[Federal Register Volume 71, Number 82 (Friday, April 28, 2006)]
[Notices]
[Pages 25229-25239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-6356]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11033, et al.]
Proposed Exemptions; The Southwest Gas Corporation (Southwest
Gas)
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ------, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or fax. Any such
comments or requests should be sent either by e-mail to:
[email protected], or by fax to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
[[Page 25230]]
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The Southwest Gas Corporation (Southwest Gas,) Located in Las Vegas,
Nevada
[Application No. D-11033]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR part 2570 subpart B (55 FR 32836, 32847,
August 10, 1990).
Section I--Transactions and Conditions
If the proposed exemption is granted, the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) and (D) of the Code, shall not apply to the direct or
indirect purchase, from Southwest Gas, of the common stock of Southwest
Gas by an individual retirement account (IRA) that is (i) established
for the benefit of a non-employee of Southwest Gas,\1\ (ii) operated
pursuant to the terms of the Southwest Gas Corporation Dividend
Reinvestment and Stock Purchase Plan (the DRIP), and (iii) maintained
in part through administrative services provided by Southwest Gas, a
disqualified person with respect to the IRA, provided that the
following conditions are satisfied:
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\1\ Pursuant to 29 CFR 2510.3-2(d), the subject IRAs are not
``employee benefit plans'' covered by Title I of the Act. However,
because the IRA is a ``plan'' for purposes of section 4975 of the
Code, the Department has jurisdiction under Title II of the Act over
this matter.
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(a) The IRA that is established by a DRIP participant pursuant to
the terms of the DRIP (the DRIP IRA) is maintained for the exclusive
benefit of the individual covered under the IRA (the IRA Owner), his or
her spouse, or their beneficiaries;
(b) Southwest Gas complies with all applicable securities laws
relating to the Southwest Gas DRIP;
(c) Administrative and recordkeeping services provided by Southwest
Gas to the DRIP IRA are rendered pursuant to a written agreement
between Southwest Gas and an independent trustee of the DRIP IRA (the
IRA Trustee) in which Southwest Gas agrees to act as the IRA Trustee's
agent for the provision of such services;
(d) Southwest Gas receives no compensation, fees, or commissions,
directly or indirectly, for the provision of such administrative and
recordkeeping services, including any portion of the fees that the IRA
Trustee may be entitled to receive from the DRIP IRA;
(e) The combined total of all fees and other consideration
received, direct or indirect, by any disqualified persons (other than
Southwest Gas) for the provision of services to the DRIP IRA is not in
excess of ``reasonable compensation'' within the meaning of section
4975(d)(2) of the Code;
(f) The DRIP IRA and/or IRA Owner does not pay a brokerage fee or
commission in connection with the purchase of the common stock of
Southwest Gas;
(g) Neither Southwest Gas, the IRA Trustee, nor any affiliate
thereof has any discretionary authority or control regarding the
determination to acquire, manage, or dispose of the DRIP IRA assets, or
renders investment advice (within the meaning of 26 CFR 54.4975-9(c))
respecting those assets;
(h) Cash dividends paid on Southwest Gas common stock held in the
DRIP IRA account that are used to purchase Original Issue Shares of
Southwest Gas common stock are automatically reinvested in additional
shares of Southwest Gas common stock on the earliest date that such
dividends can reasonably be segregated;
(i) Cash dividends paid on Southwest Gas common stock held in a
DRIP IRA account that will be used to purchase Open Market Shares of
Southwest Gas common stock under the DRIP are temporarily invested by
the IRA Trustee, on the earliest date that such cash dividends can
reasonably be segregated, in a no-load money market mutual fund
registered under the Investment Company Act of 1940, and earnings
accrued thereon are allocated at the end of each quarter on a pro-rata
basis among those IRA Owners who earned such dividends during that
quarter and then applied immediately towards the purchase of additional
shares of Southwest Gas common stock for the accounts of such IRA
Owners;
(j) Pending the IRA Trustee's investment of the cash contributions
of IRA Owners (including rollover contributions), such amounts are
temporarily invested by the IRA Trustee, on the earliest date that the
IRA Owners' contributions can reasonably be segregated, in a no-load
money market mutual fund registered under the Investment Company Act of
1940, and earnings accrued thereon are allocated at the end of each
quarter on a pro-rata basis among those IRA Owners who made a
contribution during that quarter and then applied immediately towards
the purchase of additional shares of Southwest Gas common stock for the
accounts of such IRA Owners;
(k) The terms of both the money market mutual fund and of any
purchase of Southwest Gas common stock pursuant to the terms of the
DRIP (including the purchase price) are at least as favorable to the
DRIP IRA as those obtainable in a comparable arm's length transaction
with an unrelated party;
(l) Prior to participation in the DRIP IRA, each IRA Owner receives
a written disclosure, drafted in a manner calculated to be understood
by the average IRA Owner, which contains: (i) The general terms and
conditions of the DRIP IRA; (ii) The identity of the no-load money
market mutual fund; (iii) Any fees, commissions, or compensation paid
to the IRA Trustee and/or its affiliates in connection with the DRIP
IRA, including the investment advisory and other fees paid by the
mutual fund to the IRA Trustee and/or its affiliates; (iv) A disclosure
of the right of IRA Owners to receive written notice of any amendment
to the terms of the DRIP or the DRIP IRA at least 30 days in advance of
its effective date (and the right of such IRA Owners to refuse consent
to any amendment); and (v) Information about the exemption from the
prohibited transaction rules applicable to the DRIP IRA and the right
of each IRA Owner to request a copy of both this notice of proposed
exemption and a copy of the final exemption, if granted;
(m) An IRA Owner participating in the DRIP IRA is furnished
periodically with a statement, at least quarterly, containing (i) the
date, quantity, and price with respect to each purchase of common stock
that occurred during the prior quarter and (ii) information concerning
the quarterly, pro rata allocation of money market mutual fund
[[Page 25231]]
earnings attributable to each IRA Owner's account during the period
immediately preceding the investment of cash amounts in Southwest Gas
stock;
(n) Southwest Gas retains, at least annually and at its own
expense, an independent certified public accountant to perform an
audit, in accordance with generally accepted auditing standards, of the
DRIP IRAs, and provides the IRA Trustee with the current audit report
prepared by such accountant, together with any written commentary from
the accountant that accompanies the audit; and
(o) The IRA Owner is permitted to terminate his or her
participation in the DRIP IRA at any time, without penalty, and
transfer his or her IRA account balance to an IRA at another financial
institution.
Section II--Definitions
(a) The term ``IRA'' means an individual retirement account
described in Code section 408(a). For purposes of this exemption, the
term ``IRA'' shall not include an individual retirement account that is
an employee benefit plan covered by Title I of the Act.
(b) The term ``DRIP'' (an acronym for Dividend Reinvestment Plan)
refers to the ``Southwest Gas Corporation Dividend Reinvestment and
Stock Purchase Plan'', which allows investors to purchase Southwest Gas
common stock and to automatically reinvest cash dividends paid on such
stock into additional shares of Southwest Gas stock.
(c) The term ``Original Issue Shares'' refers to authorized but
unissued shares of Southwest Gas common stock purchased directly from
Southwest Gas.
(d) The term ``Open Market Shares'' refers to outstanding shares of
Southwest Gas common stock purchased on the open market or through
negotiated transactions.
Summary of Facts and Representations
1. Southwest Gas is a natural gas utility serving over one million
customers in Arizona, California, and Nevada. The common stock of
Southwest Gas is publicly traded on both the New York Stock Exchange
(NYSE) and the Pacific Stock Exchange.
2. Southwest Gas currently sponsors the DRIP, which allows its
shareholders, natural gas customers, employees, and residents of
Arizona, California, and Nevada (the states in which Southwest Gas does
business) to make purchases of Southwest Gas common stock and to
automatically reinvest the dividends received on the stock in
additional shares of such stock. The applicant represents that the DRIP
is neither an ``employee benefit plan'' subject to the Act, nor a
``plan'' as defined in section 4975(e)(1) of the Code.
The DRIP provides that the shares of Southwest Gas common stock
purchased thereunder will be either (i) authorized but unissued shares
of common stock purchased directly from Southwest Gas (Original Issue
Shares), which is the most common method of purchasing such shares, or
(ii) outstanding shares of the common stock purchased on the open
market or through negotiated transactions (Open Market Shares).\2\ In
the case of the sale of Original Issue Shares, Southwest Gas receives
cash that it may use for its construction programs and other corporate
purposes.
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\2\ In this regard, the Department notes that the relief granted
herein shall not extend to the DRIP IRA's purchase, through
negotiated transactions, of outstanding shares of Southwest Gas
common stock.
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From the viewpoint of the investor, when additional shares are
purchased through a DRIP directly from the issuer, there is no charge
for brokerage commissions. Further, DRIPs may be attractive to
``small'' investors because eligibility for such a program typically is
not dependent upon a significant investment in the stock of the
company.
3. Southwest Gas wishes to offer an ``IRA option'' to non-employee
participants in its existing DRIP. To this end, Southwest Gas would
contract with an independent trustee to authorize the establishment of
certain IRAs to be invested exclusively in common stock of Southwest
Gas that is acquired through the DRIP. The mechanics concerning the
purchase of Southwest Gas common stock through the DRIP IRA (e.g., the
purchase price and whether the shares purchased are Original Issue
Shares or Open Market Shares) are determined by the terms of the DRIP.
Marshall & Ilsley Trust Company N.A. (M & I), a financial institution
that is independent of Southwest Gas, has been designated by Southwest
Gas to serve as the directed trustee of the DRIP IRAs.\3\ M & I offers
a comprehensive range of trust, investment, recordkeeping, custodial
and related services for retirement plans covering more than 370,000
retirement plan participants nationwide, and holds $82 billion in
custodial assets. The applicant represents that the DRIP IRAs would be
considered ``plans,'' as defined in section 4975(e)(1) of the Code.
However, because the DRIP IRA option would not be available to any
employees of Southwest Gas, and Southwest Gas would not otherwise act
as an ``employer'' (as defined in section 3(5) of the Act) with respect
to the DRIP IRAs, the applicant represents that the DRIP IRAs would not
be considered ``employee benefit plans,'' as defined in section 3(3) of
the Act.\4\
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\3\ It is represented that, in the event it becomes necessary to
appoint a successor trustee (the Successor) to replace M & I, the
applicant will notify the Department 60 days in advance of such
appointment. Any Successor shall be independent of Southwest Gas and
its affiliates, possess experience comparable to M & I, and assume M
& I's responsibilities with respect to the DRIP IRAs.
\4\ See also 29 CFR 2510.3-2(d) for conditions relating to
circumstances when an ``IRA'' is not considered an ``employee
benefit plan'' subject to Title I of the Act.
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The IRA Owner could add to his or her DRIP IRA's investment in
Southwest Gas common stock in the following ways: (i) Through the
automatic reinvestment of the dividends paid on the Southwest Gas
common stock held by the DRIP IRA in additional shares of such stock;
(ii) By making cash contributions to the DRIP IRA for the purchase of
additional shares; or (iii) By rolling over retirement assets to be
invested in Southwest Gas common stock. The IRA Owner's total annual
cash contribution to the DRIP IRA would be subject to the applicable
contribution limits established under the Code for IRAs (except in the
case of contributions that qualify as rollover contributions, which
receive special tax treatment under the Code).
According to the applicant, the DRIP IRAs would also provide two
significant tax benefits under current federal law: (i) The dividends
paid on the shares of Southwest Gas stock held in the DRIP IRAs
generally would not be taxable to the IRA Owner until distribution, or
(in the case of a Roth IRA) not at all; and (ii) The IRA Owner may be
able to deduct certain contributions to the DRIP IRA on his or her
federal income tax return.
4. Although M & I, the IRA Trustee, intends to provide the trustee
services associated with the DRIP IRAs for a fee,\5\ Southwest Gas
proposes to provide certain administrative and recordkeeping services
to the DRIP IRAs at no cost, pursuant to a written agency agreement
with M & I. Southwest Gas will receive no compensation, fees, or
commissions, directly or indirectly, for such services, including any
portion of fees that the trustee may be entitled to receive from the
IRA. The administrative and recordkeeping services provided to the DRIP
IRAs by
[[Page 25232]]
Southwest Gas would be the same type of services provided to non-IRAs
under the DRIP.
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\5\ The Department provides no opinion herein as to whether the
fees paid by the DRIP IRAs to M & I for trustee services would meet
the conditions required under Code section 4975(d)(2) and the
regulations promulgated thereunder (see 26 CFR 54.4975-6), which,
among other things, requires that the compensation paid to the
disqualified person must be reasonable.
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The DRIP IRAs are ``plans'' under section 4975(e)(1)(B) of the
Code, while Southwest Gas, as a ``person providing services'' to the
DRIP IRAs, is a ``disqualified person,'' as defined in section
4975(e)(2)(B) of the Code. Thus, Southwest Gas seeks an individual
exemption to permit purchases of publicly traded common stock by the
DRIP IRAs from Southwest Gas that would otherwise be prohibited under
the Code. Southwest Gas wishes to reduce the overall fees charged to
the DRIP IRAs for services in order to maximize the amount of money
available for investing in the DRIP IRA. The applicant also represents
that the requested exemption is in the interests of the DRIP IRAs and
their participants and beneficiaries because, absent an exemption, the
DRIP IRAs would have to pay a fee to a third party for the same
services that Southwest Gas is willing to provide without charge.
5. The IRA Trustee will be responsible for purchasing Southwest Gas
stock for the DRIP IRAs in the form of either Original Issue Shares or
Open Market Shares. The purchases of Southwest Gas common stock will be
Original Issue Shares so long as the market price exceeds 75 percent of
the book value of such stock, determined quarterly by Southwest Gas
based upon publicly available information contained in its annual and
quarterly reports filed with the Securities and Exchange Commission.\6\
However, any switch from Original Issue to Open Market Shares (or vice
versa) will not occur more than once in any 12-month period.\7\ The IRA
Trustee also will purchase Open Market Shares during periods when
Southwest Gas is precluded from selling common stock due to limitations
under the securities laws.
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\6\ The applicant represents that, historically, the shares
purchased in the DRIP have been Original Issue Shares.
\7\ The applicant represents that the book value of Southwest
Gas stock is included in the annual report on Form-10K; the number
of outstanding shares and total equity are included in each of the
quarterly reports on Form-10Q. The determination to switch between
Original Issue and Open Market Shares is made at the time these
reports are filed with the SEC.
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Any purchase of Southwest Gas common stock by a DRIP IRA pursuant
to the DRIP will be at least as favorable to the DRIP IRA as those
obtainable in a comparable arm's length transaction with an unrelated
party. In the case of Original Issue Shares, the price per share will
be the closing price of Southwest Gas stock, as reported on the NYSE,
on the investment date, or, if there is no trading in such stock, the
closing price on the last date on which trading occurred prior to the
investment date. In the case of Open Market Shares, the price per share
will be the weighted average composite closing price, as reported on
the NYSE, of all Southwest Gas common stock acquired by the IRA Trustee
during the investment period described in the DRIP. Southwest Gas will
pay brokerage commissions charged by an independent broker selected by
the IRA Trustee, in connection with the purchase of Open Market Shares.
6. Pursuant to the terms of the DRIP, dividends payable on shares
of Southwest Gas common stock that are held in a DRIP IRA account will
be automatically reinvested in additional shares of Southwest Gas
common stock. In addition, cash contributions or rollover contributions
that are directed to the DRIP IRA by an IRA Owner will be invested in
Southwest Gas common stock in accordance with the terms of the DRIP.\8\
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\8\ The applicant represents that the DRIP IRA will also accept
rollover contributions in the form of Southwest Gas common stock.
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The applicant represents that the IRA Trustee will invest these
amounts in Southwest Gas common stock as soon as practicable after
their receipt by the IRA Trustee, but in any event no later than one
month after their receipt. The applicant represents that ``one month''
can be up to 35 days, a maximum period imposed by the Securities and
Exchange Commission. As a general matter, the applicant further
represents that the IRA Trustee is not restricted from immediately
acquiring Southwest Gas common stock with the dividends and cash
contributions, as the 35-day investment window is not a hold period;
rather, it is intended to ensure that the IRA Trustee has independence
in controlling the timing of investments rather than Southwest Gas.
The Applicant represents that, pending the investment in Southwest
Gas stock, the IRA Trustee will invest any cash contributions or
rollover contributions of IRA Owners in a money market mutual fund,
which may be a mutual fund for which the IRA Trustee or its affiliate
serves as investment advisor. At the end of each quarter, the IRA
Trustee shall allocate the earnings of the money market mutual fund
among those IRA Owners who made cash contributions or rollover
contributions during that quarter. The allocations will be computed on
a pro-rata basis, taking into account the funds contributed by the IRA
Owner during the preceding quarter and the number of days that such
contributions were invested in the money market account. The allocated
earnings will then be applied towards the immediate purchase of
additional shares (or fractional shares) of Southwest Gas common stock
for investment in the DRIP IRA of each contributing IRA Owner.
The procedure for the reinvestment of dividends of Southwest Gas
common stock is dependent upon whether the shares being purchased are
Original Issue Shares or Open Market Shares. If the shares purchased
are Original Issue Shares, then the cash dividend is utilized to
purchase additional shares of Southwest Gas common stock on the same
day that the dividend is paid.\9\ If the shares purchased are Open
Market Shares, the cash dividends attributable to IRA Owners would be
deposited into a money market account pending investment in Southwest
Gas common stock, in the same manner as would govern the deposit of the
cash contributions of IRA Owners awaiting investment.
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\9\ The condition contained in section I(h) relating to the
purchase of Original Issue Shares with cash dividends requires that
the purchase occur on the earliest date that the dividends can
reasonably be segregated. If this occurs on the day the dividends
are paid, then this reasonable segregation period would not extend
beyond this date.
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7. The terms of the DRIP IRA will be disclosed in advance of
participation in the DRIP IRA pursuant to a written agreement signed by
each IRA Owner. According to the applicant, if the IRA Trustee charges
fees with respect to the DRIP IRA, the Trustee or Southwest Gas will
provide a fee schedule; any such fees will be subtracted from the DRIP
IRA, unless paid by the IRA Owner directly. In addition, IRA Owners
will receive written notice of any amendment to the DRIP IRA terms at
least 30 days in advance of its effective date and have the right to
refuse consent to any amendment. Such amendments will not affect the
conditions described in Section I of the exemption, if granted.
8. The IRA Owner will be furnished with customary statements, at
least quarterly, containing the date, quantity, and price with respect
to each purchase of Southwest Gas common stock. Such disclosures should
assist IRA Owner in assessing whether continued participation in the
DRIP IRA is in accordance with his or her investment objectives for
retirement purposes.
Further, under the terms of the trust agreement, Southwest Gas must
retain an independent certified public accountant to conduct an annual
audit of all the DRIP IRAs to be performed in accordance with generally
accepted
[[Page 25233]]
auditing procedures. During the course of the audit, selected IRA
Owners will be asked to confirm the audit statement regarding their IRA
accounts on a basis and using a sample deemed acceptable by such
accountants. Southwest Gas has agreed to promptly furnish M&I with a
copy of the audit report and any written commentary from the
accountants generated by the audit.
9. The applicant represents that IRA Owners may terminate
participation in the DRIP IRA, without penalty, at any time. The
applicant represents that the terms of the DRIP permit Southwest Gas to
impose termination fees (ranging from $10 to $75), with proper notice
to the DRIP participant, but that Southwest Gas intends to pay any such
fees associated with termination of a DRIP IRA. Because the DRIP IRAs
are intended to be invested exclusively in the common stock of
Southwest Gas, an IRA Owner who wishes to pursue other investment
alternatives must terminate his or her DRIP IRA and roll over the
proceeds to a different IRA. According to the applicant, the IRA Owner
may terminate his or her DRIP IRA by requesting a distribution of all
the account assets. The distribution may consist of the issuance of a
Southwest Gas common stock certificate (with fractional shares paid in
cash),\10\ or may consist solely of the payment of cash. In the case of
cash distribution requests, the IRA trustee will have responsibility
for selecting a broker independent of Southwest Gas to sell the DRIP
IRA assets on the open market.\11\ The IRA Owner will pay associated
brokerage commissions for the sale of the Southwest Gas common stock by
the IRA; thus, any cash distribution payment will be net of brokerage
commissions.
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\10\ The applicant represents that the cash amount for
fractional shares will be calculated based upon the sales price of
whole shares at the time the distribution request is processed.
\11\ See PTE 86-128 (51 FR 41686, Nov. 18, 1986, as amended on
Oct. 17, 2002, 67 FR 64137), which allows certain plan fiduciaries
to use certain affiliated broker-dealers to execute securities
transactions on behalf of plans, including IRAs. The Department is
not opining on the applicability of PTE 86-128 to the sale of the
DRIP IRA assets through an affiliated broker-dealer. In any event,
no relief is provided under this exemption for the selection, by the
IRA Trustee, of an affiliate to execute transactions involving the
sale of Southwest Gas common stock on behalf of the DRIP IRAs.
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10. In summary, the applicant represents that the proposed
transactions satisfy the statutory criteria for an exemption under
section 4975(c)(2) of the Code for the following reasons: (a)
Administrative and recordkeeping services will be provided to the DRIP
IRA pursuant to a written agreement between Southwest Gas and the
Trustee of the DRIP IRA in which Southwest Gas will act as the IRA
Trustee's agent for the provision of such services; (b) Southwest Gas
will receive no compensation or fees for these services, including any
portion of fees that the IRA Trustee may be entitled to receive from
the DRIP IRA; (c) The combined total of all fees and other
consideration received by the IRA Trustee for the provision of services
to the DRIP IRA is not in excess of ``reasonable compensation'' within
the meaning of section 4975(d)(2) of the Code; (d) The IRA or IRA Owner
does not pay a brokerage fee or commission in connection with the
purchase of the Southwest Gas stock; (e) Neither Southwest Gas, the IRA
Trustee, nor any affiliate thereof has any discretionary authority or
control regarding the determination to acquire, manage, or dispose of
the IRA assets, or renders investment advice (within the meaning of 26
CFR 54.4975-9(c)) respecting those assets; (f) Southwest Gas will, at
least annually, and at its own expense, retain an independent certified
public accountant to perform an audit of the DRIP IRAs, in accordance
with generally accepted auditing standards, and provide the audit
report prepared by such accountant to the IRA Trustee; (g) Cash
dividends on Southwest Gas common stock held in a DRIP IRA account that
are used to purchase Original Issue Shares of Southwest Gas common
stock are automatically reinvested in additional shares of Southwest
Gas common stock on the earliest date that such dividends can
reasonably be segregated; (h) Pending the IRA Trustee's investment of
the cash amounts (e.g., cash contributions or rollover contributions by
IRA Owners) in Southwest Gas stock, such amounts are deposited in a
money market mutual fund on the earliest date that they can reasonably
be segregated, and earnings accrued thereon are allocated at the end of
each quarter on a pro-rata basis among IRA Owners receiving cash
amounts and then applied immediately towards the purchase of additional
shares of Southwest Gas common stock for the accounts of such IRA
Owners; (i) The terms of any purchase of common stock pursuant to the
DRIP, including the purchase price, will be at least as favorable to
the DRIP IRA as those obtainable in a comparable arm's length
transaction with an unrelated party; (j) Prior to participation in the
DRIP IRA, each IRA Owner receives a written disclosure containing,
among other things, information concerning the terms and conditions of
the DRIP IRA and any fees paid to the IRA Trustee in connection with
the DRIP IRA; (k) The IRA Owner will be furnished with a statement, at
least quarterly, containing the date, quantity, and price with respect
to each purchase of common stock; and (l) The DRIP IRA may be
terminated without penalty by the IRA Owner at any time.
Notice to Interested Persons
The applicant represents that the DRIP IRAs that would be affected
by the proposed exemption do not yet exist. Thus, there are currently
no IRA Owners who can be identified as interested persons. However, the
applicant will provide M&I with a copy of this notice of proposed
exemption and of the final exemption, if granted, as published in the
Federal Register. Comments with respect to the proposed exemption are
due within 30 days of the date of publication of this notice in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Mark Judge of the Department,
telephone (202) 693-8339. (This is not a toll-free number.)
Massachusetts Mutual Life Insurance Company, Located in Springfield,
Massachusetts
[Exemption Application No. D-11228]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).\12\
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\12\ Unless otherwise noted, references to specific provisions
of the Act shall refer also to the corresponding provisions of the
Code.
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Section I--Transactions
(a) If the exemption is granted, the restrictions of section
406(a)(1)(B) and (D) of the Act, and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(B) and (D) of the Code, shall not apply to: (1) The
extension of credit (``Market Rate Advance or Advances'') by
Massachusetts Mutual Life Insurance Company (``MassMutual'') to a
participant-directed individual account plan (``the Plan'') if the
conditions of Sections II, III and V are met; and (2) the Plan's
repayment of a Market Rate Advance or Advances, plus accrued interest;
and
(b) If the exemption is granted, the restrictions of section
406(a)(1)(B) and
[[Page 25234]]
(D) and 406(b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to (1) the
interest-free extension of credit (``Interest-free Advance'') to a Plan
by its respective sponsor (``the Plan Sponsor'') and (2) the repayment,
by the Plan to the Plan Sponsor, of any Interest-free Advance, if the
conditions of Sections II, IV and V are met:
Section II--General Conditions
(a) Each Market Rate Advance and each Interest-free Advance
(collectively ``the Advance or Advances'') is made in connection with
the administration of a portion of the plan's assets by MassMutual as a
unitized fund (``Unitized Fund'') in order to enable daily
transactions, such as participant investment transfers, distributions
or participant loans, and to facilitate redemptions from the Unitized
Fund;
(b) Each Advance is unsecured, uncollateralized, and without
recourse;
(c) No commitment fees or commissions are paid by the Plan with
respect to the Advances;
(d) The aggregate amount advanced on any business day that an
Advance is initiated does not, after the Advance is made, exceed 25% of
the total market value of the Unitized Fund;
(e) Each Advance is made in accordance with the terms of a written
agreement between MassMutual, the Plan, and, if Interest-free Advances
by the Plan Sponsor are being offered, the Plan Sponsor (``the
Agreement''). The Agreement describes the terms and procedures for the
Advances, including instructions addressing the initiation, amount and
repayment. With respect to Market Rate Advances, the Agreement sets
forth the formula or method for determining the interest rate payable
with respect to each Advance. The Agreement is approved in writing by a
fiduciary of the Plan who is independent of, and not an affiliate of,
MassMutual (``Independent Plan Fiduciary'');
(f) The Agreement may be terminated by the Independent Plan
Fiduciary at any time, subject to the Plan's repayment of any
outstanding Advances, with no penalty for such termination;
(g) The fair market value of the assets in the Unitized Fund is
determined by an objective method specified in the Agreement;
(h) Any employer security in a Unitized Fund is a ``publicly traded
qualifying employer security'' as defined below.
(i) The Plan is required to repay each Advance and any accrued
interest in accordance with the terms of the Agreement as soon as
possible after the initiation of the advance.
(j) Within one business day after an Advance is initiated,
MassMutual notifies the Independent Plan Fiduciary of the amount of the
Advance and, if a Market Rate Advance, the actual interest rate to be
applied;
(k) Within ten (10) days after a Market Rate Advance is fully
repaid, MassMutual provides the Independent Plan Fiduciary with a
confirmation statement including the date of repayment, the amount of
the Advance, and if a Market Rate Advance, the actual interest rate
applied, and the total amount of interest paid by the Plan.
(l) Each Advance is initiated, accounted for and administered by
MassMutual, in accordance with the terms of the Agreement and the Act.
(m) Neither MassMutual nor any of its affiliates is: (1) A trustee
of the Plan (other than a nondiscretionary trustee who does not render
investment advice with respect to the assets of the Unitized Fund); (2)
a plan administrator (within the meaning of section 3(16)(A) of the Act
and Code section 414(g)); (3) a fiduciary who is expressly authorized
in writing to manage, acquire, or dispose of, on a discretionary basis,
any assets of the Unitized Fund; or (4) an employer any of whose
employees are covered by the Plan;
(n) MassMutual maintains or causes to be maintained for a period of
six years, in a manner that is accessible for audit and examination,
the records necessary to enable the persons described in the next
paragraph to determine whether the conditions of this exemption have
been met, except that:
(1) If the records necessary to enable the persons described in the
next paragraph to determine whether the conditions of the exemption
have been met are lost or destroyed, due to circumstances beyond the
control of MassMutual, then no prohibited transaction will be
considered to have occurred solely on the basis of the unavailability
of those records; and
(2) No party in interest, other than MassMutual which is
responsible for record-keeping, shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act or the taxes
imposed by section 4975(a) and (b) of the Code if the records are not
maintained or are not available for examination as required by the next
paragraph;
(o)(1) Except as provided below in subparagraph (2) and
notwithstanding any provisions of section 504(a)(2) and (b) of the Act,
the records referred to in the above paragraph are unconditionally
available at their customary location for examination during normal
business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of the plan or any duly authorized employee or
representative of such fiduciary;
(C) Any contributing employer and any employee organization whose
members are covered by the plan, or any authorized employee or
representative of these entities; or
(D) Any participant or beneficiary of the plan or the duly
authorized representative of such participant or beneficiary.
(2) None of the persons described in subparagraph (1)(B)-(D) above
shall be authorized to examine trade secrets or commercial or financial
information which is privileged or confidential.
Section III--Conditions Specific to Market Rate Advances
The relief provided under Section I (a) is available only if the
following conditions are met:
(a) Market Rate Advances are made on terms at least as favorable to
the Plan as those the Plan could obtain in an arm's length transaction
with an unrelated party;
(b) Neither MassMutual nor its affiliate has or exercises any
discretionary authority or control with respect to the initiation of a
Market Rate Advance, the amount of a Market Rate Advance, the interest
rate payable on a Market Rate Advance, or the repayment of the Market
Rate Advance;
(c) Interest payable by the Plan on each Market Rate Advance is
determined in accordance with an objective formula or method described
in the Agreement;
Section IV--Conditions Specific Interest-Free Advances
The relief provided under Section I (b) is available only if the
following conditions are met:
(a) No interest or other fee is charged to the plan, and no
discount for payment in cash is relinquished by the plan, in connection
with the Interest Free Advance;
(b) The Interest-free Advance is not a loan described in section
408(b)(3) of ERISA and the regulations promulgated there under (29 CFR
2550.408b-3) or section 4975(d)(3) of the Code and the regulations
promulgated there under (26 CFR 54.4975-7(b));
[[Page 25235]]
(c) The Interest-free Advance is not made directly or indirectly by
an employee benefit plan;
(d) Any Interest-free Advance that is entered into for a term of 60
days or longer must be made pursuant to a written loan agreement that
contains all of the material terms of such loan.
Section V--Definitions
(a) The term ``affiliate'' means (i) any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such other person; (ii) any officer,
director, employee or relative (as defined in section 3(15) of the Act)
of such other person; and (iii) any corporation or partnership of which
such other person is an officer, director or partner.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``Plan Sponsor'' means the employer of the employees
covered by the Plan.
(d) The term ``publicly traded qualifying employer security,'' for
purposes of this exemption, means a security that meets the definition
of ``stock'' pursuant to section 407(d)(5)(A) of the Act and the
definition of ``NMS stock'' as defined in SEC Regulation NMS, 17 CFR
242.600(b)(47).
(e) The term ``unitized fund'' for purposes of the exemption means
a fund that, to facilitate trading and/or accounting, has established
``units'' representing undivided interests in all of the assets of such
fund.
Statement of Facts and Representations
1. MassMutual is a mutual life insurance company organized under
the laws of the Commonwealth of Massachusetts and subject to
supervision and regulation by the Insurance Commissioner of
Massachusetts. MassMutual conducts business in all 50 states, as well
as in the District of Columbia and Puerto Rico. MassMutual and its
family of companies serve the needs of over 10 million clients and
offer a broad-based portfolio of financial products and services,
including mutual funds, money management, trust services, retirement
planning products, life insurance, annuities, disability income
insurance, and long-term care insurance.
2. MassMutual represents that it performs a wide variety of
services for employee benefit plans subject to the Act, including
unitization services. As part of these activities, MassMutual enters
into arrangements with Plan Sponsors for the administration of their
Plans and the investment of their Plan assets. As of December 31, 2005,
MassMutual had net capital of $8,787,000,000 and assets under
management of $395,881,000,000.
3. Unitization services facilitate daily trading between investment
options offered under a plan by permitting daily trading of plan
investment options that would otherwise not be able to be traded or
settled within one day. Unitization services permit daily transactions
by establishing ``units'' representing undivided interests in all of
the assets of the Unitized Fund. MassMutual represents that it
establishes a daily unit value by dividing the market value of the
Unitized Fund by the number of units held by participants, and on a
daily basis, processes participant contributions to, and withdrawals
from, the Unitized Fund as purchases and sales of units at the daily
unit value. When cash is required to settle transactions in units
resulting from participant withdrawals and exchanges of units from the
Unitized Fund, the cash requirements are satisfied first from the
liquid investments of the Unitized Fund and then shares of the Unitized
Fund investments may be sold to restore the liquidity. MassMutual
represents that all employer securities and separately managed accounts
it administers are unitized. The unitization services that are the
subject of this application are only being offered to individual plans,
no transactions covered by this application involve pooled accounts.
4. Under this proposed exemption, MassMutual would offer Plans with
unitized funds the opportunity to establish one or both of the
following two programs: (a) Market Rate Advances from MassMutual or (b)
Interest-free Advances from the plan sponsor or its affiliate.\13\ In
either case, Plans would use these Advances only if the cash portion of
a Unitized Fund is insufficient to cover unit redemption requests on a
particular business day.
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\13\ The Department notes that PTE 80-26, as amended [71 FR
17917, April 7, 2006] provides relief for interest-free loans by the
plan sponsor or its affiliate, if the conditions of the amended
exemption are met.
---------------------------------------------------------------------------
5. MassMutual states that it may provide unitization services to
Plans where MassMutual is a trustee, custodian, or recordkeeper. In
some cases, MassMutual may be engaged by the Plan solely to provide
unitization services and MassMutual would have custody of the Plan's
assets only to the extent required for the administration of the
Unitized Fund.
6. MassMutual represents that because participant-directed Plans
generally offer MassMutual funds as investment options, procedures for
investments, exchanges and redemptions under these Plans accommodate
mutual fund trading practices. Participant investment transactions
would generally be processed as follows: (a) after the close of
business on each trade date, mutual fund transfer agents calculate the
daily net asset value (the ``NAV'') at which shares may be purchased or
redeemed for each mutual fund and recordkeepers receive the daily NAV
for each mutual fund; (b) the recordkeeper processes participant
instructions for exchanges between investment options and Plan
withdrawals that are submitted to the recordkeeper before a cut-off
time (e.g., 3 p.m.) on any business day (the ``trade date'' or ``T''),
and purchase orders resulting from new Plan contributions received on
the trade date, using the daily NAV provided for each mutual fund at
the close of business on that trade date; (c) the recordkeeper
aggregates participant transaction information to create a single Plan
purchase or redemption order for each mutual fund offered as a Plan
investment option. The recordkeeper submits these orders to the mutual
funds during the night, or possibly, very early on the next business
day (T+1); (d) on T+1, the purchase and redemption transactions are
settled by the transfer of money from the master contributions account
for purchases to the mutual funds and the collection of the redemption
proceeds from the mutual funds which are held in the master
disbursement account. Redemption proceeds are reinvested on T+1 if the
redemption transaction is processed as part of an exchange between Plan
investment options, or transferred to the Plan trustee if withdrawn
from the Plan; and (e) in the case of an exchange between investment
options offered under a Plan, the recordkeeper may process the exchange
as a simultaneous redemption and purchase transaction on T, and both
transactions are settled on T+1.
7. MassMutual represents that these procedures are successful
because mutual funds meet two important requirements: The transfer
agent establishes a daily NAV for processing purchases and redemptions;
and mutual funds maintain liquidity that permits payment of redemption
proceeds on T+1. Interests in collective trust funds also may be traded
on a daily basis under these procedures if administered
[[Page 25236]]
to allow daily contributions and withdrawals. MassMutual explains that
some investment options that Plan sponsors may wish to offer
participants do not meet requirements for daily trading. For example:
(a) Purchase and sale transactions involving employer stock owned by a
Plan typically settle on a ``T+3'' basis, which means that proceeds
upon the sale of employer stock may not be received for three business
days after the day of a sale transaction. (b) ``Stable value funds''
typically hold insurance company guaranteed investment contracts (GICs)
or other investments that provide a benefit-responsive guarantee (e.g.,
so-called ``alternative'' stable value contracts, such as ``synthetic
GICs''), which may require up to ten (10) days notice for withdrawals;
and (c) withdrawals from a Plan account managed by an investment
manager, within the meaning of section 3(38) of the Act (managed
account), might require sales of securities owned in the managed
account. Like employer stock, sales of securities from a managed
account generally would settle on a ``T+3'' basis.
8. Unitization services provided by MassMutual allow participants
to engage in daily transactions involving these types of Plan
investment options by providing a daily price and liquidity that
permits withdrawals on any business day. MassMutual represents that
Unitized Fund administration is a ministerial service that MassMutual
performs under specific instructions from a Plan fiduciary independent
of MassMutual (an ``Independent Plan Fiduciary''). The Independent Plan
Fiduciary may be the Plan administrator described in section 3(16)(A)
of the Act, another Plan fiduciary responsible for determining the
Plan's investment options, or an investment manager described in
section 3(38) of the Act appointed for a Plan. All of the Independent
Plan Fiduciary's instructions are provided in, or in accordance with, a
written unitization agreement (the Agreement) made between MassMutual
and the Independent Plan Fiduciary. Where Interest-free Advances are
being offered, the Plan Sponsor will also be a party to the Agreement.
Among other things, MassMutual represents that the Agreement provides
standing instructions addressing the initiation, amount, repayment and,
with respect to Market Rate Advances by MassMutual, the formula or
method for determining the interest rate payable with respect to each
Advance. The terms of the Agreement are approved in writing by the
Independent Plan Fiduciary.
9. MassMutual represents that the Independent Plan Fiduciary
directs it to establish a Unitized Fund consisting of the assets that
are the primary investment under the Plan investment option to be
unitized and cash, or cash equivalent investments, that provide
liquidity for the Unitized Fund (the ``cash portion'') in order to
facilitate daily trading.\14\ For example, a unitized employer stock
fund would consist of shares of employer stock \15\ and a cash portion;
a unitized stable value fund would consist of GICs and/or alternative
stable value contracts and a cash portion, and a unitized managed
account would consist of investments selected and managed by the Plan's
investment manager and a cash portion. In most cases, the Independent
Plan Fiduciary directs MassMutual to invest the cash portion directly
or indirectly in shares or units of a money market fund, including one
managed by MassMutual. In this regard, MassMutual is able to submit
redemption orders for shares or units of the Money Market Fund on any
business day and receive cash on the Plan's behalf on the same business
day, which allows MassMutual to transfer funds to settle redemptions
from the Unitized Fund on T+1. The Independent Plan Fiduciary may
direct MassMutual to invest the cash portion of a Unitized Fund in
investments other than the Money Market Fund, provided that the
investment offers similar liquidity.
---------------------------------------------------------------------------
\14\ The Department notes that whether or not unitization is
appropriate for particular plan is a fiduciary decision. In making
this decision, the fiduciary should consider such factors such as
plan asset size, number of plan participants, the size of the
unitized fund, and the type and nature of the unitized fund and the
assets (e.g., whether exchange-traded and readily available, or less
liquid.)
\15\ The standard unitization agreement submitted by MassMutual
did not permit in-kind distributions of employer securities. In
response to questions, MassMutual explained that in-kind
distributions are an option that may be selected by the plan. The
Department notes that offering in-kind distributions of employer
securities gives participants the option to elect the special tax
treatment available for net unrealized appreciation in employer
securities, pursuant to IRC 402(e)(4).
---------------------------------------------------------------------------
10. MassMutual's fees for unitization services are also described
in the Agreement. Generally, the fees may include an initial set-up
charge and an annual administration charge, which may be a fixed
amount, a fee based on the value of assets in the unitized account, or
a combination of both. MassMutual represents that in no event will it
have any discretionary authority or control or provide any investment
advice (as described by section 3(21) of the Act and regulations
thereunder) with respect to the selection of the assets of a Unitized
Fund. In this regard, the Independent Plan Fiduciary or an investment
manager appointed in accordance with Plan terms and independent of
MassMutual would be solely responsible for determining the investments
of the Unitized Fund and, as further described below, providing
MassMutual with specific instructions regarding the operation of the
Unitized Fund. In addition, MassMutual does not provide any asset
allocation or other services that may affect or influence participant
transactions involving a Unitized Fund.
11. MassMutual explains that to establish a Unitized Fund, the
Independent Plan Fiduciary directs MassMutual in the Agreement to
calculate the market value of assets owned by the Plan in connection
with the investment option to be unitized (e.g., the employer stock or
other investments and the cash portion) on the first day that the
option is unitized (the unitization date) and then establish ``units''
of the Unitized Fund by dividing the market value by a proposed initial
unit value. Typically, an initial number of units are determined by
dividing the current market value of the combined assets by $10.
12. On the unitization date, the recordkeeper allocates the units
to participant accounts based on each participant's pro rata interest
in the Unitized Fund. Each business day after the unitization date, the
Agreement requires MassMutual to establish a daily unit price based on
the current market value of the Unitized Fund. Procedures for
determining current market value are specified in the Agreement and
would require an objective method so that MassMutual does not have any
discretion in determining the market value of the unitized Fund or unit
price.
For example, in the case of employer stock, the Agreement may
require MassMutual to value the stock at the closing price on the New
York Stock Exchange. Securities issued by mutual funds would be valued
at the daily net asset value published by the mutual fund. In the case
of GICs or alternative stable value contracts, the Agreement would
generally direct MassMutual to use book value as reported by the
contract issuer. In the case of a managed account, the investment
manager may value the managed account, or MassMutual may determine the
value if MassMutual has custody of the managed account assets.
MassMutual provides the daily unit price for each Unitized Fund after
the close of each business day. The unit price is made available to
[[Page 25237]]
the Plan's recordkeeper for purposes of processing new participant
investments in the Unitized Fund, withdrawals from the Unitized Fund,
and participant-directed exchanges involving the Unitized Fund.
13. Each business day, according to MassMutual, the Plan's
recordkeeper aggregates all participant investment transactions
involving the Unitized Fund to create a Plan purchase and redemption
order for units of the Unitized Fund. The recordkeeper submits the
purchase and redemption orders on the same basis that the recordkeeper
submits orders for the mutual fund investment options offered under the
Plan. Generally, the Plan's recordkeeper is a party to the Agreement
and agrees to process participant investment transactions involving the
Unitized Fund in accordance with requirements that accommodate
MassMutual's provision of unitization services, as described by the
Agreement. In the case of a managed account, the investment manager may
also be party to the Agreement and would agree to assist MassMutual in
providing unitization services by, e.g., providing daily valuation
information and selling assets of the managed account when required for
liquidity purposes. Upon receipt of a purchase order, MassMutual
increases the total number of units of the Unitized Fund by the number
of units purchased and accepts funds transferred to MassMutual to pay
for the units purchased. Upon receipt of a unit redemption order,
MassMutual reduces the number of units accordingly and forwards funds
to settle the unit redemptions.
14. MassMutual represents that the Agreement includes specific
instructions for the management of liquidity of a Unitized Fund.
Specifically, the Independent Plan Fiduciary must specify a
``target liquidity,'' which specifies the intended size of the cash
portion in comparison with the total assets of a Unitized Fund. The
target liquidity would be established at a level that reasonably
provides enough cash to accommodate the expected volume of redemption
transactions generated by participants in the ordinary course. A
typical target liquidity may range from 1% to 10%, depending on factors
such as the size of the Unitized Fund, the average trading volume of
assets held in the Unitized Fund, the number of participants with an
interest in the Unitized Fund, and the relative size of each
participant's interest in the Unitized Fund. The Agreement also
specifies a ``liquidity variance'' that defines the range within which
the actual value of the cash portion, as compared to total value of the
Unitized Fund, (actual liquidity) may vary from the target liquidity.
If the actual liquidity exceeds the target liquidity by more than the
liquidity variance, excess amounts must be immediately invested. If the
actual liquidity is less than the target liquidity by more than the
target variance, then some Unitized Fund investments must be liquidated
to increase the cash portion.
15. According to MassMutual, the Agreement always provides
MassMutual with specific instructions for making new investments on
behalf of the Unitized Fund or liquidating investments of a Unitized
Fund. In the case of employer stock, MassMutual is generally directed
to place a purchase or sell order to restore the Unitized Fund to
target liquidity on the business day that the excess liquidity or
liquidity shortfall is identified. For unitized stable value funds, the
Independent Plan Fiduciary must provide MassMutual with specific
instructions as to which stable value contracts MassMutual should be
credited with deposits or withdrawals. In the case of a managed fund,
the Agreement generally requires MassMutual to notify the Plan's
investment manager of excess liquidity or a liquidity shortfall and the
manager is responsible for buying or selling account assets to restore
the actual liquidity of the managed account to the permitted range.
16. MassMutual represents that whenever the actual liquidity of a
Unitized Fund falls below the target liquidity by more than the
liquidity variance, assets of the Unitized Fund must be liquidated to
restore the target liquidity. If employer stock or other securities,
which settle on a ``T+3'' basis, are sold, the sale proceeds usually
would be received after three business days. Some transactions may take
longer to settle, for example, withdrawals from GICs or alternative
stable value contracts may require up to ten days. Nevertheless, as
long as the cash portion of the Unitized Fund is sufficient to cover
unit redemption requests submitted to MassMutual on each business day,
unit redemptions can be processed and settled on a daily basis.
17. From time to time, the actual liquidity of a Unitized Fund may
not provide sufficient liquidity for the unit redemption requests on a
business day. If requests for redemptions exceed the actual liquidity
of the Unitized Fund, MassMutual instructs the trustee to (1) fulfill
the participant's unit redemption requests and (2) sell assets to
return the fund to its requisite liquidity. MassMutual pays the trustee
for the overdraft services: Plans, however, may make their own
arrangements with the trustee. The redemptions are processed at the
unit price established the business day on which the redemptions are
resubmitted. Generally, the Agreement would instruct MassMutual to
continue to accept unit purchase orders even if unit redemption orders
have been rejected.
18. MassMutual represents that in its experience it is expensive
and burdensome to Plans and participants to reject unit redemptions due
to insufficient liquidity for several reasons. First, the reversal of a
transaction is an exception from typical administrative procedures and,
therefore, must be processed and reconciled manually rather than on
automated recordkeeping systems; this increases recordkeeping expenses
incurred by Plans and participants and increases the opportunity for
recordkeeping and reconciliation errors. Second, until the reversed
transaction is posted to participant accounts, participant account
records (which are available to participants on a daily basis) will be
inaccurate. Most important, the unit redemption requests are likely to
be requested in connection with a participant's request for an exchange
from a Unitized Fund to another Plan investment option. If the Unitized
Fund redemption requests cannot be settled, the corresponding purchases
of shares or units of the other Plan investment options also must be
reversed. As noted, MassMutual does not receive unit redemption orders
until T+1, by which time; a corresponding purchase order would also
have been received by the mutual fund transfer agent.
In many cases, it is not possible to stop a purchase of mutual fund
shares. Instead, the shares must be resold at the then current market
price. If there has been a one-day change in share price, the Plan may
be liable for the difference.
19. One way to reduce the risk that any unit redemptions may be
rejected is to increase the Unitized Fund's target liquidity. In this
regard, the Agreement generally requires MassMutual to notify the
Independent Plan Fiduciary each time that unit redemptions are rejected
so that the Independent Plan Fiduciary can evaluate whether target
liquidity is appropriate and increase target liquidity as needed.
However, increasing target liquidity affects the risk and return
characteristics of the Unitized Fund, which is an undesirable result in
the view of many Plan fiduciaries. In many cases, increases in the
portion of a fund invested in cash and cash equivalents reduces the
fund's investment return over the long-term as compared to the
[[Page 25238]]
return that could be obtained by a fund with a smaller cash portion.
20. As a service provider to Plans, MassMutual is a party in
interest to such Plans. Therefore, MassMutual represents that Advances
by MassMutual to Plans in connection with its unitization services, and
the receipt by MassMutual of interest may raise issues under section
406(a) of the Act. Advances by a plan sponsor, also a party in
interest, are prohibited under section 406. Therefore MassMutual is
requesting an exemption to permit it to make advances and earn interest
on these Market Rate Advances and to permit plan sponsors of plans that
use MassMutual's unitization services to provide Interest-free Advances
to their plans.
21. The proposed exemption for the Advances requires the Plan repay
the principal amount of a Market Rate Advance and accrued interest as
soon as possible after the initiation of the Advance. No commitment
fees or commissions will be paid by the Plan in connection with an
Advance. The Advances would be available under procedures reviewed and
approved by the Independent Plan Fiduciary and incorporated into the
Agreement. The Agreement will describe the terms and procedures for the
Advances, including instructions addressing the initiation, amount and
repayment.
22. With respect to Market Rate Advances, the Agreement will also
describe the formula or method for determining the interest rate
payable with respect to each Market Rate Advance. For example, the
Agreement might specify a formula for determining the interest on
Market Rate Advances based on a published indexed interest rate
established by an independent third party (e.g., the London Interbank
Offered Rate or the U.S. Federal Reserve's Cost of Funds Index) and
provide for daily accrual of interest until the Market Rate Advance is
repaid. MassMutual will not have or exercise any discretion with
respect to how the rate is determined under the formula or method.
Interest on Market Rate Advances will be an operating expense of a
Unitized Fund and will be paid from the assets of the Unitized Fund.
23. The Agreement governing the Advances will limit the total
amount that MassMutual or the Plan Sponsor may advance to a Plan to 25%
of the total market value of the Unitized Fund on the business day that
any Advance is made. MassMutual represents that such limits will be
imposed because Advances are intended to facilitate the administration
of a Unitized Fund in the ordinary course of business. If the liquidity
needed to settle redemption requests on a particular business day
exceeds a limit set on Advances, Plan fiduciaries may wish to review
whether the Plan should continue ``daily trading'' in participant
interests in the Unitized Fund. The fair market value of the assets of
the Unitized Fund is determined by an objective method specified in the
Agreement.
24. The Advances will not be secured or collateralized. MassMutual
will generally be directed under the Agreement to automatically sell or
redeem assets of a Unitized Fund on any business day that the actual
liquidity of a Unitized Fund falls below the target liquidity by more
than the liquidity variance. Further, MassMutual generally will be
directed by the Agreement to automatically collect the amount of an
Advance and accrued interest, if any, from proceeds received upon the
sale or redemption of those assets.
25. MassMutual represents that the liquidity needs of the Unitized
Employer Stock Fund and the market for Employer Stock may necessitate
the situation in which an, orderly liquidation of Employer Stock may
need to occur over a period of months or a few weeks. For example, (a)
if it is known that a 10 percent shareholder is liquidating his or her
interest in the Plan Sponsor in the market, large sales of Employer
Stock will typically yield a lower price than smaller sales over a
period of weeks or a few months; (b) if a large amount of Employer
Stock is to be sold by the Plan (e.g., part of the business is sold and
a large number of employees become eligible for and elect to receive
distributions from the Plan), an orderly sale of Employer Stock by the
Plan would normally yield a higher price; or (c) if the Plan Sponsor or
the Independent Plan Fiduciary determines that it would be imprudent or
unlawful to sell the Employer Stock at a particular time (e.g., it
jeopardizes the Plan's qualified tax status or it would violate a
securities law), then sales of Employer Stock would be made as prudent
and lawful as possible and would be extended over a period of time.
MassMutual represents that it will not exercise discretion with respect
the assets in the unitized fund. Where the sale will occur over several
days, MassMutual will receive specific instructions regarding the
timing of the sales from the Independent Fiduciary.
As discussed above, the employer securities may be sold over a
period of months or weeks at the then current market price. In
contrast, participant transactions involving purchase or sales of the
units in the Unitized Employer Stock Fund will be made after the close
of the market based on the unit value of the Unitized Employer Stock
Fund at the closing price of the Employer Stock held by the Unitized
Employer Stock Fund. Participants will also receive confirmation of the
unit price at which their transactions (e.g., distributions, transfers,
etc.) are made.
26. MassMutual will provide notice to the Independent Plan
Fiduciary about each Advance at the time the Advance is made and after
the Advance is repaid. With respect to Market Rate Advances, no later
than one business day after a Market Rate Advance is initiated,
MassMutual will notify the Independent Plan Fiduciary of the principal
amount of the Market Rate Advance and the interest rate to be applied.
Within ten days after a Market Rate Advance is fully repaid, MassMutual
will provide the Independent Plan Fiduciary with a confirmation
including the date of repayment, the amount of the Market Rate Advance,
the actual interest rate applied, and the total amount of interest paid
by the Plan.
27. The Agreement may be terminated by the Independent Plan
Fiduciary at any time, subject to the Plan's repayment of any
outstanding Advances made as required by the terms of the Agreement.
The Advances will be made on terms at least as favorable to the Plan as
those the Plan could obtain in an arm's-length transaction with an
unrelated party.
28. Neither MassMutual nor an affiliate may have, or exercise, any
discretionary authority or control with respect to the initiation of an
Advance, the amount of an Advance, the interest rate payable on a
Market Rate Advance, or the repayment of an Advance. These
circumstances are determined by the Independent Plan Fiduciary and are
set forth in the Agreement. In addition, MassMutual or an affiliate may
not be (a) a trustee of the Plan (other than a nondiscretionary trustee
who does not render investment advice with respect to the assets of the
Unitized Fund), (b) a Plan administrator, (c) a fiduciary who is
expressly authorized in writing to manage, acquire, or dispose of, on a
discretionary basis, any assets of the Unitized Fund, or (d) an
employer any of whose employees are covered by the Plan.
29. In response to concerns raised by the Department regarding the
unitization of employer security funds consisting of that were not
sufficiently liquid, MassMutual agreed that this exemption would only
apply to those qualifying employer securities that would meet the
definition of qualifying employer securities that were stock pursuant
to 407(d)(5)(A) of the Act. To
[[Page 25239]]
further assure sufficient liquidity, MassMutual agreed that the
employer securities must also qualify as ``NMS stock'' pursuant to the
SEC's recently published Regulation NMS, 17 CFR 242.600(b)(46)and
(47).\16\ The term generally covers securities that are listed on a
National Securities Exchange, such as the New York Stock Exchange or
The NASDAQ Stock Market, Inc.\17\ In order to meet the definition of
NMS stock, the stock must be one for which transaction reports are
collected and processed, and such reports must be available for review.
Therefore, according to MassMutual, limiting application of the
proposed exemption to employer securities which meet the definition of
NMS stock ensures that only those securities which can be readily
valued, based on market quotations, will be covered by the proposed
transactions.
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\16\ The Securities Exchange Act of 1934 directs the Securities
and Exchange Commission (the ``SEC'') to designate certain
securities or classes of securities qualified for trading in the
national market system. See 15 U.S.C. 78k-1(a)(2). 17 CFR 242.600
provides:
a. The term national market system security as used in section
11A(a)(2) of the Act shall mean any NMS security as defined in
paragraph (b) of this section.
b. For purposes of Regulation NMS (Rules 242.600 through
242.612), the following definitions shall apply:
46. NMS security means any security or class of securities for
which transaction reports are collected, processed, and made
available pursuant to an effective transaction reporting plan, or an
effective national market system plan for reporting transactions in
listed options.
47. NMS stock means any NMS security other than an option.
\17\ The NASDAQ Stock Market has been authorized by the SEC to
become a national securities exchange and is in the process of
making that conversion.
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30. In summary, MassMutual represents that the subject transactions
satisfy the criteria contained in section 408(a) of the Act for the
following reasons:
(a) The requested exemption will be administratively feasible
because the Advances will be monitored by the Independent Plan
Fiduciary of each Plan. Thus the level of oversight required by the
Department will be minimal.
(b) The requested exemption will be in the interests of Plan
participants and beneficiaries because it will allow Plans to avoid
rejections of the Unitized Fund redemption transactions resulting from
insufficient liquidity. This will protect Plan participants and
beneficiaries from the expense, inconvenience, possible recordkeeping
errors, and potential Plan exposure for trading losses on corresponding
purchase transactions for other Plan investments, which could result if
Unitized Fund liquidity is insufficient to settle the redemption on a
requested business day. The protection will be available where the plan
sponsor is willing to provide the liquidity without interest, as well
as where the sponsor is not willing to do so, but decides, in the
interest of the plan, that liquidity is needed.
(c) The requested exemption will protect participants' and
beneficiaries' rights because (i) the terms and conditions of Advances
will be clearly disclosed in a written Agreement between MassMutual and
an Independent Plan Fiduciary, which will specifically describe the
procedures under which Advances will be made and repaid, the amount of
each Advance, and, in the case of a Market Rate Advance, the formula or
method for determining interest; (ii) the terms on which Advances would
be made must be at least as favorable to the Plan as a similar third
party arm's length transaction; (iii) the Agreement permitting the
Advances can be terminated by the Independent Plan Fiduciary at any
time, without penalty; (iv) MassMutual will provide to the Independent
Plan Fiduciary on the business day following the day an Advance is
made, a notice describing the amount of the Advance and, if it is a
Market Rate Advance, the interest rate payable, and within 10 days of
the repayment of each Advance, notice confirming the amount of the
Advance, the date of repayment and the actual amount of interest, if
any, paid by the Plan. These notices provide an Independent Plan
Fiduciary the ability to monitor each Advance and ensure the Advances
are appropriate and in the interest of the Plan's participants and
beneficiaries; (v) MassMutual will not have or exercise any
discretionary authority or control over the assets of the Plan invested
in a Unitized Fund and will act solely at the direction of an
Independent Plan Fiduciary. In addition, MassMutual may not have a
relationship to a Plan receiving Advances that might provide MassMutual
any discretionary authority or control with respect to the investment
of the assets of the Unitized Fund or Market Rate Advances to be made
to the Plan; and (vi) the relief requested for interest free loans is
protective because no fees will be charged and no recourse will be
given.
FOR FURTHER INFORMATION CONTACT: Andrea W. Selvaggio of the Department,
telephone (202) 693-8540. (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 of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 24th day of April, 2006.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E6-6356 Filed 4-27-06; 8:45 am]
BILLING CODE 4510-29-P