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Secretary of Labor Thomas E. Perez
Grant of Individual Exemptions; The Banc Funds Company, LLC (TBFC) [Notices] [08/10/2000]

EBSA (Formerly PWBA) Federal Register Notice

Grant of Individual Exemptions; The Banc Funds Company, LLC (TBFC) [08/10/2000]

[PDF Version]

Volume 65, Number 155, Page 49018-49028


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 2000-37; Exemption Application No. D-
10624, et al.]

 
Grant of Individual Exemptions; The Banc Funds Company, LLC 
(TBFC)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) from certain of the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, DC. The

[[Page 49019]]

notices also invited interested persons to submit comments on the 
requested exemptions to the Department. In addition the notices stated 
that any interested person might submit a written request that a public 
hearing be held (where appropriate). The applicants have represented 
that they have complied with the requirements of the notification to 
interested persons. No public comments and no requests for a hearing, 
unless otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, effective December 
31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. 1 (1996), transferred the authority of the Secretary of the 
Treasury to issue exemptions of the type proposed to the Secretary of 
Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:
    (a) The exemptions are administratively feasible;
    (b) They are in the interests of the plans and their participants 
and beneficiaries; and
    (c) They are protective of the rights of the participants and 
beneficiaries of the plans.

The Banc Funds Company, LLC (TBFC)

Located in Chicago, IL

[Prohibited Transaction Exemption 2000-37; Exemption Application No. D-
10624]

Exemption

Section I. Covered Transactions

    The restrictions of sections 406(a) and 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)(A) through (D) of the Code, shall not 
apply, effective July 15, 1998, to: (1) The purchase or redemption of 
interests in the Banc Fund V, L.P. (the Partnership) by employee 
benefit plans (the Plans) investing in the Banc Fund V Group Trust (the 
BF V Group Trust), where TBFC, a party in interest with respect to the 
Plans, is the general partner of MidBanc V, L.P., which is, in turn, 
the general partner (the General Partner) of the Partnership; (2) the 
sale, for cash or other consideration, by the Partnership of certain 
securities that are held as Partnership assets, to a party in interest 
with respect to a Plan participating in the Partnership through the BF 
V Group Trust, where the party in interest proposes to acquire or merge 
with the portfolio company (the Portfolio Company) that issued such 
securities; and (3) the payment to the General Partner, by Plans 
participating in the Partnership through the BF V Group Trust, of an 
incentive fee (the Performance Fee) which is intended to reward the 
General Partner for the superior performance of investments in the 
Partnership.
    This exemption is subject to the following conditions as set forth 
below in Section II.

Section II. General Conditions

    (a) Prior to a Plan's investment in the BF V Group Trust and the 
Partnership, a Plan fiduciary which is independent of TBFC and its 
affiliates (the Independent Fiduciary) approves such investments on 
behalf of the Plan.
    (b) Each Plan investing in the BF V Group Trust and the Partnership 
has total assets that are in excess of $50 million.
    (c) No Plan may invest more than 10 percent of its assets in the BF 
V Group Trust, and the interests held by the Plan may not exceed 25 
percent of the assets of the BF V Group Trust.
    (d) No Plan may invest more than 25 percent of its assets in 
investment vehicles (i.e., collective investment funds or separate 
accounts) managed or sponsored by TBFC and/or its affiliates.
    (e) Prior to investing in the BF V Group Trust and the Partnership, 
each Independent Fiduciary contemplating investing therein receives a 
Private Placement Memorandum and its supplement containing descriptions 
of all material facts concerning the purpose, structure and the 
operation of the BF V Group Trust and the Partnership.
    (f) An Independent Fiduciary which expresses further interest in 
the BF V Group Trust and Partnership receives--
    (1) A copy of the BF V Group Trust Agreement outlining the 
organizational principles, investment objectives and administration of 
the BF V Group Trust, the manner in which shares in the Group Trust may 
be redeemed, the duties of the parties retained to administer the BF V 
Group Trust and the manner in which BF V Group Trust shares are to be 
valued; and
    (2) A copy of the Partnership Agreement describing the 
organizational principles, investment objective and administration of 
the Partnership, the manner in which the Partnership interests may be 
redeemed, the manner in which Partnership assets are to be valued, the 
duties and responsibilities of the General Partner, the rate of 
remuneration of the General Partner, and the conditions under which the 
General Partner may be removed.
    (g) If accepted as an investor in the BF V Group Trust and the 
Partnership, the Independent Fiduciary is--
    (1) Furnished with the names and addresses of all other 
participating Plan and non-Plan investors in the Partnership;
    (2) Required to acknowledge, in writing, prior to purchasing a 
beneficial interest in the BF V Group Trust (and a corresponding 
limited partnership interest in the Partnership) that such Independent 
Fiduciary has received copies of such documents; and
    (3) Required to acknowledge, in writing, to the General Partner 
that such fiduciary is independent of TBFC and its affiliates, capable 
of making an independent decision regarding the investment of Plan 
assets, knowledgeable with respect to the Plan in administrative 
matters and funding matters related thereto, and able to make an 
informed decision concerning participation in the BF V Group Trust and 
the Partnership.
    (h) Each Plan, including the trustee (the Trustee) of the BF V 
Group Trust, receives the following written disclosures from the 
General Partner with respect to its ongoing participation in the BF V 
Group Trust and the Partnership:
    (1) Within 90 days after the end of each fiscal year of the BF V 
Group Trust as well as at the time of termination, an annual financial 
report containing a balance sheet for the BF V Group Trust and the 
Partnership as of the end of such fiscal year and a statement of 
changes in the financial position for the fiscal year, as audited and 
reported upon by independent, certified public accountants. The annual 
reports will also disclose the remuneration that has accrued or is paid 
to the General Partner;
    (2) Within 60 days after the end of each quarter (except in the 
last quarter) of each fiscal year of the Partnership and the BF V Group 
Trust, an unaudited quarterly financial report consisting of at least a 
balance sheet for the Partnership and the BF V Group Trust as of the 
end of such quarter and a profit and loss statement for such quarter. 
The quarterly report will also specify the remuneration that is 
actually paid or accrued to the General Partner; and
    (3) Such other written information as may be needed by the Plans 
(including copies of the proposed exemption and grant notice describing 
the exemptive relief provided herein).

[[Page 49020]]

    (i) At least annually, the General Partner will hold a meeting of 
the Partnership, at which time, the Independent Fiduciaries of the 
participating Plans will have the opportunity to decide on whether the 
Partnership, the BF V Group Trust, the Trustee or the General Partner 
should be terminated as well discuss any aspect of the Partnership, the 
BF V Group Trust and the agreements promulgated thereunder with the 
General Partner.
    (j) During each year of the BF V Group Trust and the Partnership, 
representatives of the General Partner will be available to confer by 
telephone or in person with independent Plan fiduciaries to discuss 
matters concerning the BF V Group Trust or the Partnership.
    (k) The terms of all transactions that are entered into on behalf 
of the Partnership remain at least as favorable to a Plan investing in 
the BF V Group Trust as those obtainable in arm's length transactions 
with unrelated parties. In this regard, the valuation of assets in the 
Partnership that is done in connection with the distribution of any 
part of the General Partner's Performance Fee will be based upon 
independent market quotations or (where the same are unavailable) 
determinations made by an independent appraiser.
    (l) In the case of the sale by the Partnership of Portfolio Company 
securities to a party in interest with respect to a participating Plan 
that occurs in connection with the acquisition of a Portfolio Company 
represented in the Partnership's portfolio, the party in interest may 
not be the General Partner, TBFC, any employer of a participating Plan, 
or any affiliate thereof, and the Partnership receives the same terms 
as is offered to other shareholders of a Portfolio Company.
    (m) As to each Plan, the total fees paid to the General Partner and 
its affiliates constitute no more than ``reasonable compensation'' 
within the meaning of section 408(b)(2) of the Act.
    (n) Any increase in the General Partner's Performance Fee is based 
upon a predetermined percentage of net realized gains minus net 
unrealized losses determined annually between the date the first 
contribution is made to the Partnership until the time the Partnership 
disposes of its last investment. In this regard,
    (1) Except as provided below in Section II(o), no part of the 
General Partner's Performance Fee may be withdrawn before December 31, 
2005, which represents the end of the Acquisition Phase (the 
Acquisition Phase) for the Partnership, and not until the BF V Group 
Trust has received distributions equal to 100 percent of its capital 
contributions made to the Partnership;
    (2) Prior to the termination of the Partnership, no more than 75 
percent of the Performance Fee credited to the General Partner may be 
withdrawn by the General Partner;
    (3) The debit account established for the General Partner to 
calculate the Performance Fee (the Performance Fee Account) is credited 
annually with a predetermined percentage of net realized gains minus 
net unrealized losses, minus Performance Fee distributions;
    (4) No portion of the Performance Fee may be withdrawn if the 
Performance Fee Account is in a deficit position; and
    (5) The General Partner repays all deficits in its Performance Fee 
Account and it maintains a 25 percent cushion in such account prior to 
receiving any further distribution.
    (o) During the Acquisition Phase of the Partnership only,
    (1) The General Partner is entitled to take distributions with 
respect to the Performance Fee in the amount of any income tax 
liability it or its affiliates become subject to with respect to net 
capital gains of the Partnership, provided such gains are based upon 
the sale of Portfolio Company securities that is initiated by a third 
party in connection with a merger, tender offer or acquisition, and 
does not involve the exercise of discretion by the General Partner;
    (2) The tax distributions are deducted from the Performance Fee;
    (3) The General Partner repays to the Partnership any tax refund 
received to the extent a distribution has been made to such General 
Partner; and
    (4) The General Partner provides the Trustee and the Plans with an 
annual report and accounting of all distributions and repayments 
attributable to income taxation of the General Partner and its 
affiliates, including written evidence that the distributions have been 
utilized exclusively to pay the income tax liability.
    (p) The General Partner maintains, for a period of six years, the 
records necessary to enable the persons described in paragraph (q) 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 General 
Partner, the records are lost or destroyed prior to the end of the six 
year period; and
    (2) No party in interest other than the General Partner 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 (q) below.
    (q)(1) Except as provided in section (q)(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 (p) of this 
Section II shall be unconditionally available at their customary 
location during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) Any Independent Fiduciary of a participating Plan or any duly 
authorized representative of such Independent 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.
    (q)(2) None of the persons described above in subparagraphs (B)-(D) 
of this paragraph shall be authorized to examine the trade secrets of 
the General Partner or TBFC or commercial or financial information 
which is privileged or confidential.

Section III. Definitions

    For purposes of this exemption,
    (a) The term ``TBFC'' means The Banc Funds Company and any 
affiliate of TBFC as defined in paragraph (b) of Section III.
    (b) An ``affiliate'' of TBFC includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with TBFC;
    (2) Any officer, director or partner in such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director or a 5 percent partner or owner.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) An ``Independent Fiduciary'' is a Plan fiduciary which is 
independent of TBFC and its affiliates and is either a Plan 
administrator, trustee, named fiduciary, as the recordholder of 
beneficial Interests in the BF V Group Trust or an investment manager.

[[Page 49021]]

    (e) The term ``Portfolio Companies'' include commercial banks and 
other depository institutions such as savings banks, savings and loan 
associations, holding companies controlling those entities, and 
companies providing financial services in the United States, which 
include, but are not limited to, consumer finance companies and 
demutualizing life insurance companies.
    (f) The term ``net realized gains'' refers to the excess of 
realized gains over realized losses.
    (g) The term ``net realized losses'' refers to the excess of 
realized losses over realized gains.
    (h) The term ``net unrealized losses'' refer to the excess of 
unrealized losses over unrealized gains.
    (i) The term ``net unrealized gains'' refers to the excess of 
unrealized gains over unrealized losses. For a gain or loss to be 
``realized,'' an asset of the Partnership must be sold for more than or 
less than its acquisition price. For a gain or loss to be 
``unrealized,'' the Partnership asset must increase or decrease in 
value but not be sold.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption (the Notice) that was published on May 
23, 2000 at 65 FR 33360.
    Effective Date: This exemption is effective as of July 15, 1998.

Written Comments

    The Department received two written comments with respect to the 
Notice and no requests for a public hearing. The comments, which were 
submitted by TBFC, requested certain modifications to the Notice and 
the Summary of Facts and Representations (the Summary). Discussed below 
are TBFC's suggested changes to the Notice and the Summary, as well as 
the Department's responses with respect thereto.
    1. ``Effective'' Dates. TBFC has pointed out several discrepancies 
in the anticipated term of BF V as well as during the period in which 
the Performance Fee can typically be drawn. TBFC represents that the 
scheduled termination date of the Partnership is December 31, 2007, 
according to Section 9.02 of the Trust Agreement and Section 5 of the 
Partnership Agreement. However, TBFC states that the Notice indicates 
that the Partnership is scheduled to terminate on December 31, 2008 and 
the Performance Fee draw down period is scheduled to occur during 2007 
and 2008. Thus, TBFC explains that the dates contained in the Notice 
are in arrears of the actual commencement, operation and termination of 
the Partnership.
    In this regard, TBFC states that examples of these date 
discrepancies can be summarized in the following table:

------------------------------------------------------------------------
         FR page no.                Location               Comment
------------------------------------------------------------------------
33362.......................  Section II(n)(1)....  Describes the
                                                     beginning of the
                                                     Performance Fee
                                                     draw down period
                                                     (i.e., the end of
                                                     the Acquisition
                                                     Phase) as being
                                                     after December 31,
                                                     2006 when it really
                                                     begins after
                                                     December 31, 2005.
33364.......................  Summary,              TBFC notes that the
                               Representation 6,     expected
                               second paragraph,     termination date of
                               second sentence.      the Partnership is
                                                     correctly
                                                     identified as
                                                     December 31, 2007
                                                     here.
33365.......................  Summary,              Identifies the date
                               Representation 10,    after which
                               third paragraph,      Management Fees may
                               first sentence.       be reduced (if
                                                     return of capital
                                                     has been
                                                     sufficient) as
                                                     December 31, 2006,
                                                     when the date is
                                                     December 31, 2005.
33366.......................  Summary,              Describes the
                               Representation        beginning of the
                               11(c), first          Performance Fee
                               sentence.             draw down period as
                                                     January 1, 2007
                                                     when the actual
                                                     date is January 1,
                                                     2006.
33366.......................  Summary,              Describes the period
                               Representation 12,    over which the
                               first paragraph,      Performance Fee can
                               second sentence.      be drawn as running
                                                     through 2007 and
                                                     2008, when the
                                                     actual years are
                                                     2006 and 2007.
33367.......................  Summary,              Identifies the
                               Representation 14,    expected
                               first and second      termination date of
                               sentences.            the Partnership as
                                                     December 31, 2008
                                                     when the actual
                                                     date is December
                                                     31, 2007.
33370.......................  Summary,              Describes the
                               Representation        Performance Fee
                               21(k)(1), second      draw down period as
                               sentence.             beginning after
                                                     December 31, 2006
                                                     when the actual
                                                     date is December
                                                     31, 2005.
------------------------------------------------------------------------

    In response to this comment, the Department wishes to emphasize its 
original understanding that TBFC would not organize the Partnership 
until after the final exemption had been granted. Assuming the 
Partnership had become operational then, there would be no 
discrepancies in the dates for the general draw down periods for the 
Performance Fee or the termination of the Partnership. Nevertheless, 
the Department has noted the aforementioned changes to the operative 
language of the Notice and the Summary. The Department has also 
modified Section II(n)(1) of the final exemption to reflect the fact 
that the Performance Fee can be drawn down after December 31, 2005.
    At TBFC's request, the Department has also agreed to make the final 
exemption retroactive to July 15, 1998. TBFC explains that this is the 
date that the Partnership received its first cash contributions from 
investors.
    2. Other Clarifications. TBFC has identified a typographical error 
on page 33364 of the Summary, in the fifth sentence of Footnote 6. In 
this regard, TBFC explains that the reference should be to ``BF III'' 
and not to ``BF II.''
    In addition, TBFC observes that on page 33366 of the Summary, the 
word ``repay'' in Representation 11(f) should be substituted for the 
word ``prepay'' in the sentence stating ``The General Partner must 
prepay any deficit in the Performance Fee Account.''
    In response to these comments, the Department has noted the 
aforementioned clarifications to the Summary.
    For further information regarding TBFC's comment letters and other 
matters discussed herein, interested persons are encouraged to obtain 
copies of the exemption application file (Exemption Application No. D-
10624) the Department is maintaining in this case. The complete 
application file, as well as all supplemental submissions

[[Page 49022]]

received by the Department, are made available for public inspection in 
the Public Documents Room of the Pension and Welfare Benefits 
Administration, Room N-5638, U.S. Department of Labor, 200 Constitution 
Avenue, NW, Washington, DC 20210.
    Accordingly, after giving full consideration to the entire record, 
including TBFC's written comments, the Department has decided to grant 
the exemption subject to the modifications and clarifications described 
above.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Standard Insurance Company (Standard)

Located in Portland, OR

[Prohibited Transaction Exemption 2000-38; Exemption Application No. D-
10705]

Exemption

Section I. Covered Transactions

    The restrictions of section 406(a) of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (D) of the Code, shall not apply, 
effective April 21, 1999, to (1) the receipt of common stock (Stock) of 
the StanCorp Financial Group, Inc. (the Holding Company), the parent of 
Standard, or (2) the receipt of cash (Cash) or policy credits (Policy 
Credits), by or on behalf of any eligible policyholder (the Eligible 
Member) of Standard which is an employee benefit plan (the Plan), 
including the Standard Group Life, Supplemental Life and AD&D Plan for 
Employees and Agents and the Standard Group Term and Short Term 
Disability Employees Plan (the Standard Welfare Plans), in exchange for 
such Eligible Member's interest in Standard, in accordance with the 
terms of a plan of demutualization (the Plan of Demutualization or 
Demutualization Plan) adopted by Standard and implemented pursuant to 
Chapter 732 of the Oregon Revised Statutes.\1\
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    \1\ Unless otherwise noted, the client Plans and the Standard 
Welfare Plans and other Plans sponsored by Standard and its 
affiliates are collectively referred to as the Plans. In addition, 
unless otherwise noted, the Standard Welfare Plans and other Plans 
sponsored by Standard and its affiliates are together referred to as 
the Standard Plans.
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    In addition, the restrictions of section 406(a)(1)(E) and (a)(2) 
and section 407(a)(2) of the Act shall not apply, effective April 21, 
1999, to the receipt or holding by the Standard Welfare Plans, of 
employer securities in the form of excess Holding Company Stock, in 
accordance with the terms of the Demutualization Plan.
    The exemptions described above are subject to the following 
conditions:
    (a) The Plan of Demutualization was implemented in accordance with 
procedural and substantive safeguards that were imposed under Oregon 
Insurance Law and was subject to review and supervision by the Director 
of the Department of Consumer and Business Services of the State of 
Oregon (the Director).
    (b) The Director reviewed the terms of the options that were 
provided to Eligible Members of Standard, which included, but were not 
limited to the subject Plans, as part of his review of the 
Demutualization Plan, and only approved such Demutualization Plan 
following a determination that the Plan was fair and equitable to all 
Eligible Members and was not detrimental to the public.
    (c) Each Eligible Member had an opportunity to vote to approve the 
Plan of Demutualization after full written disclosure was given to the 
Eligible Member by Standard.
    (d) One or more independent fiduciaries of a Plan that was an 
Eligible Member received Holding Company Stock, Cash or Policy Credits, 
pursuant to the terms of the Demutualization Plan, and neither Standard 
nor any of its affiliates exercised any discretion or provided 
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c), with 
respect to such acquisition.
    (e) With respect to the Standard Plans, where the consideration was 
in the form of Holding Company Stock, Northwestern Trust and Advisory 
Company, the independent Plan fiduciary appointed to represent the 
interests of each of the Standard Plans,
    (1) Exercised its authority and responsibility to vote on behalf of 
the Standard Plans at the special meeting of Eligible Members on the 
proposal to approve the Demutualization Plan;
    (2) Monitored the Holding Company Stock received by a Standard 
Plan; and
    (3) Provided instructions with respect to the voting, the continued 
holding and the disposition of Holding Company Stock held by all of the 
Standard Plans.
    (f) After each Eligible Member was allocated at least 52 shares of 
Holding Company Stock, additional consideration was allocated to 
Eligible Members who owned participating policies based on actuarial 
formulas that took into account each participating policy's 
contribution to the surplus of Standard which formulas have been 
approved by the Director.
    (g) All Eligible Members that were Plans participated in the 
transactions on the same basis within their class groupings as other 
Eligible Members that were not Plans.
    (h) No Eligible Member paid any brokerage commissions or fees in 
connection with the receipt of Holding Company Stock, nor has (or will) 
such Eligible Member pay any brokerage commissions or fees in 
connection with the implementation of the commission-free sales and 
purchase program.
    (i) All of Standard's policyholder obligations will remain in force 
and will not be affected by the Plan of Demutualization.

Section II. Definitions

    For purposes of this exemption:
    (a) The term ``Standard'' means The Standard Insurance Company and 
any affiliate of Standard as defined in paragraph (b) of this Section 
II.
    (b) An ``affiliate'' of Standard includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with Standard; (For purposes of this paragraph, the term ``control'' 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual.) and
    (2) Any officer, director or partner in such person.
    (c) The term ``Eligible Member'' means a policyholder who is 
eligible to vote and to receive consideration under Standard's 
Demutualization Plan. Such Eligible Member must have been a 
policyholder of Standard on September 28, 1998, the date the Plan of 
Demutualization was adopted by the Board of Directors of Standard.
    (d) The term ``policy credit'' means an increase in the 
accumulation account value \2\ (to which no surrender or similar 
charges are applied) in the general account or an increase in a 
dividend accumulation on a policy.
---------------------------------------------------------------------------

    \2\ In general, a policy's accumulation account value is 
expressed in dollar terms and reflects contributions and interest 
credited under the policy, less expenses and withdrawals. 
Accumulation values may be applied for the purchase of annuity 
benefits, or depending on the provisions of the contract, withdrawn 
by the policyholder in a lump sum or installments. Under Standard's 
Plan of Demutualization, where a policy eligible for distributions 
under such Plan has an accumulation value, the policy's accumulation 
value will be increased by an amount equal to the distribution the 
policyholder is entitled to under the Plan.
---------------------------------------------------------------------------

    Effective Date: This exemption is effective as of April 21, 1999.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of

[[Page 49023]]

proposed exemption (the Notice) that was published on May 23, 2000 at 
65 FR 33370.

Written Comments

    The Department received one written comment with respect to the 
Notice. The comment was submitted by Standard and it requested 
clarification to the Notice and the Summary of Facts and 
Representations (the Summary) of the Notice in certain areas. Discussed 
below is Standard's comment letter and the Department's responses to 
Standard's concerns.
    1. Citation of Oregon Law. Standard represents that throughout the 
Notice, the reader is cited to ``Section 732 of the Oregon Revised 
Statutes.'' Unless a statutory number is included (e.g., 732.600), 
Standard suggests that it is appropriate to cite to ``Chapter 732.''
    In response to this comment, the Department has revised the 
operative language of the Notice by substituting the word ``Chapter'' 
for the word ``Section'' in the reference to the Oregon Revised 
Statutes. The Department also acknowledges corresponding modifications 
to the Notice, on pages 33372 and 33373 of the Summary, in 
Representations 8 and 9.
    2. Relevant Dates. On page 33371 of the Notice, Section II of the 
Definitions states, in pertinent part, that ``[s]uch Eligible Member 
must have been a policyholder of Standard on December 17, 1997, the 
date the Plan of Demutualization was adopted by the Board of Directors 
of Standard.'' However, on page 33373 of the Summary, Representation 9 
of the Notice indicates that December 17, 1998 was the day on which 
``Standard's Board of Directors adopted the Demutalization Plan.''
    Standard explains that December 17, 1997 was the date on which 
Standard publicly announced its Board of Directors' intention to pursue 
the Plan of Demutualization rather than December 17, 1998. In addition, 
Standard indicates that the Plan of Demutualization was subsequently 
adopted by its Board of Directors on September 28, 1998.
    Finally, on page 33372 of the Summary, Representation 7 of the 
Notice states that the Director approved the Plan of Demutualization in 
January 1999. Standard wishes to clarify that the Plan was approved on 
February 12, 1999.
    In response to these comments, the Department has revised Section 
II(c) of the Definitions to reflect the September 28, 1998 adoption 
date of Standard's Plan of Demutualization by its Board of Directors 
and acknowledges this change in Representation 9 of the Summary. In 
addition, the Department notes the February 12, 1999 approval date of 
Standard's Plan of Demutualization in Representation 7 of the Summary.
    3. Number of Outstanding Policies. On page 33371 of the Notice, 
Representation 1 of the Summary discusses, in the fourth paragraph, the 
number of outstanding policies that were subject to provisions of the 
Act. Standard notes that the figures provided were only its preliminary 
estimates rather than final figures. After cross-checking and 
eliminating duplicate entries, Standard represents that approximately 
27,600 of its policies were issued to pension plans or welfare plans 
that were governed by the Act. Of these policies, approximately 4,600 
covered pension plans and 23,000 covered welfare benefit plans. In 
addition, Standard states that the same paragraph contains a reference 
to ``group health'' plans which are included within the ``welfare 
plan'' category. Standard wishes to point out that it does not issue a 
group health plan.
    The Department notes the foregoing clarifications to Representation 
1 of the Summary.
    4. Ownership of Standard's Affiliates. On page 33371 of the Notice, 
Representation 3 of the Summary indicates that the assets of Standard 
Mortgage Investors and Standard Real Estate Investors are owned 
completely by Standard through Standard Management. For purposes of 
clarification, Standard represents that as of the effective date of the 
demutualization (i.e., April 21, 1999), Standard Mortgage Investors and 
Standard Real Estate Investors were purchased by StanCorp Financial 
Group, the Holding Company. Therefore, Standard explains that these 
entities are currently owned by the Holding Company.
    Similarly, on page 33371 of the Summary, Representation 3 states 
that Standard, through Standard Management, Inc., owns 100 percent of 
several named subsidiaries. As of the effective date of the Plan of 
Demutualization, Standard states that it sold Standard Management, Inc. 
and its subsidiaries to the Holding Company. Therefore, as of that date 
and currently, Standard indicates that the Holding Company owns 100 
percent of Standard Management, Inc. and its subsidiaries.
    In response to these comments, the Department acknowledges the 
foregoing clarifications to Representation 3 of the Summary.
    5. Policyholder Consideration. On page 33373 of the Notice, 
Representation 9 of the Summary lists the Standard policyholders who 
were entitled to receive Cash in lieu of Stock. In addition to this 
list, Standard explains that public entities, such as States and their 
political subdivisions, also received Cash in lieu of Stock because of 
potential State constitutional and statutory restrictions on such 
entities receiving and owning Stock.
    However, Standard asserts that on page 33373 of the Notice, the 
third paragraph of Representation 10 states that ``The decision to 
receive Holding Company Stock, Cash or Policy Credits by a Plan was 
made by one or more fiduciaries of such Plan which was independent of 
Standard and its affiliates.'' Standard represents that the decision 
regarding which policyholders would receive Stock, Cash or Policy 
Credits was determined by the Plan of Demutualization, as approved by 
the Director, except for those policyholders who received 99 or less 
shares or Stock, in which case the Plan fiduciary made the election to 
receive Cash or Stock.
    The Department acknowledges this comment and is aware that 
Standard's Plan of Demutualization essentially governed the form of 
consideration that was distributed to an Eligible Member and that, 
except in limited instances, the Eligible Member had no choice in the 
allocation process. However, the Department believes that the sentence 
should be read in conjunction with the next sentence in the paragraph 
which states, in part, that ``* * * neither Standard nor any of its 
affiliates exercised discretion or provided `investment advice' within 
the meaning of 29 CFR 2510.3-21(c), with respect to such acquisition.'' 
If read in this manner, the Department wishes to emphasize that the 
primary thrust of both sentences is the notion that Standard did not, 
in any way, influence or advise an independent Plan fiduciary to accept 
whatever form of consideration that was allocated to such Eligible 
Member.
    For further information regarding Standard's comment letter and 
other matters discussed herein, interested persons are encouraged to 
obtain copies of the exemption application files [Exemption Application 
Nos. D-10705 and D-10604] the Department is maintaining in this case. 
The complete application file, as well as all supplemental submissions 
received by the Department, are made available for public inspection in 
the Public Documents Room of the Pension and Welfare Benefits 
Administration, Room N-5638, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210.

[[Page 49024]]

    Accordingly, after giving full consideration to the entire record, 
including Standard's written comment, the Department has decided to 
grant the exemption subject to the modifications and clarifications 
described above.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Standard & Poor's (S&P), Standard and Poor's Investment Advisory 
Services, LLC (SPIAS)

Located in New York, New York

[Prohibited Transaction Exemption 2000-39; Exemption Application No. D-
10720]

Exemption

    The restrictions of sections 406(a) and 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)(A) through (F) of the Code, shall not 
apply to the provision of asset allocation services (the Service) by 
SPIAS to Plan participants and the receipt of fees by SPIAS from 
Service Providers in connection with the provision of such asset 
allocation services, provided that the following conditions are met.

I. General Conditions

    A. The retention of SPIAS to provide the Service will be expressly 
authorized in writing by an Independent Fiduciary of each Plan.
    B. SPIAS shall provide the Independent Fiduciary of each Plan with 
the following, in writing:
    (1) Prior to authorization, a complete description of the Service 
and disclosures of all fees and expenses associated with the Service.
    (2) Any other reasonably available information regarding the 
Service that the Independent Fiduciary requests.
    (3) A contract for the provision of the Service which defines the 
relationship between SPIAS, the Service Providers and the Plan sponsor, 
and the obligations thereunder. Such contract shall be accompanied by a 
termination form with instructions on the use of the form. The 
termination form must expressly state that a Plan may terminate its 
participation in the Service without penalty at any time. However, a 
Plan which terminates its participation in the Service before the 
expiration of the contract will pay its pro-rata share of the fees that 
it would otherwise owe for the Service under the contract and, if 
applicable, any direct costs actually incurred by SPIAS which would 
have been recovered from the Plan but for the termination of the 
contract, including any direct setup expenses not previously recovered. 
Thereafter, the termination form shall be provided no less than 
annually.
    (4) At least 45-days prior to the implementation of any material 
change to the Service or increase in fees or expenses charged for the 
Service, notification of the change and an explanation of the nature 
and the amount of the change in the Service or increase in fees or 
expenses.
    (5) A copy of the proposed and final exemption, as published in the 
Federal Register.
    (6) An annual report of Plan activity which summarizes the 
performance of the asset allocation categories provided to the Plan and 
provides a breakdown of all fees and expenses paid to SPIAS in 
connection with the provision of the Service to the Plan for the year. 
Such report shall be provided no more than 45 days after the period to 
which it relates. Upon the Independent Fiduciary's or Plan sponsor's 
request, such report may be provided more frequently.
    C. SPIAS will provide each Plan participant with the following:
    (1) Written notice that the Service is available and provided by 
SPIAS, an entity independent of the Service Provider and the Plan 
sponsor.
    (2) Prior to using the Service, full written disclosures that will 
include information about SPIAS and a description of the Service.
    (3) Access to SPIAS's website or paper-based communications which 
will clearly indicate that the Plan participant is receiving the 
Service from SPIAS, and that SPIAS is independent of the Service 
Provider.
    (4) A risk tolerance questionnaire which must be completed prior to 
utilization of the Service.
    D. Any investment advice given to a Plan participant by SPIAS under 
the Service will be based solely on the responses provided by the Plan 
participant through the Service's interactive computer program or 
through a paper or telephone interview and will be based on the 
application of an objective methodology developed by S&P Financial 
Information Service (S&P FIS) and the S&P Investment Committee.
    E. Any investment advice given to a Plan participant will be 
implemented only at the express direction of the Plan participant.
    F. The total fees paid to SPIAS and a Service Provider, in 
connection with the provision of the Service, by each Plan does not 
exceed ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act.
    G. The only fees which are payable to SPIAS in connection with the 
provision of the Service include, subject to negotiation, one or more 
of the following:
    (1) An annual flat fee based on a fixed dollar amount per Plan 
participant for the Service. This fee may be paid by the Plan, Plan 
sponsor, Plan participant or the Service Provider.
    (2) A technology licensing fee payable by the Service Provider in 
the first year that the Service is provided to a Plan. The fee will be 
a fixed dollar amount based on the number of Plan participants and 
beneficiaries contained on the Service Provider's record-keeping 
system. Each time the number of Plan participants and beneficiaries on 
the Service Provider's record-keeping system increases by 10%, an 
additional fixed dollar amount based on the increase in Plan 
participants and beneficiaries will be assessed and charged to the 
Service Provider for the new participants and beneficiaries (the 
Revised Technology Fee).
    (3) For subsequent years, SPIAS will charge the Service Provider an 
annual technology maintenance fee equal to 20% of the technology 
licensing fee charged to the Service Provider in the first year plus 
20% of the Revised Technology Fee.
    (4) SPIAS will charge the Plan or Plan sponsor an Internet 
customization fee where a Plan sponsor contracts directly with SPIAS 
for the provision of the Service. This flat fee will be based on the 
time spent by SPIAS personnel on its customization of the Service for 
the particular Plan.
    (5) For those Plan sponsors electing to receive a Plan analysis 
report, an annual flat fee based on a fixed dollar amount per Plan 
investment analysis report. This fee will be paid by the Plan sponsor 
or Service Provider.
    H. No portion of any fee or other consideration payable by the 
Plans or the Plan sponsor to S&P or SPIAS in connection with the 
Service will be received or shared with a Service Provider.
    I. Neither the fees charged nor the compensation received by SPIAS 
will be affected by the investment elections or the decisions made by 
the Plan participants and beneficiaries regarding investment of the 
assets in their accounts.
    J. Each Service Provider shall represent to SPIAS that it will not 
impose any additional fees and/or charges (relating to the investment 
products made available to Plans) on Plans who contract for the Service 
unless such fees and charges are imposed on the Service Provider's

[[Page 49025]]

similarly situated clients who do not contract for the Service.
    K. All asset allocations are reviewed and approved by the S&P 
Investment Policy Committee (IPC) before they are made available to the 
Plan.
    L. No Service Provider will at any time own any interest, by vote 
or value in SPIAS, and neither SPIAS nor any affiliates will own any 
interest, by vote or value in a Service Provider.
    M. The annual revenues derived by SPIAS from any one Service 
Provider shall not constitute more than 5% of the annual revenues of 
S&P FIS.
    N. S&P will guarantee the payment of any liabilities of SPIAS that 
may arise by reason of a breach of a fiduciary duty described in 
section 404 of the Act or a violation of the prohibited transaction 
provisions in section 406 of the Act and 4975 of the Code.
    O. SPIAS will maintain for a period of six years, the records 
necessary to enable the persons described in paragraph (P) of this 
section to determine whether the conditions of the exemption are met, 
including records of the recommendations made to Plan participants and 
beneficiaries, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of SPIAS, the 
records are lost or destroyed prior to the end of the six year period.
    (2) No party in interest, other than SPIAS shall be subject to the 
civil penalty that may be assessed under section 502 (i) of the Act, or 
the taxes imposed by section 4975(a) and (b) of the Code if records are 
not maintained or not available for examination as required by this 
paragraph and paragraph P(1) below.
    P. (1) Except as provided in subparagraph (2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of Section 
504 of the Act, the records referred to paragraph (O) of this section 
are unconditionally available at their customary location for 
examination during normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department of Labor, 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, any duly 
authorized representative of such employer or an employee organization 
whose members are participants and beneficiaries of a participating 
Plan; or (d) Any Plan participant or beneficiary of any participating 
Plan or any duly authorized representative of such Plan participant or 
beneficiary.
    (2) None of the persons described in paragraph (1)(b)-(d) of this 
paragraph (P) shall be authorized to examine trade secrets of SPIAS, or 
commercial or financial information which is privileged or 
confidential.

II. Definitions

    A. The term ``Service'' means the asset allocation service provided 
by SPIAS to Plans which is accessed through computer software and other 
written communications in order to provide personalized recommendations 
to Plan participants regarding the allocation of their investments 
among the options offered under their Plan.
    B. The term ``Service Provider'' means an entity that has been in 
the financial services business for at least three years, and during 
such period, has not been convicted of a felony offense involving abuse 
or misuse of such entity's employee benefit plan position or 
employment, or any felony arising out of the conduct of the business of 
a broker, dealer, investment adviser, bank, insurance company or 
fiduciary. Such entity is also described in one of the following 
categories:
    1. A bank, savings and loan association, insurance company or 
registered investment adviser which meets the definition of a 
``qualified professional asset manager'' (QPAM) set forth in section 
V(a) of Prohibited Transaction Exemption 84-14 (49 FR 9494 (Mar. 13, 
1984), as corrected at 50 FR 41430 (Oct. 10, 1985)) and in addition, 
has, as of the last day of its most recent fiscal year, total client 
assets under management and control in an amount not less than $250 
million; or
    2. A broker dealer registered under the Securities Exchange Act of 
1934, which has, as of the last day of its most recent fiscal year, $1 
million in shareholders' or partners' equity, and total client assets 
under management and control in an amount not less than $250 million.
    C. The term ``Independent Fiduciary'' means a Plan fiduciary which 
is independent of SPIAS and its affiliates and independent of the 
Service Provider and its affiliates.
    D. The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, relative of, or partner in any such 
person; and
    (3) Any corporation or partnership, of which such person is an 
officer, director or partner.
    E. The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    F. The term ``Plan'' means an employee pension benefit plan as 
defined in section 3(2) of the Act.
    Effective Date: This exemption is effective for transactions 
occurring on or after March 22, 2000.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published at 65 FR 15360 (March 22, 
2000.)

Written Comments

    The Department received four comments from interested persons 
regarding the notice of proposed exemption (the Notice).
    One commentator urged the Department to clarify that the relief 
provided by the exemption and the conditions of the exemption granted 
herein applies only to SPIAS's asset allocation services, and that the 
issuance of the exemption does not constitute an endorsement of the 
SPIAS program. The Department concurs with the commentator and directs 
the commentator to the Department's exemption procedures set forth in 
29 CFR Part 2570, (55 FR 32836, August 10, 1990). Specifically, 
sections 2570.49 (b) and (c) state that an exemption is effective only 
under the conditions set forth in the exemption and only the specific 
parties to whom an exemption grants relief may rely on the exemption. 
The Department also notes that the exemption process provides relief 
from the prohibited transaction provisions of the Act, but not from the 
Act's general fiduciary responsibility provisions. Thus, the granting 
of this exemption should not be interpreted as an endorsement by the 
Department of the investment program described therein.
    The commentator also asked the Department to clarify that the 
standards and conditions of the exemption are not intended to be 
exclusive standards to be applied in all future exemptions relating to 
participant investment advisory programs. A second commentator 
expressed concern that the conditions set forth in this exemption are 
too restrictive allowing only a narrow range of financial institutions, 
service providers and plans to provide investment advisory services to 
Plan participants. This commentator requested that the Department issue 
a

[[Page 49026]]

class exemption which would provide relief for a broad range of 
investment advisory programs. The Department recognizes that there are 
many participant investment advisory programs and that these programs 
are structured in a variety of different ways. Some of these programs 
may not require exemptions from the self-dealing and conflict of 
interest provisions contained in the Act.\3\ The Department wishes to 
emphasize that, the granting of this exemption does not foreclose 
future consideration of a class exemption, or other individual 
exemptions that may be issued for participant investment advisory 
programs that would be subject to protective conditions that may differ 
from those set forth in this exemption.
---------------------------------------------------------------------------

    \3\ The Department notes that section 408(b)(2) of the Act 
exempts from the prohibitions of section 406(a) of the Act any 
reasonable arrangement for the provision of necessary service to a 
plan. However, that statutory exemption does not provide relief from 
the prohibitions described in section 406(b) of the Act. See 29 CFR 
2550.408b-2(a).
---------------------------------------------------------------------------

    One of the commentators requested that the Department modify the 
description of the covered transaction to limit relief to the receipt 
of fees. Accordingly, the commentator suggested changing the final 
exemption to read as follows: ``The restrictions of section 406(b)of 
the Act and the sanctions resulting from the application of section 
4975 of the Code by reason of section 4975(c)(1)(E) and (F) of the 
Code, shall not apply to the receipt of fees by SPIAS as a result of 
the provision of advice in connection with Plan investments under the 
Program.'' The Department has determined not to modify the final 
exemption as requested by the commentator.
    A commentator expressed concern that the record-keeping 
requirements of the exemption set forth in section I(P) might permit 
S&P to refuse to make available necessary information to Plan 
fiduciaries on the basis that such information would disclose trade 
secrets or commercial or financial information which is privileged or 
confidential. The commentator suggests that the exemption require that 
the Plan fiduciary be provided with otherwise protected information to 
the extent that it is necessary or appropriate for the fiduciary to 
fully understand the methodology underlying the Service. To the extent 
that SPIAS is unwilling to disclose information or materials that the 
Independent Fiduciary believes is necessary to fulfill its duty to 
prudently select and/or monitor SPIAS, that fiduciary is under no 
obligation to select or otherwise retain SPIAS to provide asset 
allocation services. The Department does not believe that the 
information required by a Plan fiduciary to perform its 
responsibilities to the Plan will necessarily involve trade secrets or 
commercial or financial information which is privileged or 
confidential. Accordingly, the Department has determined not modify the 
exemption as requested.
    The fourth comment was from S&P (the Applicant).
    1. Effective Date. S&P requested that the effective date of the 
exemption be made retroactive to the date of publication of the 
proposed exemption in the Federal Register. The Department concurs and 
has made the final exemption effective as of March 22, 2000.
    2. Successors and Affiliates of SPIAS. The Applicant urged the 
Department to expand the exemption to include future successors to, and 
affiliates of, SPIAS to account for the possibility of corporate 
reorganization. The Department believes that it is inappropriate to 
extend relief to parties who are currently unidentified or not 
ascertainable. However, the Department notes that if SPIAS is the 
subject of a corporate reorganization, SPIAS may, if necessary, apply 
for an amendment to this exemption.
    3. Section 408(b)(2) of ERISA. On page 15363 of the Notice, 
footnote 2 stated:

    The provision of investment advisory services to plans would be 
exempt from the prohibitions of section 406(a) of ERISA if the 
conditions of section 408(b)(2) are met. Section 2550.408b-2(a) of 
the Department's regulations provides that section 408(b)(2) of the 
Act exempts from the prohibitions of section 406(a), payment by a 
plan to a party in interest, including a fiduciary for * * * any 
service (or combination of services) if (1) such * * * service is 
necessary for the establishment or operation of the plan; (2) such * 
* * service is furnished under a contract or arrangement which is 
reasonable; and (3) no more than reasonable compensation is paid for 
such * * * service. The regulation also provides that section 
408(b)(2) does not contain an exemption from acts described in 
section 406(b) even if such act occurs in connection with a 
provision of services that is exempt under section 408(b)(2). 
Section 2550.408b-2(e)(1) further provides that a fiduciary does not 
engage in an act described in section 406(b)(1) of the Act if the 
fiduciary does not use any of the authority, control or 
responsibility which makes such person a fiduciary to cause the plan 
to pay additional fees for a service furnished by such fiduciary or 
to pay a fee for a service furnished by a person in which the 
fiduciary has an interest which may affect the exercise of such 
fiduciary's best judgement as a fiduciary. In general, whether a 
violation of section 406(b) occurs during the operation of an 
investment advisory program is an inherently factual matter. See 
Advisory Opinion 84-04 (January 4, 1984).

    The Applicant asked the Department to make a finding that, based on 
the facts and representations in the Notice, the conditions of section 
408(b)(2) are satisfied with respect to those situations in which fees 
for the Service are paid by the Plan sponsor or the Plan. The 
Department notes that whether the conditions of section 408(b)(2) of 
ERISA have been met in each case is inherently factual in nature. 
Therefore the appropriate plan fiduciaries must determine, based upon 
all of the relevant facts and circumstances surrounding each investment 
advisory program, whether the conditions of section 408(b)(2) are 
satisfied.
    4. Periodic Reporting. Section I(B)(6) of the Notice stated in 
part, that SPIAS shall provide the Independent Fiduciary of each Plan 
with ``An annual report of Plan activity which summarizes the 
performance of the Service and asset allocation recommendations and 
provides a breakdown of all fees and expenses paid by the Plan and 
participants for the year.'' The Applicant requested clarification that 
the summary of the performance of the Service relates to the 
performance of the asset allocation categories provided to the Plan, 
and suggested the following language: ``An annual report which 
summarizes the performance of asset allocation categories provided to 
the Plan (not including the performance of individual participant 
accounts) and provides a breakdown of all fees and expenses paid to 
SPIAS by the Plan or participants for the Service for the year. Such 
reports shall be provided no more than 45 days after the period to 
which it relates. Upon the Independent Fiduciary's or the Plan 
sponsor's request, such report may be provided more frequently.'' The 
Department concurs with the Applicant and has clarified the condition 
accordingly.
    In addition, the Applicant requested that the Department clarify 
that this condition refers to the fees paid to SPIAS by the Plan and 
the Plan sponsor. In response to the comment, the Department has 
determined to clarify this condition under the final exemption. 
Accordingly, for purposes of I(B)(6), the annual report must disclose a 
breakdown of all fees and expenses paid to SPIAS in connection with the 
provision of the Service to participants under the Plan. The Department 
believes that disclosure of all fees recovered by SPIAS from all 
sources in connection with the provision of the Service to a particular 
Plan, will assist the Independent Fiduciary evaluate the reasonableness 
of the arrangement.
    5. Dealings Between a Service Provider and Plans. Section I(J) 
stated

[[Page 49027]]

that ``All dealings between the Service Provider and the Plans 
participating in the Service are on a basis no less favorable to the 
Plans than dealings with other investors of the Service Provider.'' The 
Applicant represents that Plans are clients of a Service Provider and 
not necessarily investors of the Service Provider, except to the extent 
that Plans are shareholders of a mutual fund advised or administered by 
an affiliate of a Service Provider. SPIAS has no control over any 
Service Provider's dealings with any Plan. The Applicant requests that 
I(J) be deleted. The Department is not persuaded by the argument 
submitted in favor of deletion of this condition. The Department 
believes that this condition is necessary to assure that plans that 
contract with SPIAS pay no more for investment products than other 
clients of a Service Provider who do not participate in the Service. 
The Department notes, however, that this condition does not preclude 
Service Providers from charging fees related to a Plan's participation 
in the Service provided that the amount of the fees and the services to 
which the fees relate have been previously disclosed to, and approved 
by the Plan. Thus, in response to the comment, the Department has 
modified I(J) as follows: ``Each Service Provider shall represent to 
SPIAS that it will not impose any additional fees and/or charges 
(relating to the investment products made available to Plans) on Plans 
who contract for the Service unless such fees and charges are imposed 
on a Service Providers's similarly situated clients who do not contract 
for the Service.''
    6. Records. Section I(O) provides in part, that SPIAS ``will 
maintain for a period of six years, the records necessary to enable 
persons described in paragraph (P) of this section to determine whether 
the conditions of the exemption are met, including records of the 
recommendations made to the Plan participants and beneficiaries and 
their investment choices * * *'' The Applicant urges the Department to 
delete the requirement regarding maintenance of records relating to 
participant and beneficiary investment choices because S&P and SPIAS 
will have no practical way of tracking the actual investment choices of 
participants or tracking whether a participant actually used the 
advice. Further, if the Service is not provided through the Internet, 
there is no electronic record linking the advice to investment actions 
of the participant. The Department concurs with the comment and has 
deleted the requirement to retain records of participant investment 
choices.
    7. Definition of Service Provider. Section II(B) defines the term 
``Service Provider'' as

``an entity that has been in the financial services business for at 
least three years, and during such period, has not been found liable 
or guilty by a court of law, or has not been a party to a settlement 
agreement with the IRS or the Department related to any matter 
concerning an employee benefit plan, and which is described in one 
of the following categories:
    1. A bank, savings and loan association, insurance company or 
registered investment adviser which meets the definition of a 
``qualified professional asset manager (QPAM) set forth in section 
V(a) of Prohibited Transaction Exemption 84-14 (49 Fed. Reg. 9494 
(Mar. 13, 1984), as corrected at 50 Fed. Reg. 41430 (Oct. 10, 1985) 
and in addition, has, as of the last day of its most recent fiscal 
year, total client assets under management and control in an amount 
not less than $250 million; or
    2. A broker dealer registered under the Securities Exchange Act 
of 1934, which has, as of the last day of its most recent fiscal 
year, $1 million in shareholders' or partners' equity, and total 
client assets under management and control in an amount not less 
than $250 million.

    In its application, the Applicant requested that the definition of 
Service Provider include third-party record-keeping firms. The 
Applicant requested that the Department reconsider its decision not to 
include third-party record-keeping firms in the definition of ``Service 
Provider.'' The Applicant asserted that the criteria outlined in its 
application and subsequent submission provided adequate safeguards to 
limit coverage of the exemption to a small number of very substantial 
and reputable organizations. The Department is unable to conclude that 
the limitations suggested by the Applicant provide suitable protections 
to employee benefit plans participating in the Service Accordingly, the 
Department has not included third-party record-keeping firms in the 
definition of ``Service Provider.''
    In addition, the Applicant urged the Department to modify section 
II(B) with respect to the requirement that a Service Provider not have 
been a party to a settlement agreement with the Department or the IRS 
related to any matter concerning an employee benefit plan. The 
Applicant was concerned that this language would exclude many Service 
Providers which have utilized various voluntary settlement programs at 
the Department or the IRS. The Department concurs and has modified the 
definition to read as follows: ``The term `Service Provider' means an 
entity that has been in the financial services business for at least 
three years, and during such period, has not been convicted of a felony 
offense involving abuse or misuse of such entity's employee benefit 
plan position or employment, or any felony arising out of the conduct 
of the business of a broker, dealer, investment adviser, bank, 
insurance company or fiduciary.
    8. Definition of Plan. At the request of the Applicant, the 
Department has added section II(F) to the final exemption which defines 
the term ``plan'' to mean ``an employee pension benefit plan described 
in section 3(2) of the Act.''
    9. Definition of Affiliate. Section II(D) defines the term 
``affiliate'' to include:

    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person and
    (3) Any corporation or partnership of which such person is an 
officer, director partner or employee.

    The Applicant requested that the Department clarify that it did not 
intend the definition to encompass stock ownership of public companies 
by employees regardless of how de minimis or indirect. Accordingly, the 
Applicant suggested that the Department delete employees. The 
Department has modified the definition of affiliate to delete 
``employees.''
    10. Miscellaneous. (a) Page 15364 of the Notice, Representation No. 
7 described how plan participants could access the Service and the form 
of the risk tolerance questionnaire. The Applicant noted that S&P 
expects that, depending on a client's particular situation, the risk 
tolerance questionnaire may change and the number of asset allocation 
investment recommendations will vary. Thus, the Applicant requested the 
following changes be made to the Summary of Facts and Representations 
of the Notice:

    (i) The third sentence of the second paragraph of paragraph No. 
7 stated that ``A Plan participant will answer a questionnaire which 
consists of ten to fifteen questions with three or four multiple 
choice answers per question.'' The Applicant would like the phrase, 
``in its current form'' added following the words, ``questionnaire 
which'';
    (ii) In paragraph No. 7, The third sentence of the fourth 
paragraph stated ``Based on the score, the Plan participant is 
categorized into one of six investment recommendations.'' The 
Applicant asked that the phrase ``or more'' be added after the word 
``six'';
    (iii) Footnote 3 read, ``Each participant who completes the 
risk-tolerance questionnaire will be categorized, based on his/her 
score, into one of these six recommendations as discussed in 
paragraph

[[Page 49028]]

no. 7.'' The Applicant requested that the word ``six'' be deleted.
    (iv) In the first sentence of the fifth paragraph of Paragraph 
no. 7, it is stated that ``The advice provided to a Plan participant 
through the Service may only be implemented if it is expressly 
authorized in writing by the Plan participant.'' The applicant asked 
that the words ``in writing'' be removed because the Service may not 
be provided in the paper-based form, but rather by telephone or over 
the by Internet.

    The Department has made the above described revisions.
    (b) Lastly, The Applicant would like to note that S&P and SPIAS may 
be required to make payments to Service Providers for costs incurred in 
connection with the establishment, implementation and maintenance of 
the Service.

FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne, U.S. 
Department of Labor, (202) 219-8971. (This is not a toll free number.)

Washington County Hospital Association Employees' Cash Balance Plan 
(the Plan)

Located in Hagerstown, Maryland

[Prohibited Transaction Exemption 2000-40; Exemption Application No. D-
10839]

Exemption

    The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1)(A) through (E) of the Code, 
shall not apply to the past contribution by Washington County Hospital 
Association to the Plan of certain publicly-traded securities (the 
Securities), provided: (a) The contribution was a one-time transaction; 
(b) the Securities were valued at their fair market value as of the 
date of the contribution, as determined by an independent broker; (c) 
no commissions were paid in connection with the transaction; and (d) 
the Securities represented less than 5% of the assets of the Plan at 
the time of the contribution.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the notice of proposed exemption published on June 13, 2000 at 65 FR 
37182.
    Effetive Date: This exemption is effective June 18, 1998.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions to which the exemptions does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional rules. Furthermore, the 
fact that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (3) The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in each 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, DC, this 4th day of August, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-20208 Filed 8-9-00; 8:45 am]
BILLING CODE 4510-29-P