Proposed Exemptions; Bank of Oklahoma (the Bank) and First Tennessee
National Corporation; Notice [Notices] [07/07/2000]
Proposed Exemptions; Bank of Oklahoma (the Bank) and First Tennessee
National Corporation; Notice [07/07/2000]
Volume 65, Number 131, Page 42247-42271
[[Page 42247]]
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Part V
Department of Labor
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Pension and Welfare Benefits Administration
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Proposed Exemptions; Bank of Oklahoma (the Bank) and First Tennessee
National Corporation; Notice
[[Page 42248]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10590, et al.]
Proposed Exemptions; Bank of Oklahoma (the Bank) and First
Tennessee National Corporation
AGENCY: Pension and Welfare Benefits 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
request 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No.__ , stated in each Notice of
Proposed Exemption. The applications for 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-5638, 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).
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.
Bank of Oklahoma (the Bank) Located in Tulsa, OK
[Application No. D-10590]
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 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
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 (the Plan), in certain mutual funds that are
either affiliated with the Bank (the Affiliated Funds) or are
unaffiliated with the Bank (the Third Party Funds),\1\ in connection
with the participation by the Plan in the Bank-sponsored Foundations
Program (the Foundations Program).
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\1\ The Affiliated Funds and the Third Party Funds are
collectively referred to herein as the Funds.
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In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) and (F) of the Code, shall not apply
to the provision, by the Bank, of asset allocation services to an
independent fiduciary of a participating Plan (the Primary Independent
Fiduciary) or to a participant (the Directing Independent Fiduciary) of
a Plan that provides for participant investment direction (the
Participant-Directed Plan), which may result in the selection of
portfolios in the Foundations Program for the investment of Plan
assets, by the Primary Independent Fiduciary or the Directing
Independent Fiduciary, and the receipt of fees by the Bank and/or its
affiliates.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II. General Conditions
(a) The participation by a Plan in the Foundations Program is
approved by a Primary Independent Fiduciary or a Directing Independent
Fiduciary, in the case of a Participant-Directed Plan, and, no Plan
covering employees of the Bank or any of its affiliates is eligible to
participate in the Foundations Program.
(b) As to each Plan, the total fees that are paid to the Bank and
its affiliates constitute no more than reasonable compensation for the
services provided.
(c) With the exception of distribution-related fees that are paid
to the Bank pursuant to Rule 12b-1 (the Rule 12b-1 Fees) of the
Investment Company Act of 1940 (the Investment Company Act) which are
offset, no Plan pays a fee or commission by reason of the acquisition
or redemption of shares in the Funds.
(d) The terms of each purchase or redemption of shares in the Funds
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) The Bank provides written documentation to each Plan's Primary
Independent Fiduciary or Directing Independent Fiduciary of its
recommendations, as well as on the design and parameters with respect
to an asset allocation model (the Asset Allocation Model) based upon
objective criteria that are uniformly applied.
(f) Any recommendation or evaluation made by the Bank to a Primary
Independent Fiduciary or a Directing Independent Fiduciary is
implemented only at the express direction of such fiduciary.
(g) The Bank retains an independent financial analyst (the
Independent Financial Analyst) to--
(1) Review the investments of Plan assets in a Third Party Fund for
purposes of performance and suitability;
[[Page 42249]]
(2) Review determinations by the Bank to add a Third Party Fund or
replace an Affiliated Fund with a Third Party Fund; and
(3) Ensure that only one Fund fits an asset segment (the Asset
Segment) such that there is no overlap between a Third Party Fund and
an Affiliated Fund. Further, such Independent Financial Analyst may not
derive more than 5 percent of its total annual revenues from the Bank
and/or its affiliates.
(h) The quarterly fee that is paid by a Plan to the Bank and its
affiliates for asset allocation and related services (the Wrap Fee)
rendered to such Plan under the Foundations Program is offset by--
(1) All investment management fees (the Advisory Fees) that are
paid to it and/or its affiliates by the Affiliated Funds;
(2) All non-advisory fees, including custodial fees, Rule 12b-1
Fees or subadministration fees (collectively, the Administrative Fees)
that are paid to the Bank and/or its affiliates by the Affiliated
Funds; and
(3) All Administrative Fees which include, but are not limited to,
Rule 12b-1 Fees and sub-transfer agency fees, that are paid to the Bank
and/or its affiliates by the Third Party Funds, such that the sum of
the offset and the net Wrap Fee will always equal the aggregate Wrap
Fee, thereby making the Bank's selection of Affiliated Funds or Third
Party Funds for the Asset Allocation Models a ``fee-neutral'' decision.
(i) The Plan is automatically rebalanced on a quarterly basis
(using net asset values of the affected Funds as of the close of
business) on a pre-established date to the Asset Allocation Model
previously prescribed by such fiduciary if authorized in writing by the
Primary Independent Fiduciary, and if one or more Fund allocations
deviates from the Asset Allocation Model prescribed by such fiduciary
because--
(1) At least one transaction required to rebalance the Plan among
the Funds involves a purchase or redemption of securities valued at
$100 or more; and
(2) The net asset value of the Fund affected would be more than 5
percent of the Plan's investment in such Fund.
(j) The Bank may make adjustments to the composition of the Asset
Allocation Model (the Model Adjustments) unilaterally only within
certain authorized parameters approved by the Primary Independent
Fiduciary, or upon the consent of the Primary Independent Fiduciary, if
the Bank proposes to exceed the parameters.
(1) If the Model Adjustment is made unilaterally pursuant to
Section II(j) above, the Bank may only deviate from the Normal Position
of a given Asset Allocation Model within a specified range, not to
exceed 15 percent (above and below) the Normal Position under Section
III(1), which is applied to the Asset Allocation Model's entire
allocation.
(2) With respect to a Model Adjustment requiring independent
fiduciary consent, the Bank may not change the asset mix outside the
limits authorized by the Primary Independent Fiduciary unless it
provides the Primary Independent Fiduciary and the Directing
Independent Fiduciary, upon the request of the Primary Independent
Fiduciary, 30 days' advance written notice of the impending change.
(k) The notice referred to above in Section II(j) includes a
termination advisory form (the Termination Advisory) which--
(1) Advises the Primary Independent Fiduciary of the right to
withdraw from the Foundations Program or, in the case of the Directing
Independent Fiduciary, of the right to transfer to a different Asset
Allocation Model without penalty; and
(2) States that absent any affirmative action by the Primary
Independent Fiduciary or the Directing Independent Fiduciary, the Plan
will be reallocated within the revised Normal Positions for the Asset
Allocation Model, effective as of a given date.
(1) The Bank provides the Termination Advisory to the Primary
Independent Fiduciary and, if applicable, the Directing Independent
Fiduciary, at least annually; and provides the Termination Advisory in
all cases whenever the Bank--
(1) Makes a Model Adjustment where fiduciary consent is needed;
(2) Adds a new Fund to an Allocation Model;
(3) Removes an existing Fund within an Allocation Model; or
(4) Increases its Wrap Fee. Under such circumstances, the notice
and Termination Advisory are provided at least 30 days prior to the
implementation of the change.\2\
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\2\ For an annual mailing of the Termination Advisory or in the
event the Bank makes a Model Adjustment that is outside of current
parameters or a Fund is added or substituted, the Termination
Advisory will include language similar to that contained in Section
II(k)(1) and (2). In the event the Bank proposes an increase in its
Wrap Fee, the Termination Advisory will also include language
similar to that contained in Section II(k)(1). However, under such
circumstances, Section II(k)(2) will be modified state that absent
any affirmative action by the Primary Independent Fiduciary or the
Directing Independent Fiduciary, the revised Wrap Fee will be
effective as of a specified date.
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(m) With respect to its participation in the Foundations Program,
prior to purchasing shares in the Affiliated Funds and the Third Party
Funds, each Primary Independent Fiduciary, and, if applicable, each
Directing Independent Fiduciary, receives the following written or oral
disclosures from the Bank:
(1) A brochure describing the Foundations Program;
(2) A Foundations Program Asset Allocation Account Application;
(3) A Foundations Program Asset Allocation Account Purchase Order;
(4) A Foundations Program Account Agreement (the Account Agreement)
providing detailed information on the Foundations Program; the fee
structure of the Foundations Program; procedures and limitations
imposed on the Bank with respect to Model Adjustments; rebalancing of a
participating Plan investor's account; and the Bank's affiliation or
non-affiliation with the Funds, including a copy of the executed
Account Agreement between the Plan and the Bank, to the Primary
Independent Fiduciary rather than to the Directing Independent
Fiduciary;
(5) The Bank's Form ADV--Part II which contains a description of
the Bank's affiliation, if any, with the sponsors, distributors,
administrators, investment advisers, sub-advisers, custodians and
transfer agents of each Affiliated Fund and Third Party Fund; and
(6) Copies of the proposed and final exemptions with respect to the
exemptive relief described herein. (In the case of a Participant-
Directed Plan, this information may be provided directly by the Bank to
the Primary Independent Fiduciary for distribution to the Directing
Independent Fiduciaries.)
(n) Having acknowledged receipt of the documents described in
paragraph (m) of Section II, the Primary Independent Fiduciary submits
a completed Account Agreement to the Bank and represents in writing to
the Bank that such fiduciary is--
(1) Independent of the Bank and its affiliates;
(2) Knowledgeable with respect to the Plan in administrative
matters;
(3) Able to make an informed decision concerning the Plan's
participation in the Foundations Program; and
(4) Knowledgeable with respect to funding matters related to the
Plan.
(o) In addition to the initial disclosures described above in
paragraph (m) of this Section II, prior to investment in an Asset
Allocation Model, the Primary Independent Fiduciary or, if applicable,
the Directing Independent Fiduciary--
[[Page 42250]]
(1) Receives a written analysis from the Bank based on the
fiduciary's Investor Profile as well as a description of the Asset
Allocation Model recommended by a Bank's investment counselor which
includes a description of the actual fee structure and the actual basis
points to be rebated to such Plan fiduciary;
(2) Receives a prospectus for each Affiliated Fund and Third Party
Fund in which the Plan may be invested and, upon such fiduciary's
request, is provided a Statement of Additional Information which
supplements the prospectus; and
(3) Acknowledges receipt of the foregoing documents in writing to
the Bank.
(p) With respect to their ongoing participation in the Foundations
Program, each Primary Independent Fiduciary and/or Directing
Independent Fiduciary receives the following continuing disclosures
from the Bank:
(1) Copies of applicable prospectuses;
(2) Written confirmations of each purchase or redemption of shares
of an Affiliated Fund or a Third Party Fund, including transactions
implemented as a result of a realignment of the Asset Allocation
Model's investment mix or from the rebalancing of a Plan's investments
in conformity with the selected Asset Allocation Model;
(3) Telephone quotations of such Plan's balance (or if relevant,
individual account balances of Directing Independent Fiduciaries) under
the Foundations Program;
(4) Periodic, but at least quarterly, account statements showing
the Plan's value (or if relevant, individual account balances of
Directing Independent Fiduciaries), a summary of purchase, sale and
exchange activity and dividends received or reinvested and a summary of
cumulative realized gain and/or loss;
(5) Semiannual or annual reports that include financial statements
for the Funds as well as a description of the fees paid to the Bank and
its affiliates;
(6) At least annually, a written or oral inquiry from the Bank to
ascertain whether the information provided on the Investor Profile is
still accurate and to determine if such information should be updated;
(7) A Termination Advisory provided on an annual basis as well as
at other times noted in paragraph (1) of this Section II; and
(8) The Bank's investment advisory and other agreements with any
Affiliated Fund as well as its distribution agreement pertaining to the
Third Party Funds, upon request of the Primary Independent Fiduciary.
(Communications received from the Funds (e.g., prospectuses, annual
reports, quarterly reports, notices regarding changes in Fund managers,
proxy mailings, etc.) will be distributed to the Primary Independent
Fiduciary, who may elect to pass them through to the Directing
Independent Fiduciaries.)
(q) The Bank maintains, for a period of six years, the records
necessary to enable the persons described in paragraph (r) of this
Section II 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 the Bank 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 the Bank 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 (r) of this Section II below.
(r)(1) Except as provided in section (r)(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 (q) of this
Section II are unconditionally available at their customary location
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(r)(2) None of the persons described above in paragraphs (r)(1)(B)-
(r)(1)(D) of this paragraph (r) are authorized to examine the trade
secrets of the Bank or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Bank'' means the Bank of Oklahoma, N.A., a
subsidiary of BOK Financial Corporation and any affiliate of the Bank,
as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of the Bank includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the Bank.
(2) Any individual who is an officer, director or partner in the
Bank or a person described in subparagraph (b)(1) of this Section III,
and
(3) Any corporation or partnership of which the Bank or an
affiliate or person described in subparagraphs (b)(1) or (b)(2) of this
Section III, is a 10 percent or more partner or owner.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
(e) The term ``Plan'' refers to an employee benefit plan which is
eligible to participate under the Foundations Program. Such Plans are
qualified under sections 401(a) and 501(a) of the Code and include
Keogh plans (Keogh Plans); individual retirement accounts (IRAs);
simplified employee pension plans (SEP-IRAs); Salary Reduction
Simplified Employee Pensions (SARSEPs), provided that the SARSEP was
established prior to January 1, 1996, the date as of which the Code
provision authorizing such plans was repealed); and savings incentive
match plans for employees (SIMPLEs); and, in the case of a Participant-
Directed Plan, the individual account of a Directing Independent
Fiduciary.
(f) The term ``Directing Independent Fiduciary'' means, as to a
participating Plan, a participant in a Participant-Directed Plan that
is authorized to direct the investment of his or her account balance.
(g) The ``Administrative Fees'' refer to custodial, Rule 12b-1
Fees, and sub-administration fees that are paid to the Bank or its
affiliates from or on behalf of the Affiliated Funds on account of the
Bank's services to the Affiliated Funds, as well as Rule 12b-1 Fees,
sub-transfer agency fees and other fees that may be paid to the Bank or
its affiliates on account of the investment of participating Plans in
the Third Party Funds.
(h) The ``Advisory Fees'' refer to investment advisory fees that
are paid by the Affiliated Funds to the Bank and its affiliates.
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(i) The term ``Affiliated Fund'' means a portfolio of an investment
company registered under the Investment Company Act for which the Bank
or an affiliate of the Bank acts as the investment adviser, and may
also serve as custodian or sub-administrator.
(j) The term ``Asset Segment'' refers to a subdivision of each
asset class (the Asset Class) into which the Asset Allocation Model is
divided (e.g., international equities is an Asset Segment under the
Asset Class ``stocks''). Asset Segments are determined by the Bank with
reference to recognized investment objectives and styles established by
independent mutual fund analysts such as Morningstar, Inc.
(Morningstar) and Lipper Analytical Services, Inc. (Lipper).
(k) The ``Investment Management Group'' refers to a committee
comprised of the Bank's senior investment professionals.
(l) The term ``Model Adjustment'' means an adjustment to the Normal
Position of an Asset Allocation Model (i.e., a change in the Asset
Allocation Model among the three Asset Classes, the division of the
Asset Class into Asset Segments, and the identity of the Funds which
represent the various Asset Segments).
(m) The ``Normal Position'' refers to the initial allocation of
each Asset Allocation Model among the various Asset Classes, Asset
Segments and Funds.
(n) The ``Offset Fees'' refer to the Advisory Fees and
Administrative Fees that are paid by, or on behalf of, the Funds to the
Bank and/or its affiliates and which are offset against the Wrap Fee.
(o) The term ``Participant-Directed Plan'' refers to a qualified
Plan under which participants direct the investments of their
individual accounts.
(p) The term ``Primary Independent Fiduciary'' refers to a plan
fiduciary within the meaning of section 3(21)(A) of the Act who has (1)
investment discretion and authority over the Plan's assets and (2) is
not an affiliate of the Bank. Typically, the Primary Independent
Fiduciary will be the plan administrator, the employer which sponsors
the Plan, an investment committee appointed under the Plan document or
an IRA account holder.
(q) The term ``Termination Advisory'' refers to the notice advising
the Primary Independent Fiduciary or the Directing Independent
Fiduciary of the right to withdraw from the Foundations Program without
penalty. The Termination Advisory, which will contain instructions on
its use, will be provided to such participants on an annual basis, or
whenever the Bank makes a Model Adjustment that is outside of a current
Allocation Model, in the event a new Fund is added to an Allocation
Model or an existing Fund is removed from an Allocation Model, or the
Bank's Wrap Fee is increased. Depending on the circumstances
precipitating its distribution, the Termination Advisory will include a
provision advising the Primary Independent Fiduciary or the Directing
Independent Fiduciary that absent any affirmative action by the Primary
Independent Fiduciary or the Directing Independent Fiduciary, the
authorization of the Plan's participation in the Foundations Program
will continue, or the participating Plan will be reallocated in
accordance with the revised Normal Position for the Asset Allocation
Model in which the Plan's assets are invested, or the Bank's Wrap Fee
will be increased. The Bank will provide the Termination Advisory to
the Primary Independent Fiduciary and/or the Directing Independent
Fiduciary at least 30 days prior to the implementation of the proposed
change.
(r) A ``Third Party Fund'' is a portfolio of an investment company
that is registered under the Investment Company Act for which neither
the Bank nor any affiliate of the Bank acts as investment adviser,
custodian and/or sub-administrator.
(s) The term ``Wrap Fee'' refers to the Plan or account-level fee
the Bank, BOSC, Inc. (BOSC) and/or their affiliates charge each Plan
for the asset allocation, custodial and related services under the
Foundations Program.
(t) The term ``Independent Financial Analyst'' means an independent
third party which has entered into a written contract with the Bank to
(1) review the investment of Plan assets in a Third Party Fund, (2)
review the Funds each time the Bank determines to add a Third Party
Fund or replace an Affiliated Fund with a Third Party Fund, and (3)
determine that only one Fund fits an Asset Segment such that there is
no overlap between a Third Party Fund and an Affiliated Fund. The
Independent Financial Analyst may not derive more than 5 percent of its
total annual revenues from the Bank or its affiliates, including its
fee for serving as the Independent Financial Analyst.
As for minimum credentials, the Independent Financial Analyst will
be a Chartered Financial Analyst and will be employed by a firm which
has at least a regional presence in the investment products and
services industry. In addition, the individual assigned the duties of
the Independent Financial Analyst must alone, or with his or her
employer, have a certain minimum number of years experience in the
investment products and services industry and must not be affiliated
with the Bank, BOSC or BISYS Fund Services, Inc. (BISYS). Should the
Bank replace the Independent Financial Analyst, that entity must meet
the same requirements applicable to the current Independent Financial
Analyst. In addition, the Bank will be required to provide the
Department with advance written notification of the change in
Independent Financial Analysts and the qualifications of the successor.
Unless the Department objects to the change, the Foundations Program
will operate with the new Independent Financial Analyst.
Summary of Facts and Representations
Description of the Parties
1. The parties to the transactions discussed herein are described
as follows:
(a) The Bank is a national bank headquartered in Tulsa, Oklahoma
and a wholly owned subsidiary of BOK Financial Corporation, an Oklahoma
corporation. The Bank maintains 60 branch banks in the Oklahoma City
and Tulsa, Oklahoma metropolitan areas. It is the largest financial
institution headquartered in Oklahoma and provides a full array of
commercial banking and retail banking services while its non-bank
subsidiaries engage in various bank-related services, including
mortgage banking and providing credit life, accident and health
insurance on certain loans originated by its subsidiaries. The Bank
also offers a variety of trust and investment services for both
corporate and individual customers. For corporate clients, these
services include custodianship, trusteeship, management, administration
and recordkeeping of pension plans, profit sharing plans (including
401(k) plans) and master trusts.
In addition, the Bank serves as custodian of IRAs, SEP-IRAs,
SARSEPs and SIMPLE Plans and it sponsors non-standardized prototype
plans. Further, the Bank and its subsidiaries provide investment
advisory services to trust customers and mutual funds and they manage
collective investment funds. As of December 31, 1999, the Bank and its
affiliates had over $8.1 billion in assets under management.
The Bank serves as each Affiliated Fund's investment adviser.
Subject to the general supervision of the Affiliated Funds' Board of
Trustees (the Trustees)
[[Page 42252]]
and in accordance with the investment objectives and restrictions of
each Affiliated Fund, the Bank manages the Affiliated Funds, makes
decisions with respect thereto, places orders for all purchases and
sales of portfolio securities, and maintains each Affiliated Fund's
records relating to such purchases. Neither the Bank nor any affiliate
serves as the named distributor for any Fund.
(b) BOSC is a wholly owned subsidiary of the Bank and a full-
service broker-dealer and investment adviser registered with the SEC
and the National Association of Securities Dealers (NASD). The Bank
utilizes members of BOSC's sales force who have appropriate securities
licenses to market the Foundations Program. However, BOSC will not
perform any brokerage transactions on behalf of the Funds.
(c) BISYS and its wholly owned affiliate, BISYS Fund Services Ohio,
Inc. (BISYS Ohio) are not affiliated with the Bank. BISYS is the
administrator and distributor of each Affiliated Fund. BISYS Ohio, a
registered transfer agent, serves as the transfer agent and performs
fund accounting for the Affiliated Funds. For its administrative
services, BISYS may receive, from the Affiliated Funds, an annualized
fee of up to 0.20 percent of each Affiliated Fund's average daily net
assets. Under each Affiliated Fund's Distribution and Shareholder
Services Plan (the Distribution Plan), BISYS receives Rule 12b-1 Fees
on a monthly basis. The current maximum annualized Rule 12b-1 Fees paid
to BISYS is 0.25 percent of the average daily net assets of each
Affiliated Fund. For its transfer agency and fund accounting services,
BISYS Ohio may receive annual fees of up to 0.05 percent of each
Affiliated Fund's average daily net assets.
(d) CoreLink Financial, Inc. (CoreLink) is an affiliate of BISYS.
It is a full service broker-dealer and investment adviser registered
with the SEC and the NASD. It is the clearing broker for all
Foundations Program transactions and maintains custody of all of the
securities held under the Foundations Program.
(e) AMR Investments of Fort Worth, Texas, has been retained by the
Bank to serve as the Independent Financial Analyst for the Foundations
Program. AMR Investments is a wholly owned subsidiary of AMR
Corporation, the parent company of American Airlines, Inc. Incorporated
in 1986, AMR Investments is directly responsible for the investment
management and oversight of AMR Corporation's defined benefit and
defined contribution plans, as well as fixed income investments. AMR
Investments also provides investment advisory services to institutional
and retail clients and acts as manager of the American AAdvantage
Funds, a family of diversified mutual funds. Further, AMR Investments
offers customized fixed income portfolio management services. As a
multibillion dollar asset management firm, AMR Investments has clients
that include defined benefit plans, defined contribution plans,
foundations, endowments, corporations and other institutional
investors.
AMR Investments is not affiliated with the Bank, BOSC or BISYS. For
services rendered to the Bank as the Independent Financial Analyst, AMR
Investments may not derive more than 5 percent of its total annual
revenues from the Bank and/or its affiliates, including its services as
the Independent Financial Analyst.
(f) The Plans that are eligible to participate in the Foundations
Program will consist of employee benefit plans that are qualified under
sections 401(a) and 501(a) of the Code. The Plans will include Keogh
Plans, IRAs, SEP-IRAs, SARSEPs (provided that the SARSEP was
established prior to January 1, 1996, the date as of which the Code
provision authorizing such plans was repealed) and SIMPLE plans as
defined under 401(k)(11)(A) of the Code. The Bank may serve as an
eligible Plan's trustee, custodian, recordkeeper or prototype sponsor.
However, no Plan in which employees of the Bank or any of its
affiliates participate will be eligible to invest in the Foundations
Program.
The Funds
2. The Affiliated Funds consist of portfolios of the American
Performance Funds, a diversified, open-end management investment
company registered under the Investment Company Act. The Funds were
organized as a Massachusetts business trust and began active operations
in August 1990. Although the Affiliated Funds currently consist of ten
separately-managed portfolios, it is represented that additional
portfolios may be added in the future. Initially, eight Affiliated Fund
portfolios will be available to investors under the Foundations
Program.
Overall management and supervision of each Affiliated Fund rests
with such Fund's Board of Trustees. Individual Trustees may be removed
by the Board of Trustees or by the shareholders. The Trustees manage
the Affiliated Funds in accordance with Massachusetts law governing
business trusts. There are currently four Trustees, three of whom are
not ``interested persons.'' The Trustees elect the officers of the
Affiliated Funds who supervise such Funds' day-to-day operations. The
members of the Board of Trustees receive fees and are reimbursed for
their expenses in connection with each meeting of the Board of Trustees
they attend, except that no Trustee who is an officer or employee of
the Bank, any sub-adviser or BISYS receives any compensation from the
Affiliated Fund for acting as a Trustee. The Affiliated Funds' officers
receive no compensation from the Funds for performing the duties of
their offices.
The Bank, in its capacity as investment adviser, and BISYS, in its
capacity as administrator, bear all expenses incurred in connection
with the performance of their duties, other than the cost of securities
(including brokerage commissions) purchased for the Affiliated Funds.
Such expenses may include, but are not limited to, taxes, interest,
brokerage fees and commissions, fees and travel expenses for the
Trustees of the Fund, SEC fees, state securities qualification fees,
and the costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders.
3. The Third Party Funds are portfolios of diversified, open-end
management investment companies registered under the Investment Company
Act. They currently consist of the Federated Tax-Free Instruments, the
Federated GNMA Trust, the Federated Bond Fund, Franklin Insured Tax-
Free Income Fund, Federated Equity Income Fund, the Neuberger Berman
Genesis Fund and the Templeton Foreign Fund. No Third Party Fund's
sponsor, administrator, distributor, investment adviser or sub-adviser
is affiliated with the Bank.
The Proposed Transactions
4. The Foundations Program is designed to make no-load Affiliated
Funds and Third Party Funds available to an eligible Plan, thereby
affording the Plan the opportunity to diversify its investments. The
Foundations Program will also make professional asset allocation
management available to a smaller Plan which may not have the benefit
of such services. Moreover, by participating in the Foundations
Program, a Primary Independent Fiduciary or a Directing Independent
Fiduciary will receive a single, consolidated statement and pay a
single asset management fee. Finally, all dealings between a Plan
participating in the Foundations Program, the Funds and the Bank will
remain on a basis which is at least as favorable to the Plan
[[Page 42253]]
as such dealings are with other shareholders of the Funds holding the
same classes of shares as the Plan.
Accordingly, the Bank and BOSC (together, the Applicants) request
an administrative exemption from the Department in order to implement
the Foundations Program for Plan investors. If granted, the exemption
will provide relief from section 406(a) of the Act in order to permit
the purchase or redemption of shares in the Affiliated Funds and the
Third Party Funds by a Plan, in connection with the Plan's
participation in the Foundations Program. In addition, the exemption
will provide relief from section 406(b) of the Act to allow the Bank to
provide asset allocation services to a Primary Independent Fiduciary or
to a Directing Independent Fiduciary of a Participant-Directed Plan,
which may result in the selection of portfolios by the Primary
Independent Fiduciary or the Directing Independent Fiduciary in the
Foundations Program for the investment of Plan assets and the receipt
of fees by the Bank and/or its affiliates.
The Applicants are concerned that the Bank's fiduciary activities
under the Foundations Program (e.g., recommending an Asset Allocation
Model, making a Model Adjustment or rebalancing a participating Plan's
account) will cause the Plan to pay additional fees (i.e., Advisory
Fees and Administrative Fees) to the Bank or an affiliate of the Bank
or cause the Bank or a Bank affiliate to receive consideration from a
third party in connection with a transaction involving the Plan. The
Applicants are concerned that the combination of services the Bank will
provide under the Foundations Program, particularly, recommending an
Asset Allocation Model, making Model Adjustments and rebalancing
participating Plan accounts, may be deemed to constitute prohibited
acts of self-dealing in violation of section 406(b)(1) of the Act.
Therefore, the Applicants request exemptive relief from the Department
for the transactions that are described above.
Operation of the Foundations Program
5. An eligible Plan's Primary Independent Fiduciary may decide to
enroll a Plan in the Foundations Program. The minimum investment
required to establish an account in the Foundations Program is $10,000.
In the case of a Participant-Directed Plan, the minimum applies to each
account in the participating Plan. From time to time, however, the Bank
may lower or waive the minimum investment amount.
At any time, a Primary Independent Fiduciary or a Directing
Independent Fiduciary may add or withdraw assets of a Plan to or from
the Foundations Program (subject to a $100 minimum redemption and
purchase requirement per participating Plan which will continue to
apply after the first year). In the case of a Participant-Directed
Plan, the $100 limit will apply to each account in the Plan and the
contributions will be held in the American Performance U.S. Treasury
Fund, an Affiliated Fund, until such amounts reach $1,000,\3\ at which
time the contributions will be liquidated and the proceeds invested
pursuant to the appropriate Asset Allocation Model.\4\ The $100 limit
will not apply if the participating Plan is completely liquidated
(e.g., the participant terminates employment with the plan sponsor).
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\3\ Because of the regularly scheduled rebalancing of each Plan
investor's account, the $1,000 threshold for contributions will not
apply each year to new employer or employee contributions.
\4\ The Department is not providing, nor have the Applicants
requested relief from the provisions of section 404(c) of the Act
with respect to the Bank's temporary holding of contributions by a
Participant-Directed Plan in the American Performance U.S. Treasury
Fund.
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6. Each participating Plan's Primary Independent Fiduciary or
Directing Independent Fiduciary will complete an Investor Profile and
submit it to an investment counselor employed by the Bank or an
affiliate who will interact with the Plan investor. The Investor
Profile is a written questionnaire designed by BISYS and the Bank to
assess such fiduciary's risk tolerance and financial objectives as they
apply to the participating Plan. In the case of a single-participant
Plan such as an IRA, the Bank will distribute the Investor Profile and
other materials directly to the Primary Independent Fiduciary. In the
case of a Participant-Directed Plan, the Bank will provide Investor
Profiles and other information on the Foundations Program, at the
Primary Independent Fiduciary's discretion, either to the Primary
Independent Fiduciary for distribution to the Directing Independent
Fiduciary or, directly to the Directing Independent Fiduciary. If
requested by a Primary Independent Fiduciary, the Bank may also provide
additional information or documentation that is provided to such
Primary Independent Fiduciary to the Directing Independent Fiduciaries.
The responses to the Investor Profile will be analyzed by
investment counselors, employed by the Bank or an affiliate, utilizing
software developed and maintained by BISYS. Applying objective criteria
to the results of the analysis, the Bank will recommend a particular
Asset Allocation Model which is appropriate for the participating Plan.
The Asset Allocation Model will also describe the fee structure to be
applied and the actual number of basis points to be rebated to the Plan
investor and will use a spreadsheet to show how the rebate is
determined.
In conjunction with the recommendation, the Bank will provide each
Primary Independent Fiduciary or Directing Independent Fiduciary with
written materials explaining (a) market risk, (b) what to consider when
assessing one's own risk tolerance and investment objectives, (c)
historical risk and return characteristics of various Asset Classes and
Asset Segments, (d) the advantage of diversifying to reduce market
risk, and (e) historical risk and return characteristics of various
strategically-allocated portfolios. The Bank, through the investment
counselor, may also describe other Asset Allocation Models that are
available to the Plan and provide additional educational materials to
the Primary Independent Fiduciary or the Directing Independent
Fiduciary.
Before participating in the Foundations Program, each Primary
Independent Fiduciary or Directing Independent Fiduciary will also be
shown the historical performance of the recommended Asset Allocation
Model, including the number of years in which it has produced a
negative return, the average loss in each such year, the average annual
return, and the performance during the Model's five best and worst
years. The Primary Independent Fiduciary or the Directing Independent
Fiduciary may then accept the Bank's recommendation or invest the Plan
in another Asset Allocation Model. The Plan will not be permitted to
invest under the Foundations Program until the Primary Independent
Fiduciary or the Directing Independent Fiduciary affirmatively directs
the Bank to invest Plan assets under a particular Asset Allocation
Model.
At any time, a Primary Independent Fiduciary or a Directing
Independent Fiduciary may submit a new Investor Profile or choose a
different Asset Allocation Model. At least annually, the Bank will ask
each Primary Independent Fiduciary or Directing Independent Fiduciary,
in writing, whether any information included on the Investor Profile
has changed. The Bank will analyze and respond to a new Investor
Profile in the same manner that it responds to the original Investor
Profile.
7. Currently, the Bank has developed five Asset Allocation Models.
They are the Capital Preservation Model, the
[[Page 42254]]
Income Model, the Growth & Income Model, the Growth Model and the
Aggressive Growth Model. In addition to the present Asset Allocation
Models, the Bank proposes to add more Asset Allocation Models to the
Foundations Program in the future.
Each Asset Allocation Model will allocate a participating Plan's
assets among three major Asset Classes: cash equivalents, bonds and
stocks. For example, the Bank's Capital Preservation Model is invested
in Asset Classes in the following percentages: Cash Equivalents (15
percent), Bonds (60 percent) and Stocks (25 percent). Each Asset Class
will be further allocated into one or more Asset Segments, each of
which represents a class of investment that the Bank believes is
necessary to achieve the proper mix of risk and return in an Asset
Class. To this end, the Bank will use a current list of mutual fund
investment objectives and investment styles developed by Morningstar
and Lipper, independent mutual fund analysts to determine the
appropriate Asset Segments for a particular Asset Class.\5\ The Bank
will utilize Morningstar to classify equity Asset Segments and Lipper
to classify fixed-income Asset Segments (including money market funds
which Morningstar does not classify). For example, the Stock Asset
Class under the Bank's Capital Preservation Model will include
investments in three Funds (the Templeton Foreign Fund, the American
Performance Equity Fund and the American Performance Growth Equity
Fund) representing three Asset Segments (international stocks, income-
producing stocks and growth equity stocks), respectively.
---------------------------------------------------------------------------
\5\ The Bank will use the classification services provided by
Morningstar and Lipper unless circumstances beyond its control
require that the Bank select another independent, established mutual
fund analyst.
---------------------------------------------------------------------------
The Bank's Investment Management Group, which is comprised of the
Bank's senior investment professionals, will determine the allocation
of each Asset Allocation Model among the major Asset Classes, as well
as the allocation of the major Asset Classes among the Asset Segments.
In effect, the Investment Management Group will follow the
classification systems devised by Morningstar and/or Lipper in order to
fill particular Affiliated Funds or Third Party Funds within the given
Asset Segments.
Model Adjustments
8. The Bank's Investment Management Group creates and monitors the
composition of the Asset Allocation Models and reviews each Model's
composition at least monthly. As noted in Representation 7, the
Investment Management Group also determines the Asset Allocation
Model's division among the three Asset Classes, the division of each
Asset Class into Asset Segments and the allocation of each Asset
Segment among the Affiliated Funds and the Third Party Funds.\6\ The
breakdown among the Asset Classes and the Funds which comprise those
classes when a participating Plan is first invested pursuant to the
Asset Allocation Model is the Model's ``Normal Position.'' The
Investment Management Group may adjust the Normal Position periodically
as dictated by changing economic and market conditions. There are two
types of Model Adjustments: (a) Those that the Bank may make
unilaterally and (b) those that require the consent of the Primary Plan
fiduciary. Any deviation from the Normal Position will apply to the
Plan assets invested pursuant to the Asset Allocation Model both prior
to and after the deviation (i.e., both old and new money).\7\
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\6\ As discussed in Representation 11, the Investment Management
Group will select a Third Party Fund to fill an Asset Segment only
when (a) an Affiliated Fund representing that Asset Segment does not
exist or (b) an Affiliated Fund representing the Asset Segment
exists but it is not an ``equivalent'' to the Third Party Fund. To
be equivalent to a Third Party Fund, an Affiliated Fund must have
been publicly offering shares for at least one year. The total
return performance for the Affiliated Fund must be equal to or
exceed the total return performance of the Third Party Fund for
either the most recent one year reporting period or the annualized
three, five or ten year reporting periods. Further, the total
expense ratio for the Affiliated Fund, determined in accordance with
SEC rules for performance, must not be higher than the relevant
Third Party Fund. In addition, as noted above, the Bank will
determine which Fund fits within an Asset Segment based upon
criteria developed by Morningstar and Lipper as to what type of Fund
should fill that Asset Segment. As discussed in Representation 13,
the Independent Financial Analyst, using Morningstar or Lipper
classification criteria, will compare the Third Party Funds with the
Affiliated Funds.
\7\ In this regard, once the Normal Position is adjusted, the
revised Normal Position will be applied to the entire Plan rather
than only to amounts contributed to the Plan after the effective
date of the adjustment. For example, assume that a Plan has invested
$100,000 in Asset Allocation Model X, which is equally divided
between Funds A and B. Because the Plan has been rebalanced, it has
almost equal amounts invested in Funds A and B, despite their uneven
earnings. When Asset Allocation Model X is adjusted to provide for a
55 percent investment in Fund A and a 45 percent allocation to Fund
B, the entire $100,000 in the plan will be invested, accordingly--
i.e., $55,000 in Fund A and $45,000 in Fund B. Future contributions
to the Plan will be allocated in a similar manner.
---------------------------------------------------------------------------
A Model Adjustment does not include the substitution of a Fund but
is deemed necessary to effect a change to an Allocation Model due to
market conditions. The Bank anticipates that Funds will be substituted
only under extraordinary circumstances (see Representation 14) whereby
advance notice will be given to the Primary Independent Fiduciary to
effect the change. Accordingly, a Model Adjustment and a Fund
substitution are treated as a separate process by the Bank.
With respect to unilateral Model Adjustments, the Account Agreement
entered into by each Primary Independent Fiduciary will authorize the
Bank to deviate from the Normal Position of a given Asset Allocation
Model within a specified range, not exceeding 15 percent above or below
the Normal Position. The Model Adjustment will be made for all clients
having the same Asset Allocation Model. The percentage will be applied
to the Model's entire allocation, so the adjusted stock position of,
for example, the Capital Preservation Model (the Normal Position of
which has 25 percent invested in stocks), could range from 10 percent
to 40 percent. The specified range may be higher for a deviation from
the Asset Allocation Model's cash position which will be governed by
the Account Agreement. Any change to an Asset Class will be separately
allocated among the Asset Segments.
A corresponding decrease in an Asset Class must also fall within
the authorized deviation parameters. Further, the original Normal
Position will remain the standard for determining whether future Model
Adjustments fall within the acceptable range.
9. The Bank may not change the Normal Position (i.e., deviate more
than the range specified in the Account Agreement) without providing
the Primary Independent Fiduciary of each participating Plan that is
invested pursuant to the affected Asset Allocation Model with a written
notice of the impending change at least 30 days in advance of its
effective change. If requested by the Primary Independent Fiduciary of
a Participant-Directed Plan, the Bank will provide this notice to each
Directing Independent Fiduciary. The 30 day notice period is intended
to give the Primary Independent Fiduciary or the Directing Independent
Fiduciary time to withdraw from the Foundations Program if he or she
elects not to have the change made. The notice will include a
Termination Advisory which will advise the Primary Independent
Fiduciary or the Directing Independent Fiduciary (a) of his or her
right to withdraw from the Foundations Program without penalty and (b)
that
[[Page 42255]]
absent affirmative action by the Primary or Directing Independent
Fiduciary, the Plan will be reallocated in accordance with the revised
Normal Positions for the Asset Allocation Model, effective as of a
given date.
If the Bank makes a Model Adjustment outside of the specified
limits, the new allocation percentages will become the revised Normal
Position for the Asset Allocation Model. The Account Agreement will
then authorize the Bank to again deviate within the specified ranges
and will require the 30 day notice and Termination Advisory described
above for a shift outside the revised Normal Position.
Rebalancing
10. After a participating Plan is invested in an Asset Allocation
Model, varying performance results among the Funds that comprise the
Asset Allocation Model will eventually cause a Plan to fail to meet the
Normal Position set forth in the applicable Asset Allocation Model.
Therefore, prior to the end of each calendar quarter, the Bank will
review each participating Plan to determine whether its allocation
among the Funds will be materially out of line with the parameters
prescribed by the Asset Allocation Model. The Bank will apply the net
asset value of the affected Funds as of the end of each calendar
quarter. A Plan is materially out of line with the Asset Allocation
Model parameters if at least one transaction required to rebalance the
participating Plan among the Funds (a) would involve a purchase or sale
of securities valued at $100 or more, or (b) the net asset value of the
Fund affected would represent more than 5 percent of the Plan's
investment in such Fund. If a participating Plan is rebalanced, the
Bank will buy and sell Fund shares from the distributor at net asset
value, as of the close of business on a pre-established date within 5
business days prior to the end of the calendar quarter, in the amounts
necessary to bring the participating Plan back into conformity with the
appropriate Asset Allocation Model at the Asset Segment level. There
will be no cross-trading of securities between the Funds. Neither the
Bank nor its affiliates will receive commissions from such sales and
the participating Plans will not be charged a redemption fee.
The Account Agreement will disclose the circumstances under which a
participating Plan will be rebalanced and the date on which the
necessary trades will occur. It is represented that rebalancing will
not involve the exercise of any investment discretion by the Bank.
The Primary Independent Fiduciary or the Directing Independent
Fiduciary will not be given the option of not having their account in
the Plan rebalanced because this, according to the Bank, will undermine
the Asset Allocation Model concept. As noted herein, each Primary
Independent Fiduciary or Directing Independent Fiduciary will, however,
have the option of selecting another Asset Allocation Model or
withdrawing from the Foundations Program.
Fund Monitoring
11. The Bank's Investment Management Group will select and
periodically review the performance and continued suitability of the
Affiliated and Third Party Funds that are included within each Asset
Allocation Model. The Investment Management Group will select an
Affiliated Fund to fill an Asset Segment when there is an appropriate
Affiliated Fund but will select Third Party Funds when (a) an
Affiliated Fund representing that Asset Segment does not exist or (b)
an Affiliated Fund representing the Asset Segment exists but it is not
an ``equivalent'' of the Third Party Fund. As noted above, an
Affiliated Fund is deemed the equivalent of a Third Party Fund if (a)
the Affiliated Fund has been publicly offering shares for at least one
year, (b) total return performance of the Affiliated Fund is equal to
or exceeds the total return performance of the Third Party Fund for
either the most recent one year reporting period or the annualized
three, five or ten year reporting periods, and (c) the total expense
ratio, determined in accordance with SEC rules for performance, is not
higher than the relevant Third Party Fund.\8\
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\8\ As noted previously, assuming there are 75 Small Cap
International Funds within the universe of Third Party Funds, the
Independent Financial Analyst will examine all of the relevant Funds
using the Morningstar or Lipper classification systems.
---------------------------------------------------------------------------
12. To review the selection by the Investment Management Group of a
Third Party Fund to fill an Asset Segment, the Bank will retain the
Independent Financial Analyst. As stated previously, the Independent
Financial Analyst may not derive more than 5 percent of its total
annual revenues from the Bank or its affiliates, including its fee for
serving as the Independent Financial Analyst. As for minimum
credentials, the Independent Financial Analyst must be a Chartered
Financial Analyst and employed by a firm which has at least a regional
presence in the investment products and services industry. In addition,
the individual assigned the duties of the Independent Financial Analyst
must alone, or with his or her employer, have a certain minimum number
of years experience in the investment products and services industry
and must not be affiliated with the Bank, BOSC or BISYS.
Should the Bank replace the Independent Financial Analyst, that
entity must meet the same requirements applicable to the current
Independent Financial Analyst. Under such circumstances, the Bank will
be required to inform the Department 60 days in advance of the change.
In addition, the Bank will also be required to describe the
qualifications of the successor. Unless the Department objects to the
change within 60 days of notification, the Foundations Program will
continue to operate with the new Independent Financial Analyst.
13. On an annual basis, the Independent Financial Analyst will
determine whether the use of a Third Party Fund during the previous
year has satisfied the selection criteria set forth in Representation
11. (To recap, no Affiliated Fund is in existence and if in existence,
the Affiliated Fund is not equivalent to the Third Party Fund.) The
Independent Financial Analyst will also determine that the Third Party
Fund considered by the Bank represents the correct Asset Segment based
upon Morningstar or Lipper classifications. If the Independent
Financial Analyst determines that a Third Party Fund has been used
under circumstances which do not satisfy these criteria, an appropriate
Affiliated Fund will be substituted after appropriate notice (i.e., the
Termination Advisory) is given to the Primary Independent Fiduciary or
the Directing Independent Fiduciary, if applicable. (See Representation
14.)
Additionally, the Independent Financial Analyst will review the
Funds each time the Bank determines to add a Third Party Fund or
replace an Affiliated Fund with a Third Party Fund. In this regard, the
Independent Financial Analyst will be required to certify that the
proposed change satisfies the ``in existence'' and ``equivalence''
criteria set forth above in Representation 11 before the effective date
of the change.
Further, the Independent Financial Analyst will be required to
determine that for an Asset Segment there is no overlap between a Third
Party Fund and an Affiliated Fund. Specifically, the Independent
Financial Analyst will determine (a) that the array of Third
[[Page 42256]]
Party and Affiliated Funds does not include two or more Funds which are
in the same classification under both the Morningstar and Lipper
classification systems; and (b) that no Third Party Fund which is to be
added is in the same Asset Class as an existing Affiliated Fund under
both the Morningstar and Lipper classification systems.
14. If the Investment Management Group determines that an
Affiliated Fund or a Third Party Fund should be replaced with another
Fund, the Bank will give written notice to the Primary Independent
Fiduciary of each participating Plan which is invested in the affected
Asset Allocation Model at least 30 days in advance of the effective
date of the Fund change. If requested by the Primary Independent
Fiduciary, the Bank will also provide this notice to each Directing
Independent Fiduciary. The notice will also include a Termination
Advisory that will advise the Primary Independent Fiduciary of the
right to withdraw from the Foundations Program or allow the Directing
Independent Fiduciary to transfer to a different Asset Allocation Model
without penalty.
Fee Structure
15. As to each investing Plan, the total fees that are paid to the
Bank and its affiliates will constitute no more than reasonable
compensation for the services provided to the participating Plans. In
this regard, the Bank and its affiliates will receive four types of
fees: (a) Advisory Fees from the Affiliated Funds,\9\ (b) Non-Advisory
Fees from the Affiliated Funds (i.e., Administrative Fees), (c)
Administrative Fees from the Third Party Funds, and (d) the Wrap Fee
paid by each participating Plan at the Plan-level. All fees received
from sources other than the participating Plan or the Plan's sponsor
will be applied to offset the Plan's legal obligation to the Bank and
its affiliates. Under no circumstances will such fees increase the
compensation received by the Bank or its affiliates.\10\
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\9\ It should be noted that Advisory Fees may also be paid by
the Affiliated Funds to unrelated sub-advisers who may be retained
by the Bank in the future to perform investment management and/or
advisory services to Plans investing under the Foundations Program.
These sub-advisory fees are not applied to offset the Plan's legal
obligation to the Bank and should be considered by the appropriate
Plan fiduciary in evaluating the appropriateness of the Foundations
Program.
\10\ The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
fiduciaries of the Plans from the general fiduciary responsibility
provisions of section 404 of the Act. Thus, the Department cautions
Primary Independent Fiduciaries of Plans investing in the Funds that
they have an ongoing duty under section 404 of the Act to monitor
the services provided to the Plans to assure that the services
remain appropriate and that the fees paid by the Plans for such
services are reasonable in relation to the value of the services
provided. In considering whether to enter into the arrangement for
the provision of asset allocation services, the Department
emphasizes that it expects the Primary Independent Fiduciary to
fully understand the operation of the Foundations Program and the
compensation paid thereunder, following disclosure by the Bank of
all relevant information pertaining to the Program.
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(a) Advisory Fees. The annualized Advisory Fees of the Affiliated
Funds, which range from 0.40 percent to 0.69 percent, are calculated
daily and paid monthly on the Affiliated Fund's average daily net
assets. However, the Bank may, from time to time, waive all or a
portion of the Advisory Fee. Each fee arrangement between the Bank and
an Affiliated Fund must be approved by the Board of Trustees of the
Affiliated Fund, including a majority of the Trustees who are not
``interested persons.''
(b) Administrative Fees from the Affiliated Funds and BISYS. The
Bank is compensated for acting as custodian to the Affiliated Funds.
For its custodial services, the Bank currently receives an annual fee
of 0.03 percent of the average daily net assets of each of the
Affiliated Funds.
In addition, the Bank may receive Administrative Fees from BISYS in
the form of annualized Rule 12b-1 Fees, pursuant to each Affiliated
Fund's Distribution Plan. Such Rule 12b-1 Fees will not exceed 0.25
percent of the average daily net assets of each Affiliated Fund.\11\
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\11\ Under each Affiliated Fund's Distribution Plan, the Fund
pays BISYS Rule 12b-1 Fees on a monthly basis [see Representation
1(c)] in order to provide distribution assistance to, or compensate
financial intermediaries, broker-dealers or similar entities
(including the Bank and affiliates or subsidiaries of BISYS and/or
the Bank) for providing shareholder services.
---------------------------------------------------------------------------
Further, BISYS currently retains the Bank as sub-administrator to
the Affiliated Funds. BISYS presently pays the Bank an annualized fee
of 0.05 percent of each Affiliated Fund's daily net assets.
(c) Administrative Fees from the Third Party Funds. The Third Party
Funds may pay Administrative Fees such as Rule 12b-1 Fees or similar
fees to the Bank or its affiliates for shareholder services (e.g., fund
recordkeeping, accounting in connection with a participating Plan's
purchase or redemption of shares of the Third Party Fund, processing
purchase and redemption transactions involving the Plans and providing
mutual fund enrollment material to Primary or Directing Independent
Fiduciaries). The annualized Administrative Fees range from 0.08
percent to 0.50 percent.
(d) The Plan-Level Wrap Fee. For their asset allocation, custodial
and related services, the Bank, BOSC, and/or their affiliates will
charge each participating Plan an annual investment fee (i.e., the Wrap
Fee). If the Plan's average daily value (including amounts invested in
either the Third Party Funds or Affiliated Funds) is less than $25,000,
the Wrap Fee will equal 1.80 percent of $25,000, unless the minimum
investment amount is lowered, in which case the Wrap Fee will equal
1.80 percent of the minimum investment. For balances greater than the
minimum investment, the fee will be calculated as follows: 1.80 percent
on $1-$99,999; 1.55 percent on $100,000-$249,999; and 1.45 percent on
any balance above $250,000. Breakpoints will be calculated on a per-
participating Plan basis rather than on each account in that Plan.
From time to time, the Bank may increase or reduce the Wrap Fee. In
the event of a Wrap Fee increase, the Bank will notify the Primary
Independent Fiduciary or, if applicable, the Directing Independent
Fiduciary, of the impending increase at least 30 days prior to its
effective date of the change. The written notification will include a
Termination Advisory and remind the Primary Independent Fiduciary of
the impending increase at least 30 days prior to its effective date.
The written notification will include a Termination Advisory which will
(a) advise the Primary Independent Fiduciary or the Directing
Independent Fiduciary of the right to withdraw from the Foundations
Program without penalty; and (b) state that absent any affirmative
action by the Primary Independent Fiduciary or the Directing
Independent Fiduciary, the new Wrap Fee will be effective no earlier
than 30 days after the receipt of the notice and the Termination
Advisory.
The Wrap Fee is assessed quarterly in arrears on the Plan's average
daily net asset value during the quarter. The Wrap Fee will be deducted
directly from the Plan.
Fund Fees and Offset
16. As noted in Representation 15, the Bank and its affiliates may
receive, either directly or indirectly, various fees from the
Affiliated Funds and the Third Party Funds which will be fully
disclosed to investors in applicable prospectuses. The Bank proposes to
offset all Advisory Fees, Administrative Fees and Rule 12b-1 Fees that
are paid to it and its affiliates with respect to a Plan's investment
in a Fund (collectively, the Offset Fees), from the
[[Page 42257]]
quarterly Wrap Fee charged to that Plan. The Bank believes that the
offset will eliminate any conflict of interest which may exist as a
result of the fact that an investment in certain Funds would generate
higher overall fees for the Bank and its affiliates, and will also
eliminate any indirect benefit that the Bank may gain by including
Funds that pay higher Advisory or Administrative Fees in the Asset
Allocation Models.
The Bank will deduct the Offset Fees as follows. At the end of each
quarter, the Bank will calculate the revenues that it received during
the quarter in the form of Offset Fees on a pro rata basis for each
Plan invested in the Foundations Program. These figures will be a
percentage of the average daily net value of participating Plan assets
in each Affiliated and Third Party Fund. The Bank will reduce the Wrap
Fee charged to each Plan for that quarter by that Plan's allocable
portion of the Offset Fees for the Asset Allocation Model in which the
Plan's assets were invested during the quarter. Thus, the sum of the
Wrap Fee which the Bank and its affiliates actually receive with
respect to each Plan (following the offset) and the Offset Fees will
always equal the total Wrap Fee to which the Primary Independent
Fiduciary agreed to in the Account Agreement and the selection of
Affiliated or Third Party Funds will always be revenue-neutral.
17. The Bank has provided the following example to demonstrate how
the Offset Fee mechanism will work:
Mr. Smith meets with a Bank investment counselor on April 3,
2000. After going through the education, profiling and
recommendation process, he decides to invest his IRA through the
Foundations Program. Mr. Smith accepts the Bank's recommendation
that, based on the results of his Investor Profile, the Growth and
Income Model is the appropriate vehicle for the IRA. So, on April 3,
2000, Mr. Smith invests $47,928.76 in that Asset Allocation Model.
This initial investment is allocated as follows:
----------------------------------------------------------------------------------------------------------------
Allocation
Fund (percent) Dollar amount Price Shares
----------------------------------------------------------------------------------------------------------------
American Performance Treasury Money Market...... 5 $2,396.44 $1.00 2,396.440
American Performance Short-Term Income Fund..... 10 4,792.88 10.02 478.331
American Performance Intermediate Bond Fund..... 5 2,396.44 10.36 231.317
American Performance Bond Fund.................. 5 2,396.44 9.53 251.463
Federated GNMA Fund............................. 10 4,792.88 11.32 423.399
Federated Bond Fund............................. 10 4,792.88 10.05 476.903
Federated Equity Income Fund.................... 9 4,313.59 19.21 224.549
American Performance Equity Fund................ 29 13,899.34 17.96 773.905
American Performance Growth Equity Fund......... 9 4,313.57 12.12 355.905
Templeton Foreign Fund.......................... 3 1,437.86 11.10 129.537
Neuberger & Berman Genesis Assets Fund.......... 5 2,396.44 14.33 167.232
---------------------------------------------------------------
Total....................................... 100 47,928.76 .............. ..............
----------------------------------------------------------------------------------------------------------------
Wrap Fee
Three business days prior to the end of the calendar quarter
(i.e., June 28, 2000), the Bank takes the following steps to
calculate the fee charged to Mr. Smith's account for the second
quarter of 2000:
<bullet> The Bank calculates the average balance of Mr. Smith's
account during the quarter as $48,124.44.
<bullet> The annual Wrap Fee on accounts of up to $99,000 is
1.80 percent. Therefore, the quarterly fee is 45 basis points or
0.45 percent of the average daily balance during the quarter. Mr.
Smith's quarterly Wrap Fee is $216.56 ($48,124.44 x 0.45%). This
amount is deducted from the account based on the Fund/fee hierarchy.
\12\ The Fund/fee hierarchy determines which position(s) will be
liquidated to pay fees. Because Mr. Smith has enough assets in the
American Performance Treasury Money Market Fund to pay the fee, a
liquidation of $216.56 is posted to this Fund.
---------------------------------------------------------------------------
\12\ It is represented that Funds are liquidated to pay fees in
the following order: American Performance U.S. Treasury Fund,
American Performance Intermediate Bond Fund, American Performance
Bond Fund, Federated Bond Fund, Federated GNMA Trust Fund, Federated
Equity Income Fund, American Performance Equity Fund, Templeton
Foreign Fund, Neuberger and Berman Genesis Asset Fund and the
American Performance Aggressive Growth Fund.
Because each Asset Allocation Model, other than the Aggressive
Growth Model, includes an investment in a money market fund, the
Bank anticipates that almost all of the Wrap Fee will be taken from
the American Performance Treasury Money Market Fund. An Account's
entire holding in a particular Fund will be liquidated before any
portion of the next Fund in the hierarchy is liquidated. If the
liquidation is more than $1,000, the Account automatically will be
rebalanced. If the liquidation is for $100 to $1,000, the Account
will be rebalanced at the next quarter's end. If the liquidation is
for less than $100, the Account will not be rebalanced on account of
the fee payment, although it may be rebalanced in the regular course
of the Foundations Program.
---------------------------------------------------------------------------
Offset Fees
<bullet> The Bank prepares a spreadsheet detailing the
annualized compensation it received from the Affiliated Funds and
the Third Party Fund during the quarter. For example,
------------------------------------------------------------------------
Allocation Basis points
Fund (percent) received
------------------------------------------------------------------------
American Performance Treasury Money 5 2
Market.................................
American Performance Short-Term Income 10 1
Fund...................................
American Performance Intermediate Bond 5 3
Fund...................................
American Performance Bond Fund.......... 5 3
Federated GNMA Fund..................... 10 3
Federated Bond Fund..................... 10 3
Federated Equity Income Fund............ 9 2
American Performance Equity Fund........ 29 24
American Performance Growth Equity Fund. 9 7
Templeton Foreign Fund.................. 3 1
Neuberger & Berman Genesis Assets Fund.. 5 3
-------------------------------
Total............................... 100 52
------------------------------------------------------------------------
[[Page 42258]]
<bullet> The rebate to be credited to Mr. Smith's account is
calculated by multiplying his average daily balance ($48,124.44) by
the basis points received (52) and then dividing the result by 4.
The rebate ($62.56) [($48,124.44 x 0.52%/4)] is credited to the
American Performance Treasury Money Market Fund. \13\
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\13\ For each Fund represented in the foregoing Asset Allocation
Model, the Bank will determine the total number of basis points
received on an annual basis from all fee sources within that Fund.
As noted above, these fees include Rule 12b-1 Fees, Advisory Fees
and Administrative Fees. For example, for the American Performance
Equity Fund, the total annual basis points received is 83.
The Bank will then multiply this amount (83) by the percentage
of the Fund contained in the Asset Allocation Model. In this Asset
Allocation Model, 29 percent of the investor's money is allocated to
the American Performance Equity Fund. Accordingly, under the Bank's
fee-offset arrangement, 29 percent of 83 basis points (or 24 basis
points) will be rebated to Mr. Smith's account.
The Bank represents that this method of allocation will be
repeated for all Funds shown in this particular Asset Allocation
Model. The total rebated amounts attributable to each Fund will be
added together to arrive at the total number of basis points that
will be rebated to investors in this Asset Allocation Model.
Accordingly, Mr. Smith and other investors in this Asset Allocation
Model, will be rebated 52 basis points on an annual basis.
In addition, Mr. Smith and other investors will receive full
disclosure from the Bank regarding the fees and the fee-offset
arrangement, including the actual number of basis points to be
rebated under an applicable Allocation Model. To show how the rebate
is calculated, a spreadsheet will be utilized. Finally, an investor
will see rebated amounts in their performance statements. (See also
Representations 6 and 18.)
---------------------------------------------------------------------------
Disclosures
18. Aside from the Investor Profile described in Representation 6,
Primary Independent Fiduciaries and Directing Independent Fiduciaries
will receive several types of disclosures: (a) Initial disclosures
which are made to the Primary Independent Fiduciary and, if applicable,
the Directing Independent Fiduciary before a Plan is enrolled under the
Foundations Program; (b) subsequent disclosures which are made
exclusively to the Primary Independent Fiduciary; (c) specific
disclosures which are made to the Primary Independent Fiduciary or the
Directing Independent Fiduciary; and (d) continuing disclosures that
are made to the Primary Independent Fiduciary or the Directing
Independent Fiduciary throughout the time that the participating Plan
is enrolled under the Foundations Program.
(a) Initial Disclosures for the Primary Independent Fiduciary or
the Directing Independent Fiduciary. Before a Plan's assets are
invested under the Foundations Program, the Primary Independent
Fiduciary or, if applicable, the Directing Independent Fiduciary, will
receive a brochure describing the Foundations Program, a Foundations
Asset Allocation Account Application, a Foundations Asset Allocation
Purchase Order, and a Foundations Program Account Agreement. The
Account Agreement will provide detailed information on the Foundations
Program, including the way in which fees are calculated and charged,
the procedure for and limitations on the Bank's ability to make Model
Adjustments and its rebalancing of a participating Plan, and the
procedure to be followed in the event that the Primary or Directing
Independent Fiduciary objects to a Model Adjustment. In addition, the
Bank will disclose, through the Form ADV-Part II, its affiliation or
non-affiliation with the Funds to the Primary Independent Fiduciary
prior to such fiduciary's enrolling an eligible Plan in the Program.
Further, the Bank will provide to the Primary Independent Fiduciary the
executed Account Agreement and copies of the proposed exemption and the
grant notice. Assuming the Bank provides copies of the proposed
exemption and the grant notice directly to the Primary Independent
Fiduciary, such disclosures may be distributed by the Primary
Independent Fiduciary to the Directing Independent Fiduciaries.
To participate in the Foundations Program, the Primary Independent
Fiduciary will submit a completed Account Agreement to the Bank. In
addition, the Primary Independent Fiduciary will be required to
represent in writing that such fiduciary is (1) independent of the Bank
and its affiliates; (2) knowledgeable with respect to the Plan in
administrative matters; (3) able to make an informed decision
concerning the participating Plan's participation in the Foundations
Program; and (4) knowledgeable with respect to funding matters related
to the Plan.
Once the Plan is enrolled in the Foundations Program, the Primary
Independent Fiduciary or, if applicable, the Directing Independent
Fiduciary, will complete an Investor Profile and submit it to an
investment counselor in the manner described herein in Representation
6.
(b) Subsequent Disclosures Exclusively for the Primary Independent
Fiduciary. In addition to the initial disclosures described above in
Representation 18(a), the Bank will provide each Primary Independent
Fiduciary with the following materials and/or oral disclosures: (1) A
copy of the executed Account Agreement between the Plan and the Bank;
and (2) a description of the Bank's affiliation, if any, with the
sponsors, distributors, administrators, investment advisers, sub-
advisers, custodians and transfer agents of each Affiliated and Third
Party Fund. In addition, the Primary Independent Fiduciary will
acknowledge in writing that he or she has received copies of the
aforementioned documents prior to investing in the Foundations Program.
(c) Specific Disclosures for the Primary Independent Fiduciary or
the Directing Independent Fiduciary. The Bank will provide each Primary
Independent Fiduciary or Directing Independent Fiduciary with the
following materials and/or oral disclosures prior to investing in an
Asset Allocation Model: (1) a written analysis based on such
fiduciary's Investor Profile, (2) a description of the Asset Allocation
Model recommended by the Bank's investment counselor, which includes a
description of the actual fee structure and the actual number of basis
points that will be rebated to such Plan fiduciary; (3) a prospectus
for each Affiliated Fund and Third Party Fund in which the Plan may be
invested, showing, among other things, the internal fees for the Fund;
and (4) upon the request of the Primary Independent Fiduciary or the
Directing Independent Fiduciary, a Statement of Additional Information
which supplements the prospectus. The Primary Independent Fiduciary or
the Directing Independent Fiduciary will also acknowledge in writing to
the Bank that he or she has received copies of the aforementioned
documents prior to the Plan's investment in an Asset Allocation Model.
(d) Continuing Disclosures for the Primary Independent Fiduciary or
the Directing Independent Fiduciary. In addition to the disclosures
described above, the Bank will provide each Primary Independent
Fiduciary and Directing Independent Fiduciary with the following
continuing disclosures: (1) Copies of applicable prospectuses; (2)
written confirmation of each purchase and redemption of shares of an
Affiliated Fund or a Third Party Fund, including transactions
implemented as a result of a realignment of the Asset Allocation
Model's investment mix or from the rebalancing of a participating
Plan's investments in conformity with the selected Asset Allocation
Model; (3) telephone quotations of the Plan's balance under the
Foundations Program; (4) periodic, but at least quarterly, account
statements showing the Plan's value, a summary of purchase, sale and
exchange activity and dividends received or reinvested, a summary of
cumulative realized gain and/or loss, and rebated amounts; (5)
semiannual or annual reports that include financial
[[Page 42259]]
statements for the Funds, as well as a description of the fees that are
paid by the Funds to the Bank and its affiliates; (6) at least
annually, a written or oral inquiry from the Bank to ascertain whether
information provided on the Investor Profile is still accurate and to
determine if such information should be updated; (7) an annual
Termination Advisory; and (8) the Bank's investment advisory and other
agreements with any Affiliated Fund as well as its distribution
agreement pertaining to the Third Party Funds, upon request.
Communications received from the Funds will be distributed to the
Primary Independent Fiduciary, who may elect to pass this information
through to Directing Independent Fiduciaries.
Finally, for a period of six years, the Bank will maintain records
necessary to enable the Department, Plan fiduciaries, participants and
others to determine whether the conditions of the requested exemption
have been met.
More Steering Concerns
19. The Applicants state that the Asset Allocation Models used in
the Foundations Program were designed to meet very specific risk
tolerances and investment objectives developed by Morningstar and
Lipper. The Applicants note that each Asset Segment in an Asset
Allocation Model performs a role in addressing those tolerances and
objectives. In this regard, the Applicants explain that each Asset
Segment is represented by only one Fund--an Affiliated Fund or a Third
Party Fund. Therefore, the Applicants state that the Bank cannot steer
assets within an Asset Allocation Model to a Third Party Fund rather
than an Affiliated Fund representing the same Asset Segment.
20. In summary, the Applicants represent that the proposed
transactions will satisfy the statutory criteria for an administrative
exemption under section 408(a) of the Act because:
(a) The investment of a Plan's assets under the Foundations Program
will be made by a Primary Independent Fiduciary or a Directing
Independent Fiduciary who is independent of the Bank and its affiliates
such that the Plan fiduciary will maintain complete discretion with
respect to participating under the Foundations Program.
(b) No Plan will pay a fee or commission by reason of the
acquisition or redemption of shares of the Funds.
(c) As to each Plan, the total fees that are paid to the Bank and
its affiliates will constitute no more than reasonable compensation for
the services provided.
(d) Prior to investing under the Foundations Program, each Primary
Independent Fiduciary or Directing Independent Fiduciary will receive
offering materials and disclosures from the Bank which set forth all
material facts concerning the purpose, fee structure, rebate
arrangement, operation, rebalancing, risks and participation in such
Program.
(e) The Bank will provide written documentation to a Primary
Independent Fiduciary or a Directing Independent Fiduciary of its
recommendations based upon objective criteria that will be uniformly
applied.
(f) The quarterly Wrap Fee that is paid by a Plan to the Bank for
asset allocation and related services rendered to such Plan under the
Portfolio Advisor Program will be offset by--(1) All Advisory Fees
received by the Bank and/or its affiliates from the Affiliated Funds;
(2) all Administrative Fees that are received by the Bank from the
Affiliated Funds; and (3) all Administrative Fees that are paid by the
Third Party Funds to the Bank and/or its affiliates, such that the sum
of the Wrap Fee and the Offset Fees will always equal the total Wrap
Fee and the selection of Affiliated or Third Party Funds will always be
revenue-neutral.
(g) No Plan assets will be invested according to a Model Adjustment
without the consent of the Primary Independent Fiduciary if the Model
Adjustment is outside the range specified in the Account Agreement.
(h) The periodic rebalancing of a Plan investor's account will not
involve an exercise of discretionary management or control over the
Plan by the Bank.
(i) The Bank will retain the Independent Financial Analyst to (1)
review the investment of Plan assets in a Third Party Fund to ensure
adequate performance and suitability, (2) review the Funds each time
the Bank determines to add a Third Party Fund or replace an Affiliated
Fund with a Third Party Fund; and (3) ensure that there is no overlap
between the Funds.
(j) Although the Primary Independent Fiduciary or the Directing
Independent Fiduciary may withdraw from the Foundations Program at any
time, any authorizations made by such Plan investors with respect to
increases in the Wrap Fee, Model Adjustments that are outside of an
Asset Allocation Model, the addition or substitution of a Fund, will be
terminable at will and without penalty to the Plan.
(k) Each Primary Independent Fiduciary or Directing Independent
Fiduciary will receive ongoing disclosures from the Bank regarding the
continued participation of the Plan in the Foundations Program.
(l) All dealings between a Plan, the Funds and the Bank will remain
on a basis which is at least as favorable to the Plan as such dealings
are with other shareholders of the Funds holding the same classes of
shares as the Plan.
Notice to Interested Persons
The Applicants represent that because potentially interested
participants and beneficiaries of eligible Plans which might choose to
participate in the Foundations Program cannot be identified at this
time, the only practical means of notifying such participants and
beneficiaries of this proposed exemption is by publication of the
notice of pendency in the Federal Register. Therefore, comments and
requests for a hearing must be received by the Department no later than
30 days from the date of the publication of this notice of proposed
exemption in the Federal Register.
For Further Information Contact: Ms. Jan D. Broady of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
First Tennessee National Corporation Located in Memphis, Tennessee
[Application No. D-10898]
Proposed Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A.(1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice
[[Page 42260]]
with respect to the assets of that Excluded Plan.\14\
---------------------------------------------------------------------------
\14\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
---------------------------------------------------------------------------
B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act,
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code, shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.\15\ For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
---------------------------------------------------------------------------
\15\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
---------------------------------------------------------------------------
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975(a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust,
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in, the prospectus or private
placement memorandum provided to investing plans before they purchase
certificates issued by the trust.\16\
---------------------------------------------------------------------------
\16\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
---------------------------------------------------------------------------
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed by reason of section 4975(c) of the Code, for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. The restrictions of sections 406(a) and 407(a) of the Act, and
the taxes imposed by sections 4975(a) and (b) of the Code by reason of
sections 4975(c)(1)(A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating
from a rating agency (as defined in section III.W.) at the time of such
acquisition that is in one of the three highest generic rating
categories;
(4) The trustee is not an affiliate of any other member of the
Restricted Group. However, the trustee shall not be considered to be an
affiliate of a servicer solely because the trustee has succeeded to the
rights and responsibilities of the servicer pursuant to the terms of a
pooling and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933;
and
(7) In the event that the obligations used to fund a trust have not
all been transferred to the trust on the closing date, additional
obligations as specified in subsection III.B.(1) may be transferred to
the trust during the pre-funding period (as defined in section III.BB.)
in exchange for amounts credited to the pre-funding account (as defined
in section III.Z.), provided that:
(a) The pre-funding limit (as defined in section III.AA.) is not
exceeded;
(b) All such additional obligations meet the same terms and
conditions for eligibility as those of the original obligations used to
create the trust corpus (as described in the prospectus or private
placement memorandum and/or pooling and servicing agreement for
[[Page 42261]]
such certificates), which terms and conditions have been approved by a
rating agency. Notwithstanding the foregoing, the terms and conditions
for determining the eligibility of an obligation may be changed if such
changes receive prior approval either by a majority of the outstanding
certificateholders or by a rating agency;
(c) The transfer of such additional obligations to the trust during
the pre-funding period does not result in the certificates receiving a
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(d) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the trust at the
end of the pre-funding period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the trust on the closing date;
(e) In order to ensure that the characteristics of the receivables
actually acquired during the pre-funding period are substantially
similar to those which were acquired as of the closing date, the
characteristics of the additional obligations will be either monitored
by a credit support provider or other insurance provider which is
independent of the sponsor, or an independent accountant retained by
the sponsor will provide the sponsor with a letter (with copies
provided to the rating agency, the underwriter and the trustees)
stating whether or not the characteristics of the additional
obligations conform to the characteristics of such obligations
described in the prospectus, private placement memorandum and/or
pooling and servicing agreement. In preparing such letter, the
independent accountant will use the same type of procedures as were
applicable to the obligations which were transferred as of the closing
date;
(f) The pre-funding period shall be described in the prospectus or
private placement memorandum provided to investing plans; and
(g) The trustee of the trust (or any agent with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to the Act.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this proposed exemption:
A. ``Certificate'' means:
(1) A certificate--
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) A certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) or a Financial Asset Securitization
Investment Trust (FASIT) within the meaning of section 860D(a) or
section 860L, respectively, of the Internal Revenue Code of 1986; and
(b) That is issued by, and is an obligation of, a trust; with
respect to certificates defined in (1) and (2) above for which FTNC or
any of its affiliates is either (i) the sole underwriter or the manager
or co-manager of the underwriting syndicate, or (ii) a selling or
placement agent.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1)(a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association); and/or
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T); and/or
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property); and/or
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U); and/or
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2); and/or
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) Property which had secured any of the obligations described in
subsection B.(1);
(3)(a) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and/or
(b) Cash or investments made therewith which are credited to an
account to provide payments to certificateholders pursuant to any yield
supplement agreement or similar yield maintenance arrangement to
supplement the interest rates otherwise payable on obligations
described in subsection III.B.(1) held in the trust, provided that such
arrangements do not involve swap agreements or other notional principal
contracts; and/or
(c) Cash transferred to the trust on the closing date and permitted
investments made therewith which:
(i) Are credited to a pre-funding account established to purchase
additional obligations with respect to which the conditions set forth
in clauses (a)-(g) of subsection II.A.(7) are met and/or;
(ii) Are credited to a capitalized interest account (as defined in
section III.X.); and
(iii) Are held in the trust for a period ending no later than the
first distribution date to certificateholders occurring after the end
of the pre-funding period.
[[Page 42262]]
For purposes of this clause (c) of subsection III.B.(3), the term
``permitted investments'' means investments which are either: (i)
direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by the United States, or any agency
or instrumentality thereof, provided that such obligations are backed
by the full faith and credit of the United States or (ii) have been
rated (or the obligor has been rated) in one of the three highest
generic rating categories by a rating agency; are described in the
pooling and servicing agreement; and are permitted by the rating
agency; and
(4) rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship, yield supplement agreements
described in clause (b) of subsection III.B.(3) and other credit
support arrangements with respect to any obligations described in
subsection III.B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the investment pool consists only of
assets of the type described in clauses (a) through (f) of subsection
III.B.(1) which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have
been rated in one of the three highest generic rating categories by a
rating agency for at least one year prior to the plan's acquisition of
certificates pursuant to this proposed exemption, and (iii)
certificates evidencing interests in such other investment pools have
been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
proposed exemption.
C. ``Underwriter'' means:
(1) First Tennessee National Bank (the Bank) or First Tennessee
Securities Corporation (FTSC);
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
FTNC; or
(3) Any member of an underwriting syndicate or selling group of
which FTNC or a person described in (2) is a manager or co-manager with
respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services obligations contained in
the trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services obligations
contained in the trust, including the master servicer and any
subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this proposed
exemption (if granted) applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
[[Page 42263]]
(1) Which is secured by equipment which is leased;
(2) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) With respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust owns or holds a security interest in the lease;
(2) The trust owns or holds a security interest in the leased motor
vehicle; and
(3) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. ``Rating Agency'' means Standard & Poor's Structured Rating
Group (S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps
Credit Rating Co. (D & P) or Fitch IBCA, Inc. (Fitch), or their
successors.
X. ``Capitalized Interest Account'' means a trust account: (i)
which is established to compensate certificateholders for shortfalls,
if any, between investment earnings on the pre-funding account and the
pass-through rate payable under the certificates; and (ii) which meets
the requirements of clause (c) of subsection III.B.(3).
Y. ``Closing Date'' means the date the trust is formed, the
certificates are first issued and the trust's assets (other than those
additional obligations which are to be funded from the pre-funding
account pursuant to subsection II.A.(7)) are transferred to the trust.
Z. ``Pre-Funding Account'' means a trust account: (i) which is
established to purchase additional obligations, which obligations meet
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and
(ii) which meets the requirements of clause (c) of subsection
III.B.(3).
AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount
allocated to the pre-funding account, as compared to the total
principal amount of the certificates being offered which is less than
or equal to 25 percent.
BB. ``Pre-Funding Period'' means the period commencing on the
closing date and ending no later than the earliest to occur of: (i) the
date the amount on deposit in the pre-funding account is less than the
minimum dollar amount specified in the pooling and servicing agreement;
(ii) the date on which an event of default occurs under the pooling and
servicing agreement; or (iii) the date which is the later of three
months or 90 days after the closing date.
CC. ``FTNC'' means First Tennessee National Corporation, a
Tennessee corporation, and its affiliates.
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts (see 60 FR at 35932).
Summary of Facts and Representations
1. FTNC, a Tennessee corporation, is a Memphis, Tennessee based
bank holding company, which has assets of over $18 billion and through
its subsidiaries, including the Bank, operates 419 branches in various
cities in Tennessee, Arkansas and Mississippi. FTNC also owns and
operates subsidiaries that engage in trust, brokerage, investment
management, mortgage banking and consumer finance, including First
Tennessee ABS, Inc.
FTSC is a subsidiary of the Bank. On April 12, 1999, the Office of
the Controller of the Currency (OCC) granted approval for the Bank to
establish FTSC as a wholly-owned subsidiary of the Bank. The OCC
approval permitted FTSC to engage in certain securities activities
which are permissible for national banks to engage in directly, and
also to underwrite and deal in municipal revenue bonds. On January 28,
2000, the OCC granted approval for FTSC to expand its activities in
underwriting and dealing activities with respect to all types of debt
and equity securities other than interests in open-end investment
companies. On March 13, 2000, the OCC approved a certification and
notice filed by the Bank for FTSC to become a ``financial subsidiary''
as permitted by the Gramm-Leach-Bliley Act (G-L-B Act) and OCC
regulation. As a financial subsidiary, FTSC may conduct securities
activities which are permissible for the Bank to engage in directly as
well as securities activities which the G-L-B Act has defined as
``financial in nature,'' such as underwriting, dealing in, and making a
market in, all types of securities, including interests in open-end
investment companies.
Trust Assets
2. FTNC seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) Single and multi-family residential or
commercial mortgage investment trusts; \17\ (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.\18\
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\17\ The Department notes that PTE 83-1 [48 FR 895, January 7,
1983], a class exemption for mortgage pool investment trusts, would
generally apply to trusts containing single-family residential
mortgages, provided that the applicable conditi |
