactions will appear in the next 
regular client statement. Such transactions will be reflected as a 
series of purchase and redemption transactions that will shift assets 
among the Portfolios in accordance with the Allocation Model as 
modified by the Consulting Group.
    (e) If, however, the reallocation to be made in response to the 
Consulting Group's recommendation exceeds an increase or decrease of 
more than 10 percent in the absolute percentage allocated to any one 
investment medium (e.g., a suggested increase in a 15 percent 
allocation to greater than 25 percent or a decrease of such 15 percent 
allocation to less than 5 percent), Salomon Smith Barney will not 
automatically adjust a Plan account. Under such circumstances, Salomon 
Smith Barney will send out a written notice (the Notice) to the 
Independent Plan Fiduciary for each affected Plan, describing the 
proposed reallocation and the date on which such allocation is to be 
instituted (the Effective Date).
    (f) The Notice will be mailed with the presumption of delivery 
within three business days to permit timely notification and adequate 
response time for the Independent Plan Fiduciary. The Notice will 
instruct the fiduciary that he or she will need to do nothing if such 
fiduciary decides to have his or her Plan account automatically 
reallocated on the Effective Date. If, on the other hand, the 
Independent Plan Fiduciary does not wish to follow the Consulting 
Group's revised asset allocation recommendation, the Notice will 
instruct the Independent Plan Fiduciary to inform a Financial 
Consultant, in writing, at least 30 calendar days prior to the proposed 
Effective Date that the fiduciary wishes to ``opt out'' of the new 
Allocation Model.\8\
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    \8\ The Notice will be mailed with the presumption of delivery 
within three business days so that the 30 day calendar period will 
not commence until the third business day following the mailing. In 
addition, the Effective Date of the Automatic Reallocation Option 
will occur no sooner than the business day following the thirtieth 
calendar day. To avoid any misunderstandings or miscalculations by 
the Independent Plan Fiduciary, Salomon Smith Barney represents that 
it will conspicuously state, in the Notice, the last date for its 
receipt of the Independent Plan Fiduciary's written response.
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    (g) If the Independent Plan Fiduciary ``opts out,'' his or her Plan 
account will not be changed on the Effective Date.

[[Page 60395]]

Under such circumstances, the Allocation Model will remain at its 
current level or at such other level as the Independent Plan Fiduciary 
designates. However, the Automatic Reallocation Option, will remain in 
effect for future changes in such participant's Allocation Model.
    (h) The Independent Plan Fiduciary will always have the ability to 
elect, terminate or reinstitute the Automatic Reallocation Option or to 
otherwise adjust an Allocation Model, in any way, by providing 
reasonably prompt notice to a Financial Consultant. Upon request by the 
Independent Plan Fiduciary, the Financial Consultant will send the 
appropriate form.
    Salomon Smith Barney states that it is not possible to predict the 
frequency of reallocations because these changes are dictated by the 
Consulting Group's analysis of market conditions. However, since 
November 1991, Salomon Smith Barney represents that asset allocation 
changes of the type that would trigger automatic reallocations have 
been instituted by the Consulting Group on ten occasions. Eight of 
these changes were of a magnitude of 10 percentage points or less. The 
other two changes were 15 percent changes and impacted only 
approximately one percent and 3 percent, respectively, of the total 
number of clients participating in the TRAK Program at the time.\9\
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    \9\ While there is no minimum percentage threshold that will 
trigger the Automatic Reallocation Option, other than the historical 
ranges specified above, Salomon Smith Barney notes that there may be 
future market circumstances that may justify an asset allocation 
adjustment of a lesser amount. Because the Consulting Group will 
only adjust asset allocation recommendations to reflect current 
market conditions, Salomon Smith Barney anticipates that triggers 
for the Automatic Reallocation Option will continue to be only 
market-related. As is currently the situation, Salomon Smith Barney 
represents that a Plan investor may, at any time and for any reason, 
contact a Financial Consultant to request a modification of an 
existing Allocation Model.
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    Salomon Smith Barney also states that the reallocation called for 
under the Automatic Reallocation Option will be effected by a dollar-
for-dollar liquidation and purchase of the required amounts in the 
respective Plan accounts. Because of the billing of Plan accounts 
participating in the TRAK Program is leveled with respect to the 
compensation received by Salomon Smith Barney and by the Financial 
Consultant involved in an account, Salomon Smith Barney states that the 
implementation of the Automatic Reallocation Option will be revenue-
neutral. In addition, Salomon Smith Barney represents that neither the 
Plan nor the participants will pay any additional fees for electing to 
use the Automatic Reallocation Option.\10\
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    \10\ General Condition II(c) of PTE 94-50 as well as this 
proposal states that no Plan will pay a fee or commission by reason 
of the acquisition or redemption of shares in the Trust. Since the 
fees paid to Salomon Smith Barney are based upon net asset values of 
investments and not transactions, a change of investment allocations 
and the net purchases and redemptions used to effect such changes do 
not change the payable fees.
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    Thus, on the basis of the foregoing, General Condition II(f) has 
been revised to read as follows:

    (f) Any recommendation or evaluation made by the Consulting 
Group to an Independent Plan Fiduciary will be implemented only at 
the express direction of such Independent Plan Fiduciary, provided, 
however, that--
    (1) If such Independent Plan Fiduciary shall have elected in 
writing (the Election), on a form designated by Salomon Smith Barney 
from time to time for such purpose, to participate in the Automatic 
Reallocation Option under the TRAK Program, the affected Plan or 
participant account will be automatically reallocated whenever the 
Consulting Group modifies the particular asset allocation 
recommendation which the Independent Plan Fiduciary has chosen. Such 
Election shall continue in effect until revoked or terminated by the 
Independent Plan Fiduciary, in writing.
    (2) Except as set forth below in paragraph II(f)(3), at the time 
of a change in the Consulting Group's asset allocation 
recommendation, each account based upon the asset allocation model 
(the Allocation Model) affected by such change would be adjusted on 
the business day of the release of the new Allocation Model by the 
Consulting Group, except to the extent that market conditions, and 
order purchase and redemption procedures may delay such processing 
through a series of purchase and redemption transactions to shift 
assets among the affected Portfolios.
    (3) If the change in the Consulting Group's asset allocation 
recommendation exceeds an increase or decrease of more than 10 
percent in the absolute percentage allocated to any one investment 
medium (e.g., a suggested increase in a 15 percent allocation to 
greater than 25 percent, or a decrease of such 15 percent allocation 
to less than 5 percent), Salomon Smith Barney will send out a 
written notice (the Notice) to all Independent Plan Fiduciaries 
whose current investment allocation would be affected, describing 
the proposed reallocation and the date on which such allocation is 
to be instituted (the Effective Date). If the Independent Plan 
Fiduciary notifies Salomon Smith Barney, in writing, at least 30 
calendar days prior to the proposed Effective Date that such 
fiduciary does not wish to follow such revised asset allocation 
recommendation, the Allocation Model will remain at the current 
level, or at such other level as the Independent Plan Fiduciary then 
expressly designates, in writing. If the Independent Plan Fiduciary 
does not affirmatively ``opt out'' of the new Consulting Group 
recommendation, in writing, prior to the proposed Effective Date, 
such new recommendation will be automatically effected by a dollar-
for-dollar liquidation and purchase of the required amounts in the 
respective account.
    (4) An Independent Plan Fiduciary will receive a trade 
confirmation of each reallocation transaction. In this regard, for 
all Plan investors other than Section 404(c) Plan accounts (i.e., 
401(k) Plan accounts), Salomon Smith Barney will mail trade 
confirmations on the next business day after the reallocation trades 
are executed. In the case of Section 404(c) Plan participants, 
notification will depend upon the notification provisions agreed to 
by the Plan recordkeeper.

Notice to Interested Persons

    Notice of the proposed exemption will be mailed by first class mail 
to the Independent Plan Fiduciary Plan of each Plan currently 
participating in the TRAK Program, or, in the case of a Section 404(c) 
Plan, to the recordholder of Trust shares. Such notice will be given 
within 15 days of the publication of the notice of pendency in the 
Federal Register. The notice will contain a copy of the notice of 
proposed exemption as published in the Federal Register and a 
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2). 
The supplemental statement will inform interested persons of their 
right to comment on and/or to request a hearing with respect to the 
pending exemption. Written comments and hearing requests are due within 
45 days of the publication of the proposed exemption in the Federal 
Register.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b)(3) of the

[[Page 60396]]

Act and section 4975(c)(1)(F) of the Code;
    (3) Before an exemption can be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the plan 
and of its participants and beneficiaries and protective of the rights 
of participants and beneficiaries of the plan;
    (4) This proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (5) This proposed exemption, if granted, is subject to the express 
condition that the Summary of Facts and Representations set forth in 
the notice of proposed exemption relating to PTE 92-77, as amended by 
PTE 94-50 and this notice, accurately describe, where relevant, the 
material terms of the transactions to be consummated pursuant to this 
exemption.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemption to the address above, 
within the time frame set forth above, after the publication of this 
proposed exemption in the Federal Register. All comments will be made a 
part of the record. Comments received will be available for public 
inspection with the referenced applications at the address set forth 
above.

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting the requested 
exemption under the authority of section 408(a) of the Act and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).

Section I. Covered Transactions

    A. If the exemption is granted, the restrictions of section 406(a) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply, to the purchase or redemption of shares by an 
employee benefit plan, an individual retirement account (the IRA), or a 
retirement plan for self-employed individuals (the Keogh Plan) \11\ in 
the Trust for Consulting Group Capital Market Funds (the Trust), 
established by Salomon Smith Barney, in connection with such Plans' 
participation in the TRAK Personalized Investment Advisory Service 
product (the TRAK Program).
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    \11\ The employee benefit plan, the IRA and the Keogh Plan are 
are collectively referred to herein as the Plans.
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    B. If the exemption is granted, the restrictions of section 406(b) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the 
Code, shall not apply, to the provision, by the Consulting Group, of 
(1) investment advisory services or (2) an automatic reallocation 
option (the Automatic Reallocation Option) to an independent fiduciary 
of a participating Plan (the Independent Plan Fiduciary), which may 
result in such fiduciary's selection of a portfolio (the Portfolio) in 
the TRAK Program for the investment of Plan assets.
    This proposed exemption is subject to the following conditions that 
are set forth below in Section II.

Section II. General Conditions

    (a) The participation of Plans in the TRAK Program will be approved 
by an Independent Plan Fiduciary. For purposes of this requirement, an 
employee, officer or director of Salomon Smith Barney and/or its 
affiliates covered by an IRA not subject to Title I of the Act will be 
considered an Independent Plan Fiduciary with respect to such IRA.
    (b) The total fees paid to the Consulting Group and its affiliates 
will constitute no more than reasonable compensation.
    (c) No Plan will pay a fee or commission by reason of the 
acquisition or redemption of shares in the Trust.
    (d) The terms of each purchase or redemption of Trust shares shall 
remain at least as favorable to an investing Plan as those obtainable 
in an arm's length transaction with an unrelated party.
    (e) The Consulting Group will provide written documentation to an 
Independent Plan Fiduciary of its recommendations or evaluations based 
upon objective criteria.
    (f) Any recommendation or evaluation made by the Consulting Group 
to an Independent Plan Fiduciary will be implemented only at the 
express direction of such Independent Plan Fiduciary, provided, 
however, that--
    (1) If such Independent Plan Fiduciary shall have elected in 
writing (the Election), on a form designated by Salomon Smith Barney 
from time to time for such purpose, to participate in the Automatic 
Reallocation Option under the TRAK Program, the affected Plan or 
participant account will be automatically reallocated whenever the 
Consulting Group modifies the particular asset allocation 
recommendation which the Independent Plan Fiduciary has chosen. Such 
Election shall continue in effect until revoked or terminated by the 
Independent Plan Fiduciary in writing.
    (2) Except as set forth below in paragraph II(f)(3), at the time of 
a change in the Consulting Group's asset allocation recommendation, 
each account based upon the asset allocation model (the Allocation 
Model) affected by such change would be adjusted on the business day of 
the release of the new Allocation Model by the Consulting Group, except 
to the extent that market conditions, and order purchase and redemption 
procedures may delay such processing through a series of purchase and 
redemption transactions to shift assets among the affected Portfolios.
    (3) If the change in the Consulting Group's asset allocation 
recommendation exceeds an increase or decrease of more than 10 percent 
in the absolute percentage allocated to any one investment medium 
(e.g., a suggested increase in a 15 percent allocation to greater than 
25 percent, or a decrease of such 15 percent allocation to less than 5 
percent), Salomon Smith Barney will send out a written notice (the 
Notice) to all Independent Plan Fiduciaries whose current investment 
allocation would be affected, describing the proposed reallocation and 
the date on which such allocation is to be instituted (the Effective 
Date). If the Independent Plan Fiduciary notifies Salomon Smith Barney, 
in writing, at least 30 calendar days prior to the proposed Effective 
Date that such fiduciary does not wish to follow such revised asset 
allocation recommendation, the Allocation Model will remain at the 
current level, or at such other level as the Independent Plan Fiduciary 
then expressly designates, in writing. If the Independent Plan 
Fiduciary does not affirmatively ``opt out'' of the new Consulting 
Group recommendation, in writing, prior to the proposed Effective Date, 
such new recommendation will be automatically effected by a dollar-for-
dollar liquidation and purchase of the required amounts in the 
respective account.
    (4) An Independent Plan Fiduciary will receive a trade confirmation 
of each reallocation transaction. In this regard, for all Plan 
investors other than Section

[[Page 60397]]

404(c) Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney 
will mail trade confirmations on the next business day after the 
reallocation trades are executed. In the case of Section 404(c) Plan 
participants, notification will depend upon the notification provisions 
agreed to by the Plan recordkeeper.
    (g) The Consulting Group will generally give investment advice in 
writing to an Independent Plan Fiduciary with respect to all available 
Portfolios. However, in the case of a Plan providing for participant-
directed investments (the Section 404(c) Plan), the Consulting Group 
will provide investment advice that is limited to the Portfolios made 
available under the Plan.
    (h) Any sub-adviser (the Sub-Adviser) that acts for the Trust to 
exercise investment discretion over a Portfolio will be independent of 
Salomon Smith Barney and its affiliates.
    (i) Immediately following the acquisition by a Portfolio of any 
securities that are issued by Salomon Smith Barney and/or its 
affiliates, the percentage of that Portfolio's net assets invested in 
such securities will not exceed one percent.
    (j) The quarterly investment advisory fee that is paid by a Plan to 
the Consulting Group for investment advisory services rendered to such 
Plan will be offset by such amount as is necessary to assure that the 
Consulting Group retains no more than 20 basis points from any 
Portfolio (with the exception of the Government Money Investments 
Portfolio and the GIC Fund Portfolio for which the Consulting Group and 
the Trust will retain no investment management fee) which contains 
investments attributable to the Plan investor.
    (k) With respect to its participation in the TRAK Program prior to 
purchasing Trust shares, (1) Each Plan will receive the following 
written or oral disclosures from the Consulting Group:
    (A) A copy of the Prospectus for the Trust discussing the 
investment objectives of the Portfolios comprising the Trust, the 
policies employed to achieve these objectives, the corporate 
affiliation existing between the Consulting Group, Salomon Smith Barney 
and its subsidiaries and the compensation paid to such entities.\12\
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    \12\ The fact that certain transactions and fee arrangements are 
the subject of an administrative exemption does not relieve the 
Independent Plan Fiduciary from the general fiduciary responsibility 
provisions of section 404 of the Act. In this regard, the Department 
expects the Independent Plan Fiduciary to consider carefully the 
totality of fees and expenses to be paid by the Plan, including the 
fees paid directly to Salomon Smith Barney or to other third parties 
and/or indirectly through the Trust to Smith Barney.
---------------------------------------------------------------------------

    (B) Upon written or oral request to Salomon Smith Barney, a 
Statement of Additional Information supplementing the Prospectus which 
describes the types of securities and other instruments in which the 
Portfolios may invest, the investment policies and strategies that the 
Portfolios may utilize and certain risks attendant to those 
investments, policies and strategies.
    (C) A copy of the investment advisory agreement between the 
Consulting Group and such Plan relating to participation in the TRAK 
Program and, if applicable, informing Plan investors of the Automatic 
Reallocation Option.
    (D) Upon written request of Salomon Smith Barney, a copy of the 
respective investment advisory agreement between the Consulting Group 
and the Sub-Advisers.
    (E) In the case of a Section 404(c) Plan, if required by the 
arrangement negotiated between the Consulting Group and the Plan, an 
explanation by a Salomon Smith Barney Financial Consultant (the 
Financial Consultant) to eligible participants in such Plan, of the 
services offered under the TRAK Program and the operation and 
objectives of the Portfolios.
    (F) A copy of PTE 94-50 as well as the proposed exemption and the 
final exemption pertaining to the exemptive relief described herein.
    (2) If accepted as an investor in the TRAK Program, an Independent 
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in 
writing, prior to purchasing Trust shares that such fiduciary has 
received copies of the documents described above in subparagraph (k)(1) 
of this Section.
    (3) With respect to a Section 404(c) Plan, written acknowledgement 
of the receipt of such documents will be provided by the Independent 
Plan Fiduciary (i.e., the Plan administrator, trustee or named 
fiduciary, as the recordholder of Trust shares). Such Independent Plan 
Fiduciary will be required to represent in writing to Salomon Smith 
Barney that such fiduciary is (a) independent of Salomon Smith Barney 
and its affiliates and (b) knowledgeable with respect to the Plan in 
administrative matters and funding matters related thereto, and able to 
make an informed decision concerning participation in the TRAK Program.
    (4) With respect to a Plan that is covered under Title I of the 
Act, where investment decisions are made by a trustee, investment 
manager or a named fiduciary, such Independent Plan Fiduciary is 
required to acknowledge, in writing, receipt of such documents and 
represent to Salomon Smith Barney that such fiduciary is (a) 
independent of Salomon Smith Barney and its affiliates, (b) capable of 
making an independent decision regarding the investment of Plan assets 
and (c) knowledgeable with respect to the Plan in administrative 
matters and funding matters related thereto, and able to make an 
informed decision concerning participation in the TRAK Program.
    (l) Subsequent to its participation in the TRAK Program, each Plan 
receives the following written or oral disclosures with respect to its 
ongoing participation in the TRAK Program:
    (1) The Trust's semi-annual and annual report which will include 
financial statement for the Trust and investment management fees paid 
by each Portfolio.
    (2) A written quarterly monitoring statement containing an analysis 
and an evaluation of a Plan investor's account to ascertain whether the 
Plan's investment objectives have been met and recommending, if 
required, changes in Portfolio allocations.
    (3) If required by the arrangement negotiated between the 
Consulting Group and a Section 404(c) Plan, a quarterly, detailed 
investment performance monitoring report, in writing, provided to an 
Independent Plan Fiduciary of such Plan showing, Plan level asset 
allocations, Plan cash flow analysis and annualized risk adjusted rates 
of return for Plan investments. In addition, if required by such 
arrangement, Financial Consultants will meet periodically with 
Independent Plan Fiduciaries of Section 404(c) Plans to discuss the 
report as well as with eligible participants to review their accounts' 
performance.
    (4) If required by the arrangement negotiated between the 
Consulting Group and a Section 404(c) Plan, a quarterly participant 
performance monitoring report provided to a Plan participant which 
accompanies the participant's benefit statement and describes the 
investment performance of the Portfolios, the investment performance of 
the participant's individual investment in the TRAK Program, and gives 
market commentary and toll-free numbers that will enable the 
participant to obtain more information about the TRAK Program or to 
amend his or her investment allocations.
    (5) On a quarterly and annual basis, written disclosures to all 
Plans of the (a) percentage of each Portfolio's brokerage commissions 
that are paid to Salomon Smith Barney and its affiliates and (b)

[[Page 60398]]

the average brokerage commission per share paid by each Portfolio to 
Salomon Smith Barney and its affiliates, as compared to the average 
brokerage commission per share paid by the Trust to brokers other than 
Salomon Smith Barney and its affiliates, both expressed as cents per 
share.
    (m) Salomon Smith Barney shall maintain, for a period of six years, 
the records necessary to enable the persons described in paragraph (n) 
of this Section to determine whether the conditions of this exemption 
have been met, except that (1) a prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the control 
of Salomon Smith Barney 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 Salomon Smith Barney shall be subject to the civil 
penalty that may be assessed under section 502(i) of the Act, or to the 
taxes imposed by section 4975(a) and (b) of the Code, if the records 
are not maintained, or are not available for examination as required by 
paragraph (n) below.
    (n)(1) Except as provided in section (2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (m) of this 
Section II shall be unconditionally available at their customary 
location during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department or the Service;
    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Plan, or 
any duly authorized representative of such participant or beneficiary.
    (2) None of the persons described above in subparagraphs (B)-(D) of 
this paragraph (n) shall be authorized to examine the trade secrets of 
Salomon Smith Barney or commercial or financial information which is 
privileged or confidential.

Section III. Definitions

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

Section IV. Effective Dates

    If granted, this proposed exemption will be effective as of June 
21, 1994 with respect to the transactions described in Section I.A. and 
B.(1). With respect to Section I.B.(2) and Section II(f)(1)-(4) of the 
General Conditions, this proposed exemption will be effective November 
9, 1998.
    The availability of this proposed exemption is subject to the 
express condition that the material facts and representations contained 
in the application for exemption are true and complete and accurately 
describe all material terms of the transactions. In the case of 
continuing transactions, if any of the material facts or 
representations described in the applications change, the exemption 
will cease to apply as of the date of such change. In the event of any 
such change, an application for a new exemption must be made to the 
Department.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant PTEs 92-77 and PTE 94-50, 
refer to the proposed exemptions and the grant notices which are cited 
above.

    Signed at Washington, D.C., this 4th day of November, 1998.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-29964 Filed 11-6-98; 8:45 am]
BILLING CODE 4510-29-P