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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Keystone Brokerage, Inc. (Keystone) [Notices] [01/22/2001]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Keystone Brokerage, Inc. (Keystone) [01/22/2001]

[PDF Version]

Volume 66, Number 14, Page 6679-6695


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10571, et al.]

 
Proposed Exemptions; Keystone Brokerage, Inc. (Keystone)

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, NW., Washington, DC 
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.

Keystone Brokerage, Inc. (Keystone), et al. Located in 
Williamsport, PA

[Application No. D-10571]

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 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).\1\
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    \1\ This proposed exemption applies to IRAs described in section 
408(a) of the Code. Pursuant to 29 CFR 2510.3-2(d), the IRAs are not 
``employee benefit plans'' covered under Title I of the Act. 
However, the IRAs are subject to jurisdiction pursuant to section 
4975 of the Code.
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Section I. Covered Transactions
    If the exemption is granted, the sanctions resulting from the 
application of section 4975 of the Code, by reason of 4975(c)(1)(A) 
through (D) of the Code shall not apply, effective October 3, 1997 
through June 30, 2000, to the purchase or redemption of shares, by a 
self-directed individual retirement account (the IRA), of investment 
portfolios (the Portfolios) of certain mutual funds that were 
affiliated with Keystone (the Affiliated Funds) or in other mutual 
funds that were unaffiliated with Keystone (the Third Party Funds),\2\ 
in connection with the IRA's participation in the KeyPremier Nautilus 
Series Program, or its successor, the Nautilus Series Program, 
(together, the Investment Advisory Program).
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    \2\ The Affiliated Funds and the Third Party Funds are 
collectively referred to herein as the Funds.
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    In addition, 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, effective October 3, 1997 through June 30, 
2000, to (1) the provision, by Keystone, of asset allocation and 
related services to an independent fiduciary of an IRA (the Independent 
Fiduciary), which resulted in the selection of Portfolios in the 
Investment Advisory Program by the Independent Fiduciary for the 
investment of IRA assets; and (2) the receipt of fees by Martindale 
Andres & Co., Inc. (Martindale) and Governor Group Advisors, Inc. 
(GGA), affiliates of Keystone, in connection with provision of 
investment advisory or sub-advisory services to the Fund Portfolios.
    This proposed exemption is subject to the conditions set forth 
below in Section II.

[[Page 6680]]

Section II. General Conditions
    (a) The participation by an IRA in the Investment Advisory Program 
was approved by an Independent Fiduciary.
    (b) As to each IRA, the total fees that were paid to Keystone and 
its affiliates constituted no more than reasonable compensation for the 
services provided.
    (c) With the exception of distribution-related fees paid to 
Keystone pursuant to Rule 12b-1 (the Rule 12b-1 fees) of the Investment 
Company Act of 1940 (the Investment Company Act) which were offset, no 
IRA paid a fee or commission by reason of the acquisition or redemption 
of the shares of the Funds.
    (d) The terms of each purchase or redemption of shares in the Funds 
remained at least as favorable to an investing IRA as those obtainable 
in an arm's length transaction with an unrelated party.
    (e) Keystone provided written documentation to each IRA's 
Independent Fiduciary of its recommendations or evaluations regarding 
the Fund Portfolios as well as the design and parameters with respect 
to an asset allocation model (the Asset Allocation Model), based upon 
objective criteria that were uniformly applied.
    (f) Any recommendation or evaluation made by Keystone to an 
Independent Fiduciary was implemented only at the express direction of 
such Independent Fiduciary.
    (g) The quarterly fee paid by an IRA to Keystone and its affiliates 
for asset allocation and related services rendered to such IRA under 
the Investment Advisory Program (the Outside Fee) was offset by--
    (1) All gross investment management fees (the Advisory Fees) that 
were paid by the Affiliated Funds to Keystone, including any sub-
advisory fees that were paid by the Affiliated Funds to third party 
sub-advisers;
    (2) All administrative fees (the Administrative Fees) that were 
paid to GGA and BISYS Fund Services Limited Partnership (BISYS), an 
unrelated party; and
    (3) All Rule 12b-1 Fees that were paid by the Third Party Funds to 
Keystone or its current and former affiliates with respect to an 
Investment Advisory Account (the Account), such that the sum of the 
offset and the net Outside Fee always equaled the aggregate Outside 
Fee, thereby making the selection of Affiliated Funds or Third Party 
Funds revenue-neutral.
    (h) With respect to its participation in the Investment Advisory 
Program, prior to purchasing shares in the Portfolios of the Affiliated 
Funds and the Third Party Funds--
    (1) Each Independent Fiduciary received the following written or 
oral disclosures from Keystone:
    (A) A brochure describing the Investment Advisory Program; an 
Investment Advisory Program Account Agreement (the Account Agreement); 
a description of the Asset Allocation Models; and a reference guide/
disclosure statement providing details about the Investment Advisory 
Program, the fees charged thereunder, the procedures for establishing, 
making additions to and withdrawing from the Accounts, and other 
related information;
    (B) A risk tolerance and goal analysis questionnaire (the 
Questionnaire) or a written report of responses given by the 
Independent Fiduciary in a personal interview (the Interview) with a 
Keystone representative (the Interview Report);
    (C) Copies of applicable prospectuses (the Prospectuses) for the 
Fund Portfolios discussing the investment objectives of the Portfolios; 
the policies employed to achieve the objectives of the Portfolios; the 
corporate affiliation existing between Keystone and its affiliates; the 
compensation paid to such entities; disclosures relating to rebalancing 
and reallocating Asset Allocation Models; and information explaining 
the risks attendant to investing in Portfolios for the Affiliated Funds 
and the Third Party Funds;
    (D) Upon written or oral request to Keystone, a Statement of 
Additional Information supplementing the applicable Prospectus, which 
described the types of securities and other instruments in which the 
Portfolios could invest and the investment policies and strategies that 
the Portfolios could utilize, including a description of the risks;
    (E) A copy of the Account Agreement between the IRA and Keystone 
relating to the IRA's participation in the Investment Advisory Program;
    (F) A written recommendation of a specific Asset Allocation Model, 
together with a copy of the Questionnaire and response or the Interview 
Report;
    (G) Upon written request to Keystone, a copy of any investment 
advisory agreement or sub-advisory agreement between Keystone and the 
Affiliated Funds; and
    (H) Written disclosures of Keystone's affiliation or non-
affiliation with the parties who act as sponsors, distributors, 
administrators, investment advisers and sub-advisers, custodians and 
transfer agents of the Portfolios.
    (2) If accepted as an investor in the Investment Advisory Program, 
the Independent Fiduciary was required to acknowledge in writing to 
Keystone prior to purchasing shares of the Fund, that such Independent 
Fiduciary had received copies of the documents described in paragraph 
(h)(1) of this Section II and represent to Keystone that such 
individual was--
    (A) Independent of Keystone and its affiliates;
    (B) Knowledgeable with respect to the IRA in administrative matters 
and funding matters related thereto; and
    (C) Able to make an informed decision concerning participation in 
the Investment Advisory Program.
    (i) Subsequent to its participation in the Investment Advisory 
Program, each Independent Fiduciary received the following written or 
oral disclosures from Keystone with respect to ongoing participation:
    (1) Written confirmations of each purchase or redemption 
transaction involving shares of an Affiliated Fund or a Third Party 
Fund Portfolio (including transactions resulting from the realignment 
of assets caused by a change in the Asset Allocation Model's investment 
mix and from periodic rebalancing of Account assets);
    (2) Telephone quotations of such Independent Fiduciary's IRA 
Account balance;
    (3) A periodic, but not less frequently than quarterly, Statement 
of Account specifying the net asset value of the IRA's assets in such 
Account, a summary of purchase, sale and exchange activity and 
dividends received or reinvested, a summary of cumulative realized 
gains and/or losses, and a statement of fees paid to Keystone and its 
affiliates;
    (4) Semiannual and annual reports that included financial 
statements for the Portfolios;
    (5) A quarterly report pertaining to the applicable Asset 
Allocation Model describing the Asset Allocation Model's performance 
during the preceding quarter; market conditions and economic outlook; 
and, if applicable, prospective changes in Portfolio allocations for 
the Asset Allocation Model and the reasons therefor;
    (6) At least annually, a written or oral inquiry from Keystone to 
ascertain whether the information provided on the Questionnaire or in 
the Interview Report was still accurate or required updating; and
    (7) At least annually during the first calendar quarter of each 
year after March 24, 1999, or at other times specified in Section 
II(l), a termination form (the Termination Form), meeting the 
requirements of Section II(k) and (l) below.

[[Page 6681]]

    (j) If authorized in writing by the Independent Fiduciary, the IRA 
was automatically rebalanced on a quarterly basis by Keystone (using 
the 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 the Independent Fiduciary, if one or more Fund 
allocations deviated from the Asset Allocation Model prescribed by the 
Independent Fiduciary because--
    (1) At least one transaction required to rebalance the IRA among 
the Funds involved a purchase or redemption of securities valued at 
$250 or more; and
    (2) The net asset value of the Fund affected was more than 5 
percent of the IRA's investment in such Fund.
    (k) Keystone was authorized to provide written notice to the 
Independent Fiduciary, at least 30 days prior to the implementation of 
any of the following changes:
    (1) A change in the asset mix outside the current Asset Allocation 
Model;
    (2) The division of a class of assets (the Asset Class);
    (3) The replacement of a Third Party Fund with an Affiliated Fund, 
or an Affiliated Fund with a Third Party Fund; and
    (4) An increase in the Outside Fee.
    (l) The written notice described above in Section II(k) was 
required to--
    (1) State that the Independent Fiduciary could terminate the IRA's 
participation in the Investment Advisory Program at will and without 
penalty, upon receipt by Keystone of written notice from the 
Independent Fiduciary; and
    (2) Explain that any of the proposed changes noted in paragraphs 
(k)(1)-(4) of Section II would go into effect if the Independent 
Fiduciary did not elect to withdraw by the effective date.
    (3) For changes occurring after March 24, 1999, the notice was to 
be accompanied by a Termination Form containing instructions identical 
to those set forth above in paragraphs (l)(1)-(2) of this Section II.
    (m) Keystone was not authorized to replace an Affiliated Fund with 
a Third Party Fund Portfolio or vice versa, nor was Keystone authorized 
to make an additional Third Party Fund Portfolio available for 
investment under the Investment Advisory Program.
    (n) Keystone will maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (o) 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 Keystone 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 Keystone, shall be subject to 
the taxes imposed by section 4975(a) and 4975(b) of the Code if the 
records are not maintained or are not available for examination as 
required by paragraph (o) of this Section II below.
    (o)(1) Except as provided in section (o)(2) of this paragraph, the 
records referred to in paragraph (o) 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 Independent Fiduciary of a participating IRA or any duly 
authorized representative of such Independent Fiduciary; and
    (C) Any participant or beneficiary of any participating IRA or any 
duly authorized representative of such participant or beneficiary.
    (2) None of the persons described above in paragraphs (o)(1)(B) and 
(o)(1)(C) of this paragraph (o) are authorized to examine the trade 
secrets of Keystone or commercial or financial information which is 
privileged or confidential.
Section III. Definitions
    For purposes of this proposed exemption:
    (a) The term ``Keystone'' means Keystone Brokerage, Inc. and any 
affiliate of Keystone, as defined in paragraph (b) of this Section III.
    (b) An ``affiliate'' of Keystone includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with Keystone; (For purposes of this subparagraph, the term ``control'' 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual.)
    (2) Any individual who is an officer, director or partner in 
Keystone or a person described in subparagraph (b)(1); and
    (3) Any corporation or partnership of which Keystone or an 
affiliate or a 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 ``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 performing a 
policy-making function for the entity.
    (d) The term ``IRA'' includes a self-directed individual retirement 
account which is described in section 408(a) of the Code and which is 
not an ``employee benefit plan'' covered under Title I of the Act. The 
term ``IRA'' does not include any IRAs that were sponsored or 
maintained by Keystone or its affiliates for their own employees nor 
does it include any IRAs that were held by employees of Keystone or its 
affiliates in their individual capacities.
    (e) The term ``Independent Fiduciary'' means an individual who was 
covered under a self-directed IRA which invested in shares of the 
Funds.
    (f) The term ``Asset Class'' means an asset class under a 
classification system used by Morningstar, Inc. (Morningstar) or 
Lipper, Inc. (Lipper). For purposes of this exemption, two Funds were 
not in the same Asset Class if they were classified differently under 
either the Morningstar or Lipper classification systems. Thus, for 
example, if two Funds were treated in separate Asset Classes under the 
Morningstar system, they would be treated as being in separate Asset 
Classes even if the Funds were in the same Asset Class (or were not 
classified at all) under the Lipper system.
    (g) The term ``Affiliated Fund'' means a portfolio of an investment 
company registered under the Investment Company Act for which Keystone 
or an affiliate acted as the investment adviser and may have also acted 
as the sub-adviser, co-administrator or custodian.
    (h) The term ``Third Party Fund'' means a portfolio of an 
investment company that is registered under the Investment Company Act 
for which neither Keystone nor any affiliate acted as an investment 
adviser, sub-adviser, co-administrator or custodian.
    (i) The ``Advisory Fees'' refer to the investment advisory fees 
that were paid by the Affiliated Funds to Keystone and its affiliates.
    (j) The ``Administrative Fees'' refer to the co-administration fees 
that were paid by the Affiliated Funds to GGA and BISYS.
    (k) The ``Rule 12b-1 Fees'' were paid to Keystone and its 
affiliates by the Third Party Funds in connection with certain 
distribution-related services (e.g., advertising) that were made 
pursuant to a written plan of distribution.
EFFECTIVE DATE:
    If granted, this proposed exemption will be effective from October 
3, 1997 until June 30, 2000.

[[Page 6682]]

Summary of Facts and Representations

Description of the Parties
    1. The parties to the transactions are described as follows:
    (a) Keystone Financial, Inc. (KFI) is a bank and financial services 
holding company headquartered in Harrisburg, Pennsylvania. KFI provides 
a full range of banking and non-banking services to persons and 
entities in Pennsylvania, Maryland, West Virginia, Virginia, New York, 
Ohio and Delaware.
    (b) Keystone is a second-tier subsidiary of KFI. Keystone provided 
services to the IRAs under the Investment Advisory Program described 
herein and served as a broker-dealer for trades under such Program.
    (c) Key Trust Company (KeyTrust) of Horsham, Pennsylvania, is a 
subsidiary of KFI. KeyTrust served as custodian for those IRAs 
utilizing the Investment Advisory Program.
    (d) Martindale of West Conshocken, Pennsylvania, is a subsidiary of 
KFI. Martindale served as the sub-adviser to the Affiliated Funds and 
prior to February 1, 1999, it served as the investment adviser to such 
Funds.
    (e) BISYS of Columbus, Ohio, is a registered broker-dealer. As 
noted above, BISYS is not affiliated with Keystone, KFI, KeyTrust or 
Martindale. BISYS, through its affiliated clearing broker, Corelink 
Financial, Inc. (Corelink), acted as the clearing broker with respect 
to purchases and sales of Fund shares by the IRAs participating in the 
Investment Advisory Program. In addition, BISYS performed various 
administrative, accounting, and recordkeeping functions on behalf of 
Keystone. In this capacity, BISYS, through Corelink, held Fund shares 
on behalf of IRAs participating in the Investment Advisory Program and 
served as sub-custodian for IRAs utilizing the Program under a 
custodial services agreement with KeyTrust. Further, BISYS served as 
distributor, Fund accountant, transfer agent, and administrator or co-
administrator for the Affiliated Funds.\3\
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    \3\ As discussed herein, Funds shares were sold to the IRAs at 
no load. Thus, the participating IRAs did not compensate Corelink, 
or for that matter, BISYS. Keystone represents that it does not know 
whether BISYS compensated Corelink for services rendered nor is it 
certain why BISYS executed trades through Corelink rather than 
performing this service directly.
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    (f) GGA, a wholly-owned subsidiary of KFI, served as the investment 
adviser to the Affiliated Funds. In addition, GGA and BISYS served as 
co-administrators for the Affiliated Funds.
    (g) The IRAs participating in the Investment Advisory Program 
included self-directed IRAs which are described in section 408(a) of 
the Code and which are not ``employee benefit plans'' covered under 
Title I of the Act. All IRA holders were outside clients of Keystone 
and its affiliates rather than employees of these entities. The IRAs 
did not include any IRAs sponsored by Keystone and/or its affiliates 
nor did they include IRAs held by employees of Keystone and/or its 
affiliates in their individual capacities.
Description of the Funds
    2. The Affiliated Funds participating in the Investment Advisory 
Program consisted of a group of Fund Portfolios referred to as 
``Governor Funds.'' Originally, the Affiliated Funds included the 
following Fund Portfolios of ``The Sessions Group'': the KeyPremier 
Prime Money Market Fund, the KeyPremier Intermediate Term Income Fund, 
the KeyPremier Established Growth Fund and the KeyPremier Aggressive 
Growth Fund.
    The Sessions Group was an open-end management investment company 
registered under the Investment Company Act of 1940 (the Investment 
Company Act), for which Martindale served as the investment adviser. 
The Sessions Group was also an Ohio business trust that offered shares 
in 19 separate series. Each series of shares constituted a different 
Portfolio, only 4 of which were offered to investors under the 
Investment Advisory Program. The Sessions Group was designed to provide 
a convenient means of investing in separate Portfolios that were 
professionally managed by Martindale. Shares in The Sessions Group were 
offered to trust customers of KeyTrust, other banking subsidiaries of 
Keystone, and the general public. Although some Portfolios required 
investors to pay load charges, all Fund Portfolios were offered to IRA 
investors at no load.
    3. Pursuant to an advisory agreement, Martindale served as the 
investment adviser to the Affiliated Funds comprising The Sessions 
Group from October 3, 1997 until February 1, 1999. Martindale's 
investment advisory agreement had been approved by the Board of 
Trustees (the Trustees) for an initial period of up to two years and 
was required to be re-approved thereafter by the Trustees or the 
Portfolios' shareholders, at least annually.
    Subject to the supervision and direction of the Trustees, 
Martindale managed the investment and reinvestment of the assets of 
each Portfolio of The Sessions Group and provided investment guidance 
and policy direction in connection with the objectives and policies of 
each such Portfolio. Although each Affiliated Fund Portfolio paid 
Martindale an Advisory Fee for services rendered, Martindale agreed to 
waive a portion of such fee. The waiver continued throughout 
Martindale's tenure as investment adviser.
    The Advisory Fees were computed daily and paid monthly at an annual 
rate based on a percentage of the value of the Portfolio's average 
daily net assets. Depending upon the Affiliated Fund Portfolio managed, 
the annualized Advisory Fees that were payable to Martindale are shown 
in the following table. The left-hand column of the table reflects the 
Advisory Fees that would have been paid to Martindale had the waiver 
been lifted while the right-hand column of the table shows the Advisory 
Fees that were actually paid to Martindale during the waiver.

------------------------------------------------------------------------
                                                    Before       After
                    Portfolio                       waiver      waiver
                                                   (percent)   (percent)
------------------------------------------------------------------------
KeyPremier Prime Money Market Fund..............        0.40        0.20
KeyPremier Intermediate Term Income Fund........        0.60        0.30
KeyPremier Established Growth Fund..............        0.75        0.40
KeyPremier Aggressive Growth Fund...............        1.00        0.50
------------------------------------------------------------------------

    4. Effective February 1, 1999, The Sessions Group was reorganized 
into ``Governor Funds,'' a Delaware business trust which then comprised 
the Affiliated Funds. Like The Sessions Group, Governor Funds 
constituted an open-end management investment company registered under 
the Investment Company Act where shares were offered to IRA investors, 
at no load. These Affiliated Funds were advised by GGA and consisted of 
the following 12 Portfolios: the Prime Money Market Fund, the U.S. 
Treasury Obligations Money Market Fund, the Established Growth Fund, 
the Aggressive Growth Fund, the Emerging Growth Fund, the International 
Equity Fund, the Intermediate Term Income Fund, the Limited Duration 
Government Securities Fund, the Pennsylvania Municipal Bond Fund, the 
Lifestyle Conservative Growth Fund, the Lifestyle Moderate Growth Fund, 
and the Lifestyle Growth Fund.
    Under the Investment Company Act, Governor Funds, as the successor 
Affiliated Funds, continued the business of The Sessions Group. In this 
regard, amounts formerly invested in

[[Page 6683]]

The Sessions Group were reinvested in the corresponding Affiliated Fund 
Portfolios of Governor Funds.
    5. As investment adviser to the Affiliated Funds, GGA also waived a 
portion of its Advisory Fees. The waiver remained in effect for the 
duration of the Investment Advisory Program. The following table shows 
the Advisory Fees that were payable to GGA. Such fees are expressed as 
a percentage of each Portfolio's net assets. The left-hand column of 
the table shows the Advisory Fees that would have been paid to GGA had 
the waiver been lifted while the right-hand column of the table shows 
the Advisory Fees that were actually paid to GGA during the waiver.

------------------------------------------------------------------------
                                                    Before       After
                    Portfolio                       waiver      waiver
                                                   (percent)   (percent)
------------------------------------------------------------------------
Prime Money Market Fund.........................        0.40        0.20
U.S. Treasury Obligations Money Market Fund.....        0.40        0.20
Established Growth Fund.........................        0.75        0.60
Aggressive Growth Fund..........................        1.00        0.70
Emerging Growth Fund............................        1.25        0.50
International Equity Fund.......................        1.25        0.40
Intermediate Term Income Fund...................        0.60        0.30
Limited Duration Government Securities Fund.....        0.60        0.30
Pennsylvania Municipal Bond Fund................        0.60        0.30
Lifestyle Conservative Growth Fund..............        0.25        0.15
Lifestyle Moderate Growth Fund..................        0.25        0.15
Lifestyle Growth Fund...........................        0.25        0.15
------------------------------------------------------------------------

    Martindale served as sub-adviser to each of the Affiliated Funds, 
except the International Equity Fund. For sub-advisory services 
rendered, Martindale was paid an annualized sub-advisory fee by the 
Affiliated Funds, as a percentage of each Portfolio's net assets. 
Martindale's sub-advisory fees, which were paid out of GGA's Advisory 
Fees, are presented as follows:

------------------------------------------------------------------------
                                                                Sub-
                        Portfolio                          advisory  fee
                                                             (percent)
------------------------------------------------------------------------
 Prime Money Market Fund................................            0.10
 U.S. Treasury Obligations Money Market Fund............            0.20
 Established Growth Fund................................            0.40
 Aggressive Growth Fund.................................            0.50
 Emerging Growth Fund...................................            0.50
 Intermediate Term Income Fund..........................            0.30
 Limited Duration Government Securities Fund............            0.30
 Pennsylvania Municipal Bond Fund.......................            0.30
 Lifestyle Conservative Growth Fund.....................            0.05
 Lifestyle Moderate Growth Fund.........................            0.05
 Lifestyle Growth Fund..................................            0.05
------------------------------------------------------------------------

    In addition, GGA and BISYS served as co-administrators for the 
Affiliated Funds. The maximum annualized fee payable to each entity 
under their Management and Co-Administration Agreement was 0.15 percent 
of the average daily net assets of the Prime Money Market Fund, the 
Pennsylvania Municipal Bond Fund, the Established Growth Fund, the 
Intermediate Term Income Fund, the Aggressive Growth Fund, the U.S. 
Treasury Obligations Money Market Fund, the Limited Duration Government 
Securities Fund, the Emerging Growth Fund and the International Equity 
Fund. Because GGA and BISYS waived a portion of their Administrative 
Fees, the aggregate annualized fee paid to each co-administrator was 
reduced to 0.115 percent.
    6. Overall responsibility for management and supervision of the 
Affiliated Funds was vested in five Trustees, three of whom were 
unrelated to Keystone and its affiliates. The Trustees approved all 
significant agreements involving the Affiliated Funds and the persons 
and companies that furnished services to such Funds. A Trustee could be 
removed by either (a) a two-thirds vote of the Trustees or (b) by a 
vote of shareholders owning at least two-thirds of the outstanding 
shares of all series of the Affiliated Funds. If a Trustee was an 
officer or a director of Keystone, a sub-adviser, Martindale, GGA, or 
BISYS, it was precluded from receiving compensation from The Affiliated 
Funds.
    Each Affiliated Fund Portfolio was required to bear its own 
expenses. These expenses included all fees and other costs not 
specifically waived and/or borne by the Affiliated Funds' service 
providers.
    7. The Third Party Funds were open-end, diversified investment 
companies registered under the Investment Company Act whose sponsors, 
administrators, distributors, investment advisers, and sub-advisers 
were not affiliated with Keystone or its affiliates. The Third Party 
Funds were made available by Keystone to the IRAs, at no load, in the 
event the Affiliated Funds failed to offer a Portfolio in a particular 
Asset Class.
    IRA investors participating in the Investment Advisory Program were 
offered two Third Party Funds. These Funds were The Putnam Fund for 
Growth and Income and The T. Rowe Price International Stock Fund.
    For distribution-related services that were rendered to the Third 
Party Funds, Keystone and its affiliates received Rule 12b-1 Fees that 
were paid by the respective Third Party Funds to their distributors. 
The Rule 12b-1 Fees were in the form of trailing commissions and did 
not exceed 0.25 percent of the assets invested in each Third Party Fund 
Portfolio.
Description of the Investment Advisory Program/Request for Exemptive 
Relief
    8. The Investment Advisory Program was an asset allocation program 
that was offered by Keystone to IRA participants between October 3, 
1997 and June 30, 2000. Formerly known as the ``KeyPremier Nautilus 
Series Program'' but later referred to as the ``Nautilus Program,'' the 
Investment Advisory Program was designed to provide small- and medium-
sized investors with access to the type of investment advice typically 
available only to larger investors. The Investment Advisory Program 
offered IRA investors the following features: (a) A unified Account 
statement covering all investments; (b) automatic allocation of assets 
and contributions; (c) a single asset allocation fee; and (d) no sales 
charges on purchases, redemptions, or transfers between investments. 
The minimum investment required for an Independent Fiduciary to 
establish an Account under the Investment Advisory Program was $25,000.
    Effective June 30, 2000, Keystone discontinued the Investment 
Advisory Program. Currently, it is providing asset allocation services 
under a separate program which does not involve investment in any 
Affiliated Funds or Third Party Funds from which it will receive fees. 
However, for the interim period between October 3, 1997 and June 30, 
2000, Keystone and the other parties to the transactions have requested 
an administrative exemption from the Department in order to provide 
retroactive relief for any prohibited transactions that may have arisen 
during the operation of the Investment Advisory Program.
    If granted, the proposed exemption would be effective from October 
3, 1997 until June 30, 2000. The proposed exemption would permit the 
purchase

[[Page 6684]]

or redemption, by an IRA, of shares of certain Affiliated Fund and the 
Third Party Fund Portfolios, in connection with the IRA's participation 
in the Investment Advisory Program. In addition, the proposed exemption 
would permit Keystone's provision of asset allocation and related 
services to an IRA's Independent Fiduciary, which resulted in such 
Independent Fiduciary's selection of Portfolios in the Investment 
Advisory Program for the investment of IRA assets, and the receipt of 
fees by Keystone and/or its affiliates.
    Keystone believes that because it and Key Trust would be considered 
disqualified persons with respect to the IRAs participating in the 
Investment Advisory Program, the decision by an Independent Fiduciary 
to participate in such Program would be statutorily exempt under 
section 4975(d)(2) of the Code. However, Keystone notes that there is 
uncertainty regarding the availability of section 4975(d)(2) of the 
Code where the asset allocation recommendations provided to an 
Independent Fiduciary of an IRA under the Investment Advisory Program 
may cause such entities to be considered fiduciaries with respect to 
the IRAs. Therefore, Keystone has requested retroactive exemptive 
relief from the Department for the transactions described above.
Operation of the Investment Advisory Program
    9. Before opening an Account in the Investment Advisory Program, 
Keystone provided each Independent Fiduciary with the following 
information: (a) A brochure describing the Investment Advisory Program; 
(b) an Account Agreement; (c) a description of the available Asset 
Allocation Models; and (d) a reference guide/disclosure document 
providing detailed information outlining the mechanics of the 
Investment Advisory Program, the fees charged under such Program, the 
procedures for establishing Accounts and making withdrawals and 
additions, and other related information. If an Independent Fiduciary 
wished to open an Account with Keystone, such Independent Fiduciary 
would complete an Account Agreement and answer a series of questions 
regarding investment objectives and risk tolerance. Answers to these 
questions were communicated to an investment adviser representative for 
Keystone (the Keystone Representative) either through a personal 
Interview, or by obtaining and completing a Questionnaire (which was in 
paper or electronic form).
    Once completed, the Questionnaire was presented to the Keystone 
Representative. If answers were given through an Interview, the 
Keystone Representative would prepare a written report of the answers 
(i.e., the Interview Report). Then, a copy of the Interview Report 
would be given to the Independent Fiduciary. The responses provided by 
the Independent Fiduciary during the Interview or on the Questionnaire 
were scored by the Keystone Representative to determine which of 
several Asset Allocation Models were the most appropriate, given the 
financial goals, objectives and risk tolerances previously identified 
by the Independent Fiduciary in the Interview or Questionnaire.
    10. The Asset Allocation Models were designed to satisfy a variety 
of risk tolerances, investment horizons, and tax planning concerns. 
There were six Asset Allocation Models available to the IRAs under the 
Investment Advisory Program. Each Asset Allocation Model consisted of 
an asset distribution among the Asset Classes.
    The Asset Allocation Models were developed and maintained by an 
investment committee (the Allocation Committee) consisting of 
investment professionals of the Asset Management Division of KFI.
    In constructing the Asset Allocation Models, the Allocation 
Committee utilized Encorr Software which had been developed by Ibbotson 
Associates, an unrelated party, to determine the optimal allocations 
for various risk/return tolerances among five general Asset Classes 
based on historical risk and return. The Allocation Committee then 
divided one of these Asset Classes (e.g., Large Cap) into two asset 
sub-classes (e.g., Large Cap and Large Cap Growth) on the basis of 
historical risk and return data as shown below in Table I.

                                     Table I.--Sample Asset Allocation Model
----------------------------------------------------------------------------------------------------------------
              Asset class                         Fund type                     Portfolio             Percentage
----------------------------------------------------------------------------------------------------------------
Money Market...........................  Affiliated................  Prime Money Market Fund.......            6
Fixed Income...........................  Affiliated................  Intermediate Term Income Fund.           76
Large Cap Growth.......................  Affiliated................  Established Growth Fund.......            8
Large Cap Value........................  Third Party...............  Putnam Fund for Growth and               10
                                                                      Income.
                                                                                                    ------------
    Total..............................  ..........................  ..............................          100
----------------------------------------------------------------------------------------------------------------

    11. The Allocation Committee could make adjustments to the Asset 
Allocation Models to take into consideration the investment goals and 
risk tolerances represented by such Models, and to account for changes 
in the economy and market conditions. These adjustments could include 
changing the investment mix of the Asset Allocation Models by modifying 
the proportion of assets invested in each Asset Class. In no event 
could Keystone change the asset mix of an Asset Allocation Model 
without first notifying the Independent Fiduciary in writing of the 
proposed change and giving such Independent Fiduciary at least 30 days 
within which to elect not to have the change made. However, if the 
Independent Fiduciary did not elect otherwise, Keystone was authorized 
to make the change.
    12. The Retail Investment Product Committee of KFI (the Review 
Committee) was responsible for selecting the Portfolios used to satisfy 
the asset allocations specified by the Allocation Committee for each 
Asset Allocation Model. The Review Committee was composed of KFI 
officers with substantial portfolio management, investment and 
regulatory compliance experience. These officers also served on the 
Allocation Committee.
    The Review Committee selected Portfolios of the Affiliated Funds 
for investment to the extent that the Affiliated Funds offered a 
Portfolio in a particular Asset Class. If no Affiliated Fund offered 
the requisite Portfolio, the Review Committee selected Portfolios of 
the Third Party Funds for investment. Any changes in the Portfolios on 
the part of Keystone in order to satisfy investment in a particular 
Asset Class were only made after Keystone had provided written notice 
to all affected

[[Page 6685]]

Independent Fiduciaries. In addition, these changes would only be 
implemented if the Independent Fiduciaries did not elect otherwise 
within 30 days of such notification.
    13. Based on the results generated from the Interview or 
Questionnaire, a Keystone Representative recommended to the Independent 
Fiduciary an Asset Allocation Model, together with the corresponding 
initial investment mix of Portfolios that comprise the Asset Allocation 
Model. The asset allocation services provided by the Keystone 
Representative were of an advisory nature and were not binding upon the 
Independent Fiduciary. No action was taken on the initial 
recommendation unless and until the Independent Fiduciary accepted and 
approved, in writing, the Asset Allocation Model and corresponding 
investment mix recommended by the Keystone Representative. The 
Independent Fiduciary could add or withdraw IRA assets to or from the 
Account at any time (subject to any applicable minimum redemption and 
purchase requirement). Further, the Independent Fiduciary could also 
choose a different Asset Allocation Model by submitting a new 
Questionnaire or by means of a new Interview if the investment needs 
and goals of the Independent Fiduciary had changed.
Rebalancing of IRA Accounts
    14. Keystone invested the Account in the Affiliated Funds and/or 
Third Party Funds that the Allocation Committee had previously chosen 
to satisfy the allocation called for by the Asset Allocation Model.\4\ 
However, it was anticipated that over time, disproportionate earnings 
as between asset types would cause an Account's investment mix to drift 
out of balance with the Asset Allocation Model originally chosen by the 
Independent Fiduciary. For example, if the chosen Asset Allocation 
Model called for 50 percent of an Account's assets to be invested in 
the Fixed Income Class through the Intermediate Term Income Fund, and 
50 percent in cash through the Prime Money Market Fund, and if the 
Intermediate Term Income Fund performed better than the Money Market 
Fund during a particular period of time, more than 50 percent of the 
Account's assets would be invested in the Fixed Income Class by the end 
of the period.
---------------------------------------------------------------------------

    \4\ The Independent Fiduciary could specifically instruct 
Keystone not to invest in a specific Portfolio, in which case any 
IRA assets invested in that Portfolio would be reinvested within 
five business days in another Portfolio selected by Keystone and 
specifically approved by the Independent Fiduciary. A fee was 
charged for each such special instruction.
---------------------------------------------------------------------------

    To correct this imbalance, Keystone would periodically move assets 
among the chosen investments by buying and selling shares of selected 
Portfolios from appropriate distributors on the second to the last 
business day of each calendar quarter. For purposes of rebalancing, 
Keystone used the net asset values of the affected Funds as of the 
close of business for the preceding trading day.\5\ Keystone had no 
discretion as to the timing or amount of the rebalancing.
---------------------------------------------------------------------------

    \5\ Neither Keystone nor any of its affiliates received a 
commission from such purchases and sales.
---------------------------------------------------------------------------

    In the case of the foregoing example, Keystone would sell shares of 
the Intermediate Term Income Fund and invest the proceeds in the Prime 
Money Market Fund so that the Account would again be 50 percent 
invested in Fixed Income Securities and 50 percent in cash. Rebalancing 
would be conducted on a quarterly basis and confined to bringing the 
Account into balance with the Asset Allocation Model chosen by the 
Independent Fiduciary. Moreover, rebalancing would only occur if the 
percentage of assets invested in a particular Portfolio varied from the 
Asset Allocation Model by more than a predetermined threshold set forth 
in the Account Agreement.\6\ As stated above, Keystone used the net 
asset values of the Affiliated Funds as of the close of business on the 
preceding trading day.
---------------------------------------------------------------------------

    \6\ In other words, an Account would be rebalanced if the 
transactions requiring rebalancing had a ``material effect'' on the 
allocation. To have a material effect on an allocation of an 
Account, at least one transaction required to rebalance the Account 
had to be greater than $250 and at least one transaction had to 
change the value of the Fund Portfolio by more than 5 percent (i.e., 
the percentage of an IRA's assets invested in a Portfolio compared 
to the percentage called for in the Asset Allocation Model selected 
for the IRA). However, Keystone reserved the right to rebalance an 
Account even if the required minimums were not satisfied.
    For example, if under the Asset Allocation Model, 35 percent of 
an IRA's assets were invested in the Established Growth Fund, then 
rebalancing would occur if the percentage actually invested in the 
Established Growth Fund increased above 40 percent or decreased 
below 30 percent (but only if the dollar amount of the rebalancing 
transaction would exceed $250).
---------------------------------------------------------------------------

Reallocation of IRA Accounts
    15. Keystone represents that from time to time, it was authorized 
to make changes to the asset mix of the Asset Allocation Models, as 
well as to the mix and identity of Affiliated Fund and/or Third Party 
Fund Portfolios that satisfied the Asset Allocation Models. However, 
Keystone states that it never utilized the reallocation method during 
the time period the Investment Advisory Program was in effect. Had 
Keystone decided to implement the reallocation mechanism, it would have 
been required to inform each affected Independent Fiduciary in advance 
and in writing of the proposed change. In addition, Keystone would have 
been required to provide each Independent Fiduciary with the 
opportunity to elect not to permit such change.\7\ If the Independent 
Fiduciary took no action, Keystone would have been authorized to 
realign each Account on a quarterly basis to make the Account's 
investment mix match the new investment mix of the Asset Allocation 
Model selected by the Independent Fiduciary.
---------------------------------------------------------------------------

    \7\ For reallocations occurring after March 24, 2000, Keystone 
would have been required to include a Termination Form with the 
notice. See Representation 21. However, as stated above, Keystone 
never implemented the reallocation mechanism even though this change 
was communicated to IRA investors in the Termination Form.
---------------------------------------------------------------------------

Disclosures
    16. Aside from the Questionnaire and Interview Report described 
above, in order for an IRA to participate in the Investment Advisory 
Program, Keystone provided an Independent Fiduciary with the following 
materials and oral disclosures:
     A brochure describing the Investment Advisory Program; 
an Account Agreement; a description of the Asset Allocation Models; 
and a reference guide/disclosure statement providing details about 
the Investment Advisory Program, the fees charged thereunder, the 
procedures for establishing, making additions to and withdrawing 
from Accounts, and other related information.
     Copies of applicable Prospectuses for the Portfolios 
discussing the investment objectives of the Portfolios, the policies 
employed to achieve these objectives, and the corporate affiliation 
existing between Keystone and its affiliates, the compensation paid 
to such entities, disclosures relating to rebalancing and 
reallocating Asset Allocation Models (even though the reallocation 
service was never implemented), and information explaining the risks 
attendant to investing in the Portfolios.
     Upon written or oral request to Keystone, a Statement 
of Additional Information supplementing the Prospectuses, which 
described the type of securities and other instruments in which the 
Portfolios may invest and the investment policies and strategies 
that the Portfolios may utilize, including a description of the 
risks.
     A copy of the Account Agreement between the IRA and 
Keystone relating to the IRA's participation in the Investment 
Advisory Program.
     A written recommendation of a specific Asset Allocation 
Model, together with a copy of the Questionnaire and response, or 
the Interview Report.

    If accepted as an investor in the Investment Advisory Program, the 
Independent Fiduciary was required to

[[Page 6686]]

acknowledge in writing to Keystone, prior to investing through such 
Program, that such Independent Fiduciary had received copies of the 
aforementioned documents. In addition, the Independent Fiduciary was 
required to represent to Keystone that such individual was (a) 
independent of Keystone and its affiliates; (b) knowledgeable with 
respect to the IRA in administrative matters and funding matters 
related thereto; and (c) able to make an informed decision concerning 
participation in the Investment Advisory Program.
    17. In addition, on an ongoing basis, Keystone was required to 
provide each Independent Fiduciary with the following oral or written 
disclosures:

     Written confirmations of each purchase and redemption 
of shares of a Portfolio (including transactions resulting from the 
realignment of assets caused by a change in the Asset Allocation 
Model's investment mix and from periodic rebalancing of Account 
assets).
     Telephone quotations of Account balances.
     A periodic, but not less frequently than quarterly, 
Statement of Account specifying the net asset value of the IRA's 
assets invested in such Account, a summary of purchase, sale and 
exchange activity and dividends received or reinvested, a summary of 
cumulative realized gains or losses, and a statement of the fees 
paid to Keystone and its affiliates.
     Semiannual and annual reports that included financial 
statements for the Portfolios.
     A quarterly report pertaining to the applicable Asset 
Allocation Model describing such Asset Allocation Model's 
performance during the preceding quarter, market conditions and 
economic outlook and, if applicable, prospective changes in 
Portfolio allocations for the Asset Allocation Model, and the 
reasons therefor.
     At least annually, a written or oral inquiry from 
Keystone to ascertain whether the information provided in the 
Questionnaire or Interview Report was still accurate, and to 
determine whether such information should be updated.
     At least annually, a Termination Form.

Fee Structure

    18. As to each investing IRA, the total fees paid to Keystone and 
its affiliates constituted not more than reasonable compensation for 
the services provided within the meaning of section 4975(d)(2) of the 
Code. Keystone charged each participating IRA an annual investment fee 
(the Outside Fee) at rates set forth in the Account Agreement. For 
example, if the average daily value of the Account--

     Exceeded $149,999, the Outside Fee charged was 1.30 
percent; or
     Was less than $150,000, the Outside Fee charged was 
1.55 percent.

    The Outside Fee was computed quarterly on the average daily value 
of the assets in an IRA's Account during the quarter and was deducted 
directly from the Account (or paid directly by the Independent 
Fiduciary), also on a quarterly basis.
    Although Keystone was authorized to increase the Outside Fee 
periodically, it never implemented this change. Assuming the Outside 
Fee had been increased, Keystone would have been required to notify the 
Independent Fiduciaries of all IRAs participating in the Investment 
Advisory Program, in writing, at least 30 days prior to the effective 
date of a such fee increase. The Independent Fiduciary would have been 
permitted to withdraw from the Investment Advisory Program at will and 
without penalty, and the fee increase would only have gone into effect 
if the Independent Fiduciary did not elect to withdraw by the effective 
date.
    As stated above, each investing IRA did not pay any sales loads on 
the purchase of Portfolio shares through the Investment Advisory 
Program. The Accounts were invested only in Portfolios which charged no 
front- end or back-end sales charges or for which the sales charges had 
been waived.
    As discussed in Representation 3, Martindale received Advisory Fees 
from the Affiliated Funds. These annualized fees were paid at the Fund 
Portfolio-level and were based on a percentage of the assets held by 
such Portfolio, of between 0.20 percent and 0.50 percent. Similarly, 
GGA received annualized Advisory Fees of between 0.15 percent and 0.70 
percent and Martindale received sub-advisory fees ranging from 0.05 
percent to 0.50 percent.
    In addition to the Advisory Fees, GGA and BISYS received 
Administrative Fees from the Affiliated Funds of 0.115 percent.
    Further, Keystone and its affiliates received Rule 12b-1 Fees from 
certain Third Party Fund distributors with respect to IRA assets 
invested in the Third Party Funds through the Investment Advisory 
Program. The Rule 12b-1 Fees were in the form of trailing commissions 
of up to 0.25 percent per annum of the net asset value of each Third 
Party Fund.
    Besides the aforementioned fees, each Portfolio incurred certain 
expenses. These expenses included charges for legal and accounting 
services, printing costs, registration fees, regulatory compliance 
costs, costs associated with maintaining the Fund's legal existence, 
and shareholder communication costs.
    19. Keystone represents that with respect to each Account, it 
offset, quarterly, against the Outside Fee it received, (a) all 
Advisory Fees (including sub-advisory fees that were paid to third 
party sub-advisers), (b) all Administrative Fees GGA and BISYS received 
from the Affiliated Funds, and (c) all Rule 12b-1 Fees that were paid 
to Keystone and its affiliates by the respective Third Party Funds. 
Thus, the sum of the offset and the net Outside Fee would always equal 
the aggregate Outside Fee and the selection of Affiliated Funds or 
Third Party Funds would always be revenue-neutral. Moreover, Keystone 
believed this method of offsetting of all Fund-level fees would 
eliminate any conflicts of interest resulting from the investment of an 
Account's assets in certain Fund Portfolios that generated higher 
overall fees for Keystone and its affiliates.
    At the end of each quarter, Keystone calculated the percentage of 
gross revenues that it and its affiliates earned during the quarter in 
the form of Advisory Fees (from the Affiliated Funds) or Rule 12b-1 
Fees (from the Third Party Funds). These figures were calculated as a 
percentage of the average daily net value of assets in each Portfolio. 
The weighted average of such revenues (the Offset Percentage) were then 
calculated for each Asset Allocation Model as shown below in TABLE II. 
This yielded the amount of the Advisory Fees and Rule 12b-1 Fees that 
were earned by Keystone and its affiliates. Such fees were expressed as 
a percentage of the average daily net value of Account assets. Because 
the Outside Fee was also calculated as a percentage of the average 
daily net value of Account assets, Keystone reduced the Outside Fee for 
the quarter for each IRA by subtracting from the Outside Fee, the 
Offset Percentage for the Asset Allocation Model in which the IRA's 
assets had been invested during the quarter. Only after the Offset 
Percentage had been subtracted would Keystone deduct the Outside Fee 
from the IRA's Account.

[[Page 6687]]



  Table II.--Example of Outside Fee Offset Based on an Account With an Average Daily Value of $150,000 or More
                                          [All percentages annualized]
----------------------------------------------------------------------------------------------------------------
                                                                             Percentage  of
                                                        Total revenues           assets            Weighted  fee
           Fund type                  Asset class         (percentage)        allocated  to         percentage
                                                                                  fund
----------------------------------------------------------------------------------------------------------------
Affiliated Fund...............  Fixed Income..........            0.60   x            35.00  ...           21.00
Affiliated Fund...............  Money Market..........            0.40   x            30.00  ...           12.00
Third Party Fund..............  International Equity..            0.20   x            35.00  ...            7.00
                                                                                                 ---------------
    Total.....................  ......................  ..............  ...             100  ...           40.00
Outside Fee:..................  ......................  ..............  ...            1.30  ...  ..............
Weighted Average of Keystone    ......................  ..............  ...            0.40  ...  ..............
 Revenues (40  100):
Net Account Fee (Annual) Would  ......................  ..............  ...            0.90  ...  ..............
 be Calculated Quarterly.
----------------------------------------------------------------------------------------------------------------

    20. Like the Affiliated Funds, the Third Party Funds also incurred 
expenses for shareholder services, custody, the costs of regulatory 
compliance, legal fees, and shareholder communication costs, as well as 
the management and service fees imposed by investment advisers and 
service providers unaffiliated with Keystone or its affiliates. As for 
both the Affiliated and the Third Party Funds, these Fund-level 
expenses were not offset against Keystone's Outside Fee.
Termination Form
    21. An Independent Fiduciary had the ability to withdraw from the 
Investment Advisory Program at any time, provided such fiduciary gave 
proper notice to Keystone. In addition, Keystone was authorized to 
provide 30 days' advance written notice to the Independent Fiduciary if 
it wished to change the asset mix of an Account outside of an Asset 
Allocation Model, divide an Asset Class, replace a Third Party Fund 
with an Affiliated Fund or vice versa, or increase its Outside Fee. The 
written notice was required to (a) state that the Independent Fiduciary 
could terminate the IRA's participation in the Investment Advisory 
Program at will and without penalty, upon receipt by Keystone of 
written notice from the Independent Fiduciary; and (b) explain that any 
of the changes noted above would go into effect if the Independent 
Fiduciary did not elect to withdraw by the effective date.
    However, under either circumstance, there was no formalized 
structure in place whereby Keystone could inform an Independent 
Fiduciary of his or her right to withdraw from the Investment Advisory 
Program on a more frequent basis or to document the Independent 
Fiduciary's withdrawal decision. Therefore, on March 24, 1999, Keystone 
began distributing the Termination Form to each Independent Fiduciary 
participating in the Investment Advisory Program. Although distribution 
of such form would be required thereafter, at least annually (i.e., 
during the first calendar quarter of each year), it was considered 
mandatory in all cases where Keystone wished to make the changes noted 
above.
    The Termination Form was to be accompanied by instructions on its 
use. The instructions, which contained information similar to the 
contents of Keystone's formerly-disseminated notice, provided that (a) 
the authorization was terminable at any time and without penalty, 
either by completing and returning the Termination Form or by sending 
other written notice to Keystone; and (b) no purchases and sales under 
the Account Agreement would be executed after the next business day 
following Keystone's receipt of the Termination Form or other written 
withdrawal notice. Assuming Keystone proposed to modify an asset mix or 
raise its Outside Fee, the Termination Form would also have stated that 
the change would only go into effect if the Independent Fiduciary did 
not elect to withdraw by the effective date.
    Keystone represents that it never replaced an Affiliated Fund with 
a Third Party Fund Portfolio or vice versa, nor did it otherwise make 
an additional Third Party Fund Portfolio available for investment under 
the Investment Advisory Program, change an asset mix outside of an 
Asset Allocation Model or increase its Outside Fee. Therefore, there 
were no special circumstances to warrant an earlier distribution of 
such form. Moreover, because of the contemplated termination of the 
Investment Advisory Program on June 30, 2000, Keystone made no further 
annual distribution of the Termination Form to Independent Fiduciaries.
    22. It is represented that the transactions satisfied the statutory 
criteria for an exemption under section 4975(c)(2) of the Code because:
    (a) The investment of an IRA's assets under the Investment Advisory 
Program was made by a fiduciary that was independent of Keystone and 
its affiliates and such Independent Fiduciary maintained complete 
discretion with respect to the IRA's continued participation in the 
Investment Advisory Program.
    (b) No IRA paid a fee or commission by reason of the acquisition or 
redemption of shares of Fund Portfolios.
    (c) As to each IRA, the total fees that were paid to Keystone and 
its affiliates constituted no more than reasonable compensation for the 
services provided.
    (d) Prior to investing under the Investment Advisory Program, each 
Independent Fiduciary received offering materials and disclosures from 
Keystone which set forth all material facts concerning the purpose, fee 
structure, rebate arrangement, operation, rebalancing, risks and 
participation in such Program.
    (e) Keystone provided written documentation to an Independent 
Fiduciary of its recommendations based upon objective criteria that 
were uniformly applied.
    (f) The quarterly Outside Fee that was paid by an IRA to Keystone 
for asset allocation and related services rendered to such IRA under 
the Investment Advisory Program was offset by--(1) all gross Advisory 
Fees received by Keystone and/or its affiliates from the Affiliated 
Funds, including sub-advisory fees that are paid to third party sub-
advisers; (2) all Administrative Fees received by GGA and BISYS from 
the Affiliated Funds; and (3) all Rule 12b-1 Fees that were paid by the 
Third Party Funds to Keystone and/or its affiliates, such that the sum 
of the Outside Fee

[[Page 6688]]

and the Offset Fees equaled the total Outside Fee, and the selection of 
Affiliated or Third Party Fund Portfolios was revenue-neutral.
    (g) Although Keystone had discretion to make unilateral Model 
Adjustments to an IRA's Asset Allocation Model, it was bound by the 
financial goals and risk tolerances that the Model represented and it 
was limited in the degree of change that it could make to an Asset 
Allocation Model's investment mix.
    (h) In rebalancing an IRA investor's Account, neither Keystone nor 
its affiliates exercised discretionary management or control over the 
IRA.
    (i) Although the Independent Fiduciary could withdraw from the 
Investment Advisory Program at any time, any authorizations made by 
such IRA investors with respect to increases in the Outside Fee, Model 
Adjustments that were outside of an Asset Allocation Model, the 
addition or substitution of a Fund, would be terminable at will and 
without penalty to the IRA, upon receipt by Keystone of a Termination 
Form from such IRA investor which would advise the Independent 
Fiduciary (1) of his or her right to withdraw from the Investment 
Advisory Program and (2) that absent affirmative approval, the change 
would be effective as of a given date.
    (j) Each Independent Fiduciary received disclosures from Keystone 
regarding the participation of the IRA in the Investment Advisory 
Program.
    (k) All dealings between an IRA, the Funds and Keystone remained on 
a basis which was at least as favorable to the IRA as such dealings are 
with other shareholders of the Funds holding the same classes of shares 
as the IRA.

Notice to Interested Persons

    Keystone will provide notice of the proposed exemption to 
Independent Fiduciaries of IRAs formerly investing in the Investment 
Advisory Program within 30 days of the publication of the notice of 
pendency in the Federal Register. Such notice will be provided by 
first-class mail and will include a copy of the notice of proposed 
exemption, as published in the Federal Register, as well as a 
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2). 
The supplemental statement will inform interested persons of their 
right to comment on and/or to request a hearing with respect to the 
pending exemption. Therefore, comments and requests for a hearing must 
be received by the Department no later than 60 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.)

Reagent Chemical & Research, Inc. Employees Profit Sharing Plan and 
Trust (the Plan) Located in Middlesex, New Jersey

[Application No. D-10793]

Proposed Exemption

    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, 32847, August 10, 1990). If the exemption 
is granted, 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 proposed sale of a certain residential lot 
(the Property) by the Plan to Mr. Brian Skeuse and Mrs. Jan Skeuse (the 
Skeuses), parties in interest with respect to the Plan; provided that 
the following conditions are satisfied:
    (a) the sale is a one-time cash transaction;
    (b) the Plan receives the greater of either: (i) $105,000; or (ii) 
the current fair market value for Property established at the time of 
the sale by an independent qualified appraiser; and
    (c) the Plan pays no commissions or other expenses associated with 
the sale.

Summary of Facts and Representations

    1. The Plan was adopted on December 12, 1962. The Plan is a defined 
contribution plan with approximately 309 participants. As of July 22, 
1999, the Plan had approximately $30,438,854 in total assets. Reagent 
Chemical & Research, Inc. (RCR) is the sponsor of the Plan. RCR is a 
subchapter ``S'' corporation organized under the laws of State of 
Delaware. RCR is in the business of manufacture, distribution and sale 
of specialty chemicals. The Plan's current trustees are John T. Skeuse, 
brother of Brian Skeuse, and Stephen T. Finney, brother-in-law of Brian 
Skeuse.
    2. On November 3, 1980, the Plan purchased approximately 34.58 
acres of land (the Land) from Joe and Wenona Russo, unrelated third 
parties, for $225,000.\8\ The Property is a 2.5 acre parcel of the 
Land. Therefore, the applicant represents that the cost of the Property 
to the Plan, based on the per acre price paid for the Land, was 
$16,304.35. The Property is adjacent to the Skeuses' personal family 
residence. It is represented that the decision to purchase the Property 
as a investment for the Plan was made by Robert Dallas and Thomas 
Skeuse, Sr., who were the Plan's trustees at the time of the 
transaction.\9\
---------------------------------------------------------------------------

    \8\ The Plan sold approximately 10 acres of the Land in 1987 to 
Brian Skeuse, a party in interest, pursuant to the terms and 
conditions of Prohibited Transaction Exemption (PTE) 87-17, 52 FR 
2630 (January 23, 1987). The Department is providing no opinion 
herein as to whether the conditions of PTE 87-17 were met.
    \9\ The Department is not providing any opinion in this proposed 
exemption as to whether the acquisition and holding of the Land, 
including the Property, by the Plan violated any of the provisions 
of Part 4 of Title I of the Act.
    However, the Department notes that an investigation regarding 
the subject investments made by the Plan and related transactions 
has been conducted by the Department's Regional Office in New York. 
In this regard, the proposed exemption, if granted, will enable the 
Plan to be made ``whole'' with regard to the total costs to the Plan 
for the Property and will allow the Plan to reinvest the proceeds of 
the proposed sale in other assets which may yield greater returns.
---------------------------------------------------------------------------

    The Property is held in the Plan's aggregate portfolio and has not 
been allocated to any participant's account in the Plan. At the time of 
the Plan's purchase in 1980, the Property represented less than 1% of 
the Plan's total assets. The applicant represents that as of November 
27, 2000, the Property continued to represent less than 1% of the total 
value of the Plan's assets.
    3. The applicant represents that the Property has not been used or 
leased by anyone, including the parties in interest described herein, 
since it was acquired by the Plan. Thus, the applicant states that the 
Property has not been an income-producing asset and has been held for 
possible appreciation.
    The Plan has paid for taxes, insurance and maintenance on the 
Property since the acquisition (the Holding Costs). Specifically, the 
Plan has paid a total of approximately $34,870 in property taxes for 
the Property during this period. Further, the Plan has paid 
approximately $4,500 for the design and approval of a residential 
septic tank system for the Property. The applicant estimates that the 
insurance costs incurred by the Plan for the Property during the period 
from 1980 until 1999 were approximately $1,000. The applicant states 
that the Holding Costs for the Property have been approximately 
$40,370. Therefore, the total cost for the Property (i.e, the 
acquisition price of $16,304, plus the Holding Costs of approximately 
$40,370) was approximately $56,674 as of December 2000.

[[Page 6689]]

    4. The Property is located on 30 Old Hill Road, Raritan Township, 
Hunterdon County, New Jersey. The Property was appraised on May 11, 
1999, as having a fair market value of $95,000 (the Appraisal). The 
Appraisal was prepared by George A. Copeland, Jr., MAI (Mr. Copeland), 
who is an independent, qualified real estate appraiser in the State of 
New Jersey. Mr. Copeland is with Copeland Appraisal Associates, Inc., 
located at 971 U.S. Route 202 in Somerville, New Jersey. Mr. Copeland 
states that consideration was given in the Appraisal to three 
approaches to value, i.e., the cost approach, sales comparison 
approach, and income approach. However, Mr. Copeland relied on the 
sales comparison approach to determine the fair market value of the 
Property.
    Mr. Copeland also submitted several updates to the Appraisal of the 
Property. The first update is dated March 23, 2000 (Update I). Update I 
states that the fair market value of the Property was $100,000 as of 
March 23, 2000.
    The second update to the Appraisal of the Property is dated 
November 20, 2000 (Update II). Update II states that the fair market 
value of the Property was $105,000, as of November 20, 2000.
    Finally, the applicant also submitted a supplement to the Update II 
dated December 22, 2000 (the Supplement). Because the Property is 
adjacent to the Skeuses' personal family residence, Mr. Copeland 
considered whether a sale of the Property by the Plan to the Skeuses 
would merit a premium above the fair market value for the Property. 
However, in the Supplement, Mr. Copeland states that the Property would 
not merit a premium above its fair market value in any sale to an 
adjacent property owner.
    5. The applicant now proposes that the Skeuses purchase the 
Property from the Plan in a one-time cash transaction. The applicant 
represents that the proposed transaction would be in the best interest 
and protective of the Plan. The Plan will pay no commissions or other 
expenses associated with the sale. The Skeuses will pay the Plan the 
greater of either: (a) $105,000; or (b) the current fair market value 
of the Property, as established by a qualified independent appraiser at 
the time of the transaction. In this regard, Mr. Copeland or another 
independent qualified appraiser will update the Appraisal to determine 
the current fair market value for the Property at the time of the 
proposed sale. The sale of the Property will enable the Plan to sell an 
illiquid non-income producing asset and reinvest the sale proceeds in 
assets that may yield higher returns.
    6. In summary, the applicant represents that the transaction will 
satisfy the statutory criteria of section 408(a) of the Act and section 
4975(c)(2) of the Code because:
    (a) The proposed sale will be a one-time cash transaction;
    (b) the Plan will receive the greater of either: (i) $105,000; or 
(ii) the current fair market value for the Property, as established at 
the time of the sale by an independent qualified appraiser;
    (c) the Plan will pay no fees, commissions or other expenses 
associated with the sale; and
    (d) the sale will enable the Plan to divest itself of a non-income 
producing asset and acquire investments which may yield higher returns.

Notice to Interested Persons

    The applicant represents that notice of the proposed exemption (the 
Notice) will be distributed to interested persons, by first class mail, 
or by posting in RCR's facilities, within thirty (30) days of the date 
the Notice is published in the Federal Register. Such interested 
persons will include all participants in the Plan, all fiduciaries of 
the Plan, and any officer or director of RCR. The distribution to 
interested persons shall include a copy of the Notice, as published in 
the Federal Register, and a supplemental statement, as required 
pursuant to 29 CFR 2570.43(b)(2), which shall inform such persons of 
their right to comment and/or request a hearing with respect to the 
Notice.
    Comments and requests for a public hearing with respect to the 
Notice are due sixty (60) days following the publication of the Notice 
in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department 
at (202) 219-8883. (This is not a toll-free number.)

Ibbotson Associates, Inc. (Ibbotson) Located in Chicago, Illinois

[Exemption Application No.: D-10897]

Proposed Exemption

    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, 32847, August 10, 1990). If the exemption 
is granted, 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 Ibbotson to Plan participants and the receipt of fees by Ibbotson 
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 Ibbotson to provide the Service will be 
expressly authorized in writing by an independent fiduciary of each 
Plan.
    B. Ibbotson 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 Ibbotson, 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 Ibbotson 
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, if granted, 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 Ibbotson 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,

[[Page 6690]]

such report may be provided more frequently.
    C. Ibbotson will provide each Plan participant with the following:
    (1) Written notice that the Service is available and provided by 
Ibbotson, 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 Ibbotson and a description of the Service.
    (3) Access to Ibbotson's web site or paper-based communications 
which will clearly indicate that the Plan participant is receiving the 
Service from Ibbotson, and that Ibbotson is independent of the Service 
Provider.
    (4) A tolerance questionnaire which must be completed prior to 
utilization of the Service.
    (5) An investment advisory service agreement under which the Plan 
participant will acknowledge his or her understanding that the Service 
is provided by Ibbotson and not the Service Provider. This agreement 
must be completed prior to utilization of the Service.
    D. Any investment advice given to a Plan participant by Ibbotson 
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 Ibbotson.
    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 Ibbotson 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 Ibbotson 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 at least 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 Plan participants and beneficiaries (the 
Revised Technology Fee).
    (3) For subsequent years, Ibbotson will charge the Service Provider 
an annual technology maintenance fee equal to up to 20% of the 
technology licensing fee charged to the Service Provider in the first 
year plus up to 20% of the Revised Technology Fee.
    (4) Ibbotson will charge the Plan or Plan sponsor an Internet 
customization fee where a Plan sponsor contracts directly with Ibbotson 
for the provision of the Service. This flat fee will be based on the 
time spent by Ibbotson 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 Plan 
or the Plan sponsor to Ibbotson in connection with the Service will be 
received or shared with a Service Provider.
    I. Neither the fees charged nor the compensation received by 
Ibbotson will be affected by the investment selections or the decisions 
made by the Plan participants and beneficiaries regarding investments 
of the assets in their accounts.
    J. Each Service Provider shall represent to Ibbotson 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 similarly situated clients who do not contract for the 
Service.
    K. Ibbotson will maintain insurance coverage from an insurer with a 
rating in one of the three highest generic categories by at least one 
nationally recognized statistical rating service, in the amount of at 
least $5 million for the payment of any liabilities that may arise with 
respect to the Service by reason of a breach of fiduciary duty 
described in section 404 of the Act or a violation of the prohibitions 
of section 406 of the Act or section 4975 of the Code. Such insurance 
coverage will be provided under a ``claims made'' policy. In the event 
that Ibbotson changes insurers or ceases to provide the Service, 
Ibbotson will maintain ``trail coverage'' with respect claims made 
during the period in which the policy was in effect for a period of 
three years following such a change or cessation of the Service.
    L. No Service Provider shall at any time own any interest, by vote 
or value in Ibbotson, and neither Ibbotson nor any affiliate shall own 
any interest, by vote or value, in a Service Provider.
    M. The annual revenues derived by Ibbotson from any one Service 
Provider shall not constitute more than 5% of the annual revenues of 
Ibbotson.
    N. Ibbotson will maintain for a period of six years, the records 
necessary to enable the persons described in paragraph (O) of this 
section to determine whether the conditions of the exemption are met, 
including records of the recommendations made to Plan participants and 
beneficiaries and their investment choices, except that--
    1. A prohibited transaction will not be considered to have occurred 
if, due to circumstances beyond the control of Ibbotson, the records 
are lost or destroyed prior to the end of the six year period.
    2. No party in interest, other than Ibbotson 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 O(1) below.
    O. (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 (N) 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 or 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 (O) shall be authorized to examine trade secrets of Ibbotson, 
or commercial or financial information which is privileged or 
confidential.

[[Page 6691]]

III. Definitions
    A. The term ``Service'' means the asset allocation service provided 
by Ibbotson 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 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.
    C. The term ``independent fiduciary'' means a Plan fiduciary which 
is independent of Ibbotson and its affiliates and independent of the 
Service Provider and its affiliates.
    D. The term ``affiliate'' includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, 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 benefit pension plan as 
defined in section 3(2) of the Act.

Summary of Facts and Representations

    1. Ibbotson, founded by Professor Roger Ibbotson in 1976, provides 
products and services to help investment professionals make asset 
allocation decisions for their clients. Ibbotson's mission is to help 
its clients gather, manage and retain assets. Its clients include 
financial planners, brokers, brokerage firms, mutual fund companies, 
institutional and small money managers, pension funds, 401(k) 
providers, banks and private bankers and insurance companies. In its 
application, Ibbotson states that Professor Ibbotson's study, Stocks, 
Bonds, Bills and Inflation, has become an indispensable annual 
reference tool for investment and financial professionals.
    2. The Applicant represents that the Service will be beneficial to 
Plan participants because it will provide Plan participants with 
guidance involving analytical techniques and financial concepts that 
typically result in a more focused and well thought out program for 
Plan investments. The Applicant further states that the Service, 
thereby, allows Plan participants to more fully exercise their rights 
to self-direct their investments. The Service integrates retirement 
planning and fund allocation recommendations, including current Plan 
savings, other retirement savings, personal retirement income goals and 
tolerance for risk, time horizon to retirement and the fund choices 
specifically available in a participant's Plan. According to Ibbotson, 
these factors can be the most crucial in developing an effective 
individual retirement plan.
    The Applicant further indicates that the individual guidance which 
is provided by the Service is not typically available due to the 
hesitancy of Plan sponsors and Service Providers to provide such advice 
out of concern for potential liability, and the high cost of obtaining 
this type of advice on an individual basis. Ibbotson believes that the 
advice provided by the Service is similar to that used by professional 
investment managers for the allocation of assets in a defined benefit 
plan.
    3. Before a Plan's independent fiduciary may authorize the Plan's 
participation in the Service, Ibbotson must provide the independent 
fiduciary with a complete description of the Service, written 
disclosures of all fees and expenses associated with the Service, and a 
written contract for the provision of the Service which defines the 
relationship between Ibbotson, the Service Provider and the Plan 
sponsor and the obligations thereunder.\10\ Such contract will be 
renewable annually and will include: (a) A provision under which the 
Plan shall have 45 days notice prior to implementation of any material 
change to the Service or any fee or expense increases in connection 
with the provision of the Service by Ibbotson; and (b) a provision 
which states that a Plan may terminate its participation in the Service 
at any time without penalty. However, a Plan which terminates its 
participation in the Service before the expiration of the contract will 
be responsible for the payment of its pro-rata share of the fees owed 
under the contract as of the date of termination, and, if applicable, 
any direct costs actually incurred by Ibbotson which would have been 
recovered by Ibbotson but for the termination of the contract, 
including any direct setup expenses not previously recovered. In 
addition, Ibbotson shall provide the independent fiduciary with a copy 
of the proposed and the final exemption, if granted, as published in 
the Federal Register.
---------------------------------------------------------------------------

    \10\ In this regard, the Department notes that the fiduciary 
responsibility provisions of the Act apply to the decision of a 
Plan's independent fiduciary to authorize the Plan's participation 
in the Service. Section 404 of the Act requires, among other things, 
that a fiduciary of a plan must act prudently, solely in the 
interest of the plan's participants and beneficiaries, and for the 
exclusive purpose of providing benefits to participants and 
beneficiaries. Accordingly, the Plan's independent fiduciary must 
act prudently when deciding to participate in the Service, and in 
considering the fees associated with the Service. The Department 
expects that the Plan's independent fiduciary, prior to authorizing 
the Plan's participation in the Service, will understand fully the 
operation of the Service, and the compensation paid thereunder, 
following disclosure by Ibbotson of all relevant information 
pertaining to the Service.
---------------------------------------------------------------------------

    4. Ibbotson will provide the Service either directly to Plan 
participants through an agreement with the Plan sponsor or through an 
agreement with the Service Providers sponsoring the investment vehicles 
offered to Plan participants. In situations where Ibbotson contracts 
directly with the Plan Sponsor, Ibbotson will customize the Service for 
each Plan.\11\ The fees

[[Page 6692]]

charged for the Service will be based on a flat fee per participant. In 
many instances, Ibbotson will need to coordinate with the Plan's 
record-keeper or another Service Provider in offering the Service to a 
Plan's participants. Such entities will be independent of Ibbotson. All 
fees for the Service will be paid by the Plan sponsor or the Plan to 
Ibbotson, and the Service Providers will not receive any portion of 
such fees or other consideration from Ibbotson.
    In the second situation, Ibbotson will provide the Service to Plan 
participants pursuant to a contract that the Plan sponsor enters into 
with a Service Provider. In these instances, the fees for the Service 
will still be based on a flat dollar amount per Plan participant, but 
will be paid to Ibbotson by the Service Provider, the Plan or Plan 
participant. In addition, Ibbotson will enter into a written agreement 
with the Plan sponsor defining the relationship between the Plan 
sponsor, Ibbotson and the Service Provider.
---------------------------------------------------------------------------

    \11\ 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 a 
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 judgment 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).
---------------------------------------------------------------------------

    5. The Applicant states that, once a Plan fiduciary has authorized 
its Plan's participation in the Service, Plan participants will receive 
written notice that the Service is available and provided by Ibbotson, 
an entity which is independent of the Service Provider. Each Plan 
participant will receive an investment advisory service agreement under 
which each participant will acknowledge his or her understanding that 
the Service is provided by Ibbotson and not the Service Provider. In 
addition, Plan participants will receive full disclosures about 
Ibbotson and the Service.
    Access to the Service will be provided to Plan participants through 
the Internet, or by written materials. A Plan participant will answer a 
questionnaire which consists of multiple questions that are designed to 
evaluate a Plan participant's anticipated time horizon to retirement, 
savings rate and other personal financial factors. After the interview 
is completed, the Plan participant will receive recommendations with 
respect to his or her savings rate, retirement age and asset 
allocation\12\ and the percentage of assets that the Plan participant 
should allocate to each option.
---------------------------------------------------------------------------

    \12\ The recommendation will describe and identify the specific 
investment options available through the participant's Plan and in 
which options the Plan participant should invest.
---------------------------------------------------------------------------

    If a Plan participant elects to receive his/her advice through the 
Internet, the Plan participant will first access a website provided by 
the Service Provider or the Plan sponsor. There will be an electronic 
link from the Plan sponsor's or Service Provider's website to 
Ibbotson's website where the questionnaire and investment advice is 
housed. The Applicant represents that Ibbotson will always retain sole 
control over the content of the Service and the advice contained 
therein. Ibbotson will regularly monitor the contents of the Service 
and the advice contained therein to ensure that it remains the product 
of the objective methodology developed by Ibbotson. Ibbotson states 
that it will be apparent to the Plan participant that Ibbotson is the 
sole-provider of such advice.
    For those Plan participants using the Internet, the completed 
questionnaire is scored by computer. For those Plan participants who 
select to receive his/her advice in paper form, Ibbotson will mail the 
Service materials to Plan sponsors or Plan participants after the Plan 
sponsor has decided to hire Ibbotson. The Plan participants will mail 
their written responses back to Ibbotson. Ibbotson will, in turn, score 
the questionnaire and send its recommendations, etc., directly back to 
the Plan participant. The Plan participant, will, if she or he chooses 
to implement the recommendations, then mail or telephone the 
instructions to the Service Provider (or other designated agent for 
receiving such investment instructions.) All recommendations will be 
generated by Ibbotson's proprietary forecasting engine based on an 
analysis of Plan participant's responses to the questionnaire and an 
analysis of the investment options offered under the relevant Plan, 
including any employer stock fund.\13\ Based on the score, the Plan 
participant is categorized into one of several investment 
recommendations.\14\
---------------------------------------------------------------------------

    \13\ The Service will not, however, make any recommendations 
will respect to investments in employer stock. Instead the Service 
will treat the participant-designated level of employer stock 
holdings as an investment in the particular asset class in which the 
stock falls (i.e., large capitalized equity) with two times the 
volatility of that class and develop an overall recommendation with 
this assumption.
    \14\ These recommendation involve lower to high risk portfolios.
---------------------------------------------------------------------------

    Each recommendation contains a description of the investor profile 
associated with such recommendation that a Plan participant can review 
to see if he or she feels that he or she has been correctly classified. 
The Service will also allow Plan participants to experiment with 
different risk/return scenarios to better understand what impact the 
recommended allocation will likely have on his/her retirement.
    6. The Applicant states that the advice provided to Plan 
participants will be based on the application of an objective 
methodology developed by Ibbotson. The investment recommendations 
generated by the Service are standardized. Such recommendations are 
generated through an automated process that is then applied to each 
Plan and Plan participant advised by Ibbotson. 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 Service 
will inform Plan participants periodically of the need to review their 
situation. Plan participants are advised that the investment advice is 
valid for one year and it is advisable to repeat the questionnaire 
process periodically and if there are significant life events (such as 
the birth of a child or an increase in salary.)
    7. The Applicant represents that its role in performing the Service 
on behalf of a Plan, includes gathering information about the 
investment options offered in a particular Plan, and developing a 
recommended portfolio for each investor type. First, each Plan's 
investment option style is analyzed. Then, seven (or more) Plan-
specific asset allocation recommendations (from lower to higher risk) 
are generated by using proprietary Ibbotson software. Finally, the 
allocations are electronically transferred to a web site ``server'' 
(computer system) where one of the asset allocations is recommended to 
a Plan participant, based on his/her inputs.
    Ibbotson constructs portfolios with different risk and return 
characteristics using the investment options available under the Plan. 
These portfolios form the foundation of the advice which is provided to 
a Plan participant. This methodology can be broken into five steps.
    Step 1: Selection of asset classes. Before creating specific 
portfolios for each investment option, Ibbotson believes that it is 
first necessary to construct strategic asset-class level portfolios. 
These strategic portfolios reflect the underlying asset allocations 
that Ibbotson would like to achieve

[[Page 6693]]

using the specific investment options available under the Plan. Asset 
classes used to create the strategic portfolios may include: Large, mid 
and small cap stocks, international stocks, emerging stocks, long, 
intermediate and short term government bonds, high-yield bonds, 
municipal bonds, cash, and company stock. The asset classes used depend 
on the number and types of investment options available in the 401(k) 
plan. Ibbotson requires that the investment options in a plan provide 
exposure to at least small and large stocks, cash, and bonds for advice 
to be given. If the exposure to each of these asset classes is not 
available, Ibbotson will not provide advice services.
    Step 2: Develop expected returns. Ibbotson uses historical 
relationships and current yields on government bonds to generate 
expected returns. This approach separates the expected return of each 
asset class into three components. The first two components are a real 
risk-free rate of return and an estimate of future inflation. It is 
Ibbotson's belief that the current yield on a long-term, zero coupon 
government bond is the best estimate of these two components. The third 
component is the difference between the historical return on any asset 
class and the historical return on long-term, zero coupon government 
bonds. This difference represents the incremental return over the risk 
free rate investors have earned from taking on the risk of investing in 
an asset class. The sum of these components is the expected return 
Ibbotson uses in the mean-variance optimization process. Standard 
deviations and correlations for the asset classes are calculated using 
historical data.
    Step 3: Build model portfolios. Ibbotson employs the standard mean-
variance analysis from Modern Portfolio Theory to evaluate and 
determine its strategic, asset-level portfolio recommendations. 
However, rather than taking portfolios directly off of the efficient 
frontier defined by the estimates created in Step 2, Ibbotson chooses 
portfolios that are very close to the efficient frontier under many 
different economic and investment performance scenarios. Ibbotson 
believes that choosing portfolios this way ensures that the strategic 
portfolio characteristics will be relatively stable over time and will 
avoid drastic asset class shifts. Ibbotson deems that it is essential 
to build portfolios that have these stable properties to minimize the 
need for the Plan participant to make frequent changes to his or her 
portfolio.
    Step 4: Select funds. Once asset-level model portfolios are 
developed, they are implemented using the investment options available 
under the plan. Since at any time most funds are investing in 
securities from several asset classes, Ibbotson employs a statistical 
method to determine what asset classes a fund's investment approach is 
exposing the Plan participant to. Using the asset exposures from this 
technique, Ibbotson combines the funds so that the total asset class 
exposure of the funds in the portfolio equals the desired strategic 
portfolio weights. Since consistency of asset exposure in funds through 
time is so important, investment options that have little or no history 
must provide sufficient additional information to base reasonable 
expectations on. A mutual fund's manager tenure and fees and expenses 
are also evaluated as part of this process.
    Step 5: Monitor and re-balance. The portfolio choices must be 
reviewed regularly and rebalanced. Portfolio rebalancing is the process 
of moving a fund's asset class exposures toward its strategic target. 
This process seeks to reduce the relative performance risk associated 
with moving the asset class exposures away from what was intended in 
the strategic asset allocation. There are a variety of conditions that 
could cause a rebalancing of a portfolio. Market movements, fund asset 
exposure changes, removal and replacement of mutual funds can trigger 
rebalancing.
    As part of this ongoing process, the funds are evaluated quarterly 
and the strategic asset allocations are updated once a year. A set of 
criteria, including absolute and relative performance, is used to 
evaluate the funds used in the advice portfolios. Funds that do not 
meet the criteria will be placed on a watch list. The placement of a 
fund on the watch list does not mean that the fund will be replaced, it 
is a trigger to begin further due diligence on the fund.
    To be removed from the watch list, certain pre-established 
qualitative and quantitative measures must be met. After a fund has 
been placed on the watch list and further due diligence has determined 
that the fund no longer meets the objectives of one or more of the 
portfolios, Ibbotson will advise the plan sponsor to consider a 
suitable replacement. Any new fund entering the program will be studied 
and analyzed using the same methodology for initial fund selection 
outlined above.
    8. Ibbotson next describes the steps involved in providing 
individualized advice to Plan participants. The steps start with 
forecasting many possible expected investment returns scenarios and the 
collecting of the Plan participant's individual needs and risks. These 
are then combined with the relevant tax and plan rules to show the Plan 
participant the risk of his or her current investment path and to 
calculate advice to optimize the 401(k) plan portfolio. Rather than 
using a questionnaire to approximate the risk tolerance level of the 
Plan participant, Ibbotson uses a simulation-based forecasting approach 
designed to show a Plan participant the risks of various investment 
decisions personalized to his or her individual circumstances. The 
advice generated recommends a portfolio risk level, a savings rate and 
a retirement age appropriate to that Plan participant's retirement 
income goals.
    Step 1: Generate return and inflation data. Ibbotson's first step 
in this process is to generate hundreds of sets of asset return and 
inflation data covering the next 40 years. This data is randomly 
calculated using historical data and the relationships it has exhibited 
through time. This forecasting software uses this data to model the 
many possible wealth and income paths a Plan participant might face. By 
generating a variety of possible future wealth patterns, the Plan 
participant gets a better picture of not just the average path his or 
her wealth might take but also of shortfalls that are possible.
    Holdings of individual stocks are modeled but company stock is 
modeled as a separate asset class included along with all of the asset 
classes in the system. If a Plan participant is required or chooses to 
hold company stock then that will be included in the solution; however, 
company stock is factored into the solution with the same return as the 
appropriate capitalization group asset class with twice the standard 
deviation.
    All of this simulation data is updated annually along with the 
strategic asset allocation portfolios.
    Step 2: Gather data from plan participant and record keeper. 
Ibbotson's forecasting process enables the Plan participant to input 
data to take into account all of the Plan participant's needs and 
assets (college funding, new house, etc.) and assets (taxable and 
nontaxable) before selecting the appropriate portfolio. Ibbotson 
believes that this approach yields a more appropriate overall 
portfolio/savings match with the Plan participant's needs. To the 
extent input is provided by the Plan participant, the Ibbotson process 
takes into account items such as savings, current balances, investment 
makeup, and projected cash in-flows and out-flows for both Plan 
participant and his or her spouse.
    Step 3: Calculate current situation. The Plan participant will be 
shown two separate scenarios through the Ibbotson

[[Page 6694]]

advice application. The first calculates what chance the Plan 
participant might have of making his or her retirement goals if he or 
she continues with the current portfolio risk level and savings rate as 
entered in Step 2. The second recommends an advice solution and is 
described in Step 4.
    To calculate what chances the Plan participant has of making the 
retirement goals if no change to the portfolio or savings rate is made, 
the software uses the simulation data to calculate the wealth that 
might be accumulated under hundreds of possible future scenarios. These 
calculations take into account Social Security payments, taxes, and all 
of the other savings and withdrawals the Plan participant has entered 
as well as the various investment return and inflation scenarios. Some 
of these future wealth and income levels will be good, some will be 
average and some will be inadequate relative to the Plan participant's 
individual retirement goals. The results of all of these calculations 
are summarized into a few probability statistics that are communicated 
to the Plan participant.
    Step 4: Calculate advice. Ibbotson states that its advice 
methodology provides the Plan participant with a recommendation that 
includes the portfolio risk level, savings rate and retirement age. 
Since in the 401(k) plan world, the advice can only be given on that 
portfolio alone, the Ibbotson methodology takes all of the Plan 
participant's total holdings into account (taxable and tax deferred) 
and proposes a 401(k) portfolio that gets the Plan participant's total 
holdings as close to optimal as possible.
    Ibbotson believes that this presents the Plan participant with a 
more balanced solution for achieving his or her goals with the 
flexibility to change the parameters if he or she sees fit. Starting 
with a better balanced portfolio means that Plan participants just 
looking for an answer will get a sound answer more quickly and Plan 
participants that want to experiment with different levels of risk, 
savings rate, and or retirement age will start from a more solid 
position.
    Step 5: Present results. The advice process has many steps. 
However, the user only sees the results of Steps 4 and 5. The typical 
statistics that will be shown include the most likely income level that 
the Plan participant might have along with the least likely 
possibilities. These statistics for the scenario where no changes are 
made and for those where the Plan participant implements the advice 
will be displayed side by side so the Plan participant can easily see 
the differences. When compared to the level of income the Plan 
participant would like in retirement, this process shows the Plan 
participant just how much risk is being taken and just how likely the 
Plan participant is of hitting his or her goals. Ibbotson believes 
there is no better way to show a Plan participant in terms that can be 
understood of the risk and reward of the decisions he or she makes. 
Ibbotson also presents a short-term risk measure to assist in 
understanding volatility on the way to retirement and its impact on 
long-term goals. A Plan participant can further individualize the 
solution if he or she wants to take more risk, cannot save as much as 
recommended, or wants to change his or her retirement age.
    Once finalized, the Plan participant can then implement his or her 
decision. Although the solution is a ``snapshot'' based on the then-
inputted data, the system will inform the Plan participant periodically 
of the need to review his or her situation. It will also be stated that 
his revisiting is most important if there have been any changes in the 
Plan participant's assumptions such as a promotion or the birth of a 
child. Under any circumstances, a Plan participant will be cautioned to 
review his or her situation once a year to update any changes to the 
information upon which the advice was based and to adjust their 401(k) 
portfolio, if needed.
    9. Ibbotson represents that it will maintain insurance coverage in 
the amount of at least $5 million for the payment of any liabilities 
that may arise by reason of a breach of fiduciary duty described in 
section 404 of the Act or a violation of the prohibited transaction 
provisions of section 406 of the Act or section 4975 of the Code. This 
insurance coverage will be available to provide financial support to 
Ibbotson in the event a breach of fiduciary duty claim is brought 
against Ibbotson, and it is determined that Ibbotson has incurred 
liabilities by reason of such breach. The insurance shall be provided 
pursuant to a ``claims made'' policy which covers claims made during 
the policy period. In the event that Ibbotson changes insurers or 
ceases to provide the Service, Ibbotson will maintain ``tail coverage'' 
with respect to claims made for a period of up to three years after 
such change.\15\
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    \15\ The Department notes that the condition requiring the 
maintenance of $5 million of insurance coverage will not foreclose 
future consideration by the Department of another mechanism designed 
to assure some degree of financial accountability in the event of 
breaches of fiduciary duty described in section 404 or violations of 
the prohibited transaction provisions.
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    10. The Applicant represents that potential Service Providers will 
include banks and trust companies, mutual fund companies, brokerage 
firms and insurance companies. They will be required to meet minimum 
standards prior to participating in the provision of the Service. To 
qualify as a Service Provider, the entity must either be: (a) A 
commercial bank or trust company, savings and loan association, 
insurance company, or registered investment adviser which meets the 
definition of a ``qualified professional asset manager'' (QPAM) set 
forth in Part V(a) of Prohibited Transaction Exemption 84-14; and have 
total client assets under management and control in an amount no less 
than $250 million, or (b) a broker-dealer regulated under the 
Securities Exchange Act of 1934 and which had, as of the last day of 
its most recent fiscal year, $1 million in shareholders' and partners' 
equity, or total client assets under management and control in an 
amount no less than $250 million.
    In addition, the Applicant will require that each candidate meet 
minimum standards to ensure: (1) The availability of multiple 
investment options across a number of asset classes, (2) adequate 
service capabilities and service performance standards, with an ongoing 
adherence to those standards, (3) the absence of dependence solely upon 
bundled products \16\ for defined contribution Plans, and (4) the 
Service Provider must in Ibbotson's view, have a high level of 
professionalism and accountability.
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    \16\ Bundled products provide employers with a package of 
services including record-keeping, legal, administrative, trust, 
educational, investment, etc., with respect to the establishment and 
maintenance of plans by employers.
---------------------------------------------------------------------------

    Further, the entity must have adequate capitalization; have been in 
the financial services business for three years and 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.
    11. In providing the Service, depending on the specific 
circumstances surrounding a particular Plan and the outcome of 
negotiations between Ibbotson and the Plan sponsor or Service Provider, 
the fees that Ibbotson will charge will include some or all of the 
following fees. A technology licensing fee will be charged to the 
Service Provider. This fee is a one-time fee charged in the first year 
the Service is provided to a Plan based on the

[[Page 6695]]

number of Plan participants contained on a Service Provider's record-
keeping system. For subsequent years, Ibbotson will charge to the 
Service Provider a flat per Plan participant fee for each occurrence of 
at least 10% growth in Plan participants on its record-keeping system 
(the Revised Technology Fee). In the second year of operation with a 
Service Provider, Ibbotson will charge a Service Provider a technology 
maintenance fee equaling up to 20% of the first year's technology 
licensing fee plus up to 20% of the Revised Technology Fee.
    When a Plan sponsor contracts with Ibbotson to customize the 
Service to its particular Plan, Ibbotson will charge an Internet 
customization fee to the Plan or the Plan sponsor. This fee is based on 
the time spent by Ibbotson personnel in its customization of the 
Service to a particular Plan. In addition, Ibbotson will charge a flat 
annual per Plan participant advice fee which may be paid by the Plan, 
Plan sponsor, the Plan participants or the Service Provider.
    Finally, Ibbotson will also offer a Plan investment analysis report 
to Plan sponsors. This report is separate from the investment analysis 
advice provided to Plan participants and is optional. Ibbotson will 
analyze the Plan and its investment options. For those Plan sponsors 
who elect to receive a Plan investment analysis by Ibbotson, Ibbotson 
will also charge a Plan investment analysis fee based on a flat dollar 
amount per year. This fee may be paid by the Plan sponsor or the 
Service Provider.
    12. In summary, it is represented that the proposed transaction 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The participation in the Service will be expressly authorized 
in writing by an independent fiduciary.
    (b) Ibbotson shall provide the independent fiduciary of each Plan 
with written disclosure describing the Service and all fees and 
expenses associated with the Service, a written contract for the 
provision of the Service, a copy of the proposed and final exemption, 
and summary of annual Plan activity and expense reports.
    (c) Ibbotson will furnish the Plan participants with the following: 
notice that the Service is provided by Ibbotson, an entity that is 
independent from the Service Provider and the Plan sponsor; and full 
disclosure about the Service and Ibbotson; and a risk tolerance 
questionnaire.
    (d) Any investment advice given to Plan participants will be based 
on the Plan participants' responses to the questionnaire and any 
investment advice provided only will be implemented at the express 
direction of the Plan participant.
    (e) The total fees paid to Ibbotson and a Service Provider by each 
Plan participant participating in the Service does not exceed 
reasonable compensation within the meaning of section 408(b)(2) of the 
Act.
    (f) No portion of any fee or other consideration paid to Ibbotson 
or in connection with the Service will be shared or received by a 
Service Provider.
    (g) Neither the fees charged nor the compensation received by 
Ibbotson will be affected by the investment selections of Plan 
participants.
    (h) Participation in the Service will not cause the Plan to pay any 
additional fees or commissions with respect to acquisitions or 
dispositions of investments offered under the Plan.
    (i) No Service Provider shall own any interest in Ibbotson.
    (j) Neither Ibbotson nor any affiliate shall own an interest in a 
Service Provider.
    (k) The annual revenues derived by Ibbotson from any one Service 
Provider shall not be more than 5% of its annual revenues.
    (l) Ibbotson will maintain fiduciary liability insurance in the 
amount of at least $5 million.

Notice to Interested Persons

    The Applicant represents that because potentially interested Plan 
participants and beneficiaries cannot be identified at this time, the 
only practical means of notifying such Plan participants and 
beneficiaries of this proposed exemption is by publication in the 
Federal Register. Therefore, comments and requests for a hearing must 
be received by the Department not later than February 21, 2001.

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

General Information

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

    Signed at Washington, DC, this 10th day of January, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits, 
Administration, U.S. Department of Labor.
[FR Doc. 01-1197 Filed 1-19-01; 8:45 am]
BILLING CODE 4510-29-P