Proposed Exemptions; New York Life Insurance Company (NYLIC) [Notices] [02/15/2001]
Proposed Exemptions; New York Life Insurance Company (NYLIC) [02/15/2001]
Volume 66, Number 32, Page 10514-10534
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10584, et al.]
Proposed Exemptions; New York Life Insurance Company (NYLIC)
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-1513, 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.
New York Life Insurance Company (NYLIC), Located In New York, NY
[Application No. D-10584]
Proposed Exemption
The Department of Labor 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 C.F.R.
part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ For purposes of this exemption, references to specific
provisions of Title I of the Act unless otherwise specified, refer
to the corresponding provisions of the Code.
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I. Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) 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
following transactions, if the conditions set forth in Section II and
Section III, below, are satisfied:
(a) The receipt, directly or indirectly, by a sales agent (Sales
Agent or Sales Agents), as defined in Section IV(l) below, of a sales
commission from NYLIC in connection with the purchase, with plan
assets, of an insurance contract (the Insurance Contract or Insurance
Contracts), as defined in Section IV(h) below;
(b) The receipt of a sales commission by NYLIC, as principal
underwriter for a mutual fund registered under the Investment Company
Act of 1940, in connection with the purchase, with plan assets, of
securities issued by such mutual fund (the NYLife Fund or NYLife
Funds), as defined in Section IV(c) below;
(c) The effecting by NYLIC, as principal underwriter, of a
transaction for the purchase, with plan assets, of securities issued by
a NYLife Fund, and the effecting by a Sales Agent of a transaction for
the purchase, with plan assets, of an Insurance Contract; and
(d) The purchase, with plan assets, of an Insurance Contract from
NYLIC.
II. General Conditions
(a) The transactions are effected by NYLIC in the ordinary course
of NYLIC's business as an insurance company, or as a principal
underwriter to a NYLife Fund, or in the case of a Sales Agent, in the
ordinary course of the Sales Agent's business as a Sales Agent.
(b) The transactions are on terms at least as favorable to the plan
as an arm's length transaction with an unrelated party would be.
(c) The combined total of all fees, sales commissions, and other
consideration received by NYLIC or a Sales Agent: (1) For the provision
of services to the plan, and (2) in connection with a purchase of an
Insurance Contract or securities issued by a NYLife Fund, is not in
excess of ``reasonable compensation'' within the contemplation of
section 408(b)(2) and (c)(2) of the Act and section 4975(d)(2) and
(d)(10) of the Code. If such total is in excess of ``reasonable
compensation'' the ``amount involved'' for purposes of the civil
penalties of section 502(i) of the Act and excise taxes imposed by
section 4975(a) and (b) of the Code is the amount of compensation in
excess of ``reasonable compensation.''
III. Specific Conditions
(a) NYLIC or the Sales Agent is not--
(1) A trustee of the plan (other than a non-discretionary trustee
who does not render investment advice with respect to any assets of the
plan or a trustee to a pooled trust (the Pooled Trust), as defined in
Section IV(g)
[[Page 10515]]
below, which will not purchase Insurance Contracts or securities issued
by a NYLife Fund pursuant to this exemption);
(2) A plan administrator (within the meaning of section 3(16)(A) of
the Act and section 414(g) of the Code;
(3) A fiduciary who is expressly authorized in writing to manage,
acquire, or dispose of, on a discretionary basis, those assets of the
plan that are or could be invested in Insurance Contracts, securities
issued by a NYLife Fund, or units of a Pooled Trust; or
(4) An employer any of whose employees are covered by the plan.
(b) (1) Prior to the execution of a transaction involving the
receipt of sales commissions by a Sales Agent in connection with the
plan's purchase of an Insurance Contract, NYLIC or the Sales Agent
provides to an independent plan fiduciary (the Independent Plan
Fiduciary), as defined in Section IV(f) below, disclosures of the
following information concerning the Insurance Contract in writing and
in a form calculated to be understood by a plan fiduciary who has no
special expertise in insurance or investment matters:
(A) An explanation of: (i) The nature of the affiliation or
relationship between NYLIC and the Sales Agent recommending the
Insurance Contract; and, (ii) the nature of any limitations that such
affiliation or relationship, or any agreement between the Sales Agent
and NYLIC places on the Sales Agent's ability to recommend Insurance
Contracts;
(B) The sales commission, expressed as a percentage of gross annual
premium payments for the first year and for each of the succeeding
renewal years, that will be paid by NYLIC to the Sales Agent in
connection with the purchase of the recommended Insurance Contract,
together with a description of any factors that may affect the
commission; and
(C) A full and detailed description of any charges, fees,
discounts, penalties, or adjustments which may be paid by the plan
under the recommended Insurance Contract in connection with the plan's
purchase, holding, exchange, termination, or sale of the Insurance
Contract, including a description of any factors that may affect the
level of charges, fees, discounts, or penalties paid by the plan.
(2) Following receipt of the information required to be provided to
the Independent Plan Fiduciary, as described in Section III(b)(1)
above, and before execution of the transaction, the Independent Plan
Fiduciary acknowledges in writing receipt of such information, and
approves the transaction on behalf of the plan. The Independent Plan
Fiduciary may be an employer of employees covered by the plan but may
not be a Sales Agent involved in the transaction. The Independent Plan
Fiduciary may not receive, directly or indirectly (e.g. through an
affiliate), any compensation or other consideration for his or her own
personal account from any party dealing with the plan in connection
with the transaction.
(3) With respect to additional purchases of Insurance Contracts,
the written disclosure required under Section III(b)(1) need not be
repeated, unless--
(A) More than three years have passed since such disclosure was
made with respect to the same kind of Insurance Contract, or
(B) The Insurance Contract being recommended for purchase or the
commission with respect thereto is materially different from that for
which the approval described under Section III(b)(2) was obtained.
(c)(1) With respect to purchases with plan assets of securities
issued by a NYLife Fund, or receipt of sales commissions by NYLIC in
connection with such purchases, NYLIC provides to an Independent Plan
Fiduciary, prior to the execution of the transaction, the following
information concerning the recommended NYLife Fund in writing and in a
form calculated to be understood by a plan fiduciary who has no special
expertise in insurance or investment matters:
(A) A description of: (i) The investment objectives and policies of
the NYLife Fund, (ii) the principal investment strategies that the
NYLife Fund may use to obtain its investment objectives, (iii) the
principal risk factors associated with investing in the NYLife Fund,
(iv) historical investment return information for the NYLife Fund, (v)
fees and expenses of the NYLife Fund, including annual operating
expenses (e.g., management fees, distribution fees, service fees, and
other expenses) and fees paid by shareholders (e.g., sales charges and
redemption fees), (vi) the identity of the NYLife Fund adviser, and
(vii) the procedures for purchases of securities issued by the NYLife
Fund (including any applicable minimum investment requirements and
sales charges);
(B) A description of: (i) The expenses of the recommended NYLife
Fund, including investment management, investment advisory, or similar
services, any fees for secondary services (e.g., for services other
than investment management, investment advisory, or similar services,
including but not limited to custodial, administrative, or other
services), and (ii) any charges, fees, discounts, penalties, or
adjustments that may be paid by the plan in connection with the
purchase, holding, exchange, termination, or sale of shares of the
recommended NYLife Fund securities, together with a description of any
factors that may affect the level of charges, fees, discounts, or
penalties paid by the plan or the NYLife Fund;
(C) An explanation of (i) The nature of the affiliation or
relationship between NYLIC, the NYLife Fund, and (ii) the limitation,
if any, that such affiliation, relationship, or any agreement between
NYLIC and the NYLife Fund places on NYLIC's ability to recommend
securities issued by other investment companies;
(D) The sales commission, if any, that NYLIC will receive in
connection with the purchase of securities of the recommended NYLife
Fund, expressed either as: (i) A percentage of the dollar amount of the
plan's gross payments and the amount actually invested, (ii) an annual
percentage of average daily net asset value of securities issued by the
NYLife Fund, or (iii) both if applicable, with a description of any
factors that may affect the commission; and
(E) A description of the procedure or procedures for redeeming the
NYLife Fund securities.
The disclosures required under section III(c)(1) above shall be
deemed to be completed only if, with respect to fees and expenses of
NYLife Fund, the type of each fee or expense (e.g., management fees,
administrative fees, fund operating expenses, and other fees, including
but not limited to fees payable for marketing and distribution services
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
12b-1 Fees)) and the rate or amount charged for a specified period
(e.g., annually) is provided in a written document separate from the
prospectus of such NYLife Fund.
(2) Following receipt of the information required to be provided to
the Independent Plan Fiduciary, as described in Section III(c)(1)
above, and before execution of the transaction, the Independent Plan
Fiduciary approves the specific transaction on behalf of the plan.
Unless facts and circumstances would indicate the contrary, such
approval may be presumed if the Independent Plan Fiduciary directs the
transaction to proceed after NYLIC has delivered the written
disclosures to the Independent Plan Fiduciary. The Independent Plan
Fiduciary may be an employer of employees covered by the plan but may
not be NYLIC. The Independent Plan Fiduciary may not
[[Page 10516]]
receive, directly or indirectly (e.g. through an affiliate), any
compensation or other consideration for his or her own personal account
from any party dealing with the plan in connection with the
transaction.
(3) With respect to additional purchases of NYLife Fund securities,
NYLIC:
(A) Provides reasonable advance notice of any material change with
respect to the NYLife Fund securities being purchased or the commission
with respect thereto, and
(B) Repeats the written disclosure required under Section
III(c)(1)(A), (C), (D), and (E) once every three years. (d)(1) NYLIC
shall retain or cause to be retained for a period of six (6) years from
the date of any transaction covered by this exemption the following:
(A) The information disclosed with respect to such transaction
pursuant to Section III(b), and (c) above; and
(B) Any additional information or documents provided to the
Independent Plan Fiduciary with respect to the transaction; and
(C) The written acknowledgments described in Section III(b)(2)
above.
(2) A prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond the control of NYLIC, such records are
lost or destroyed before the end of such six-year period.
(3) Notwithstanding anything to the contrary in sections 504(a)(2)
and (b) of the Act, such records shall be unconditionally available for
examination during normal business hours by duly authorized employees
or representatives of the Department of Labor, the Internal Revenue
Service, plan participants and beneficiaries, any employer of plan
participants and beneficiaries, and any employee organization any of
whose members are covered by the plan.
(e) Neither NYLIC nor a Sales Agent renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to the assets
involved in the transaction in connection with a formal advice program
under which specific/individualized asset allocation recommendations
are made available to participants based on their responses to
questionnaires.
IV. Definitions
For purposes of this exemption--
(a) ``NYLTC'' means the New York Life Trust Company, or any other
financial institution supervised under state or federal laws and
affiliated with NYLIC;
(b) ``NYLIC'' means the New York Life Insurance Company and any of
its affiliates, including but not limited to NYLTC, as defined in
Section IV(a) above;
(c) ``NYLife Fund or NYLife Funds'' mean any investment company
registered under the Investment Company Act of 1940 for which NYLIC
serves as investment advisor and as principal underwriter (as that term
is defined in section 2(a)(29) of the Investment Company Act of 1940,
15 U.S.C. 80a-2(a)(29));
(d) An ``affiliate'' of a person means: (1) Any person directly or
indirectly controlling, controlled by, or under common control with
such person, (2) any officer, director, employee, or relative of any
such person, or any partner in such person, and (3) any corporation or
partnership of which such person is an officer, director, or employee,
or in which such person is a partner. For purposes of this definition,
an ``employee'' includes: (A) any registered representative of NYLIC,
where NYLIC or an affiliate is principal underwriter, and (B) any
insurance agent or broker or pension consultant acting under a written
agreement as NYLIC's agent in connection with the sale of an Insurance
Contract, whether or not such registered representative or insurance
agent or broker or pension consultant is a common law employee of
NYLIC;
(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) ``Independent Plan Fiduciary'' means a fiduciary with respect
to a plan, which fiduciary has no relationship to or interest in NYLIC
that might affect the exercise of such fiduciary's best judgment as a
fiduciary;
(g) ``Pooled Trust'' means any collective investment fund or group
trust maintained by NYLTC, provided that, NYLTC its successor or
affiliate does not have discretionary authority or responsibility with
respect to the management and administration of or provide investment
advice with respect to, any assets of the plan that are or could be
invested in Insurance Contracts, securities issued by a NYLife Fund, or
units of a Pooled Trust;
(h) ``Insurance Contract or Insurance Contacts'' mean an insurance
or annuity contract issued by NYLIC; \2\
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\2\ The Department expresses no opinion as to whether any so-
called ``synthetic guaranteed insurance contracts'' offered by NYLIC
constitute an Insurance Contract within the meaning of this
exemption. The Department further notes that this exemption provides
relief from the self-dealing and conflict of interest provisions of
the Act in connection with the sale of Insurance Contracts to plans
by fiduciaries. It does not provide relief from any acts of self-
dealing that do not arise directly in connection with the purchase
of specific insurance products. Thus, for example, no relief is
provided under this exemption for any act of self-dealing that may
arise in connection with the ongoing operation or administration of
an Insurance Contract.
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(i) A ``nondiscretionary trustee'' of a plan is a trustee whose
powers and duties with respect to any assets of the plan are limited
to: (1) The provision of nondiscretionary trust services, as defined in
Section IV(j) below, to such plan, and (2) the duties imposed on the
trustee by any provision or provisions of the Act or the Code;
(j) ``Nondiscretionary trust services'' mean custodial services and
services ancillary to custodial services, none of which services are
discretionary;
(k) A ``relative'' means a ``relative'' as that term is defined in
section 3(15) of the Act (or a ``member of the family'' as that term is
defined in Code section 4975(e)(6), or a brother, a sister, or a spouse
of a brother or a sister;
(l) ``Sales Agent or Sales Agents'' mean any insurance agent,
broker, or pension consultant or any affiliate thereof that is
affiliated with NYLIC; and
(m) ``Principal underwriter'' is defined in the same manner as that
term is defined in section 2(a)(29) of the Investment Company Act of
1940 (15 U.S.C. 8a-2(a)(29)).
EFFECTIVE DATE: If granted, this proposed exemption will be effective,
as of February 12, 1998, the date of the filing of the application for
exemption.
Summary of Facts and Representations
1. The plans which are expected to participate in the proposed
transactions are employee benefit plans, which are subject to the
provisions of the Act and are tax-qualified under section 401(a) of the
Code.\3\ Due to the nature of the requested exemption, the applicants
maintain that they are unable to provide any of the following specific
identifying information about the plans that may engage in the proposed
transactions: (1) The number of participants; (2) an estimate of the
percentage of assets of each plan affected by the requested exemption
or transactions; or (3) the approximate aggregate fair market value of
the total assets of each affected plan.
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\3\ The applicants have not requested an exemption, and no
relief is provided, herein, for any plan covering employees of NYLIC
or its affiliates.
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It is represented that there is no minimum investment or minimum
plan size required in order for a plan to participate in the proposed
transactions. However, it is anticipated that such plans will primarily
be participant-directed defined contribution pensions
[[Page 10517]]
plans, and that, in particular, such plans will be too small to
participate in single customer guaranteed interest contracts (GICs or
GIC) or a synthetic GIC product. In this regard, plans covered by the
exemption may include plans intended to satisfy the requirements of
section 404(c) of the Act and the regulations thereunder (a Section
404(c) Plan).\4\
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\4\ In relevant part, section 404(c) of the Act and the
regulations promulgated thereunder at 57 FR 46906 (October 13, 1992)
provide that where a participant or beneficiary of a section 404(c)
plan exercises control over the assets in his or her account, then:
(i) the participant or beneficiary shall not be deemed to be a
fiduciary by reason of his exercise of control; and (ii) no person
who is otherwise a fiduciary shall be liable under the fiduciary
responsibility provisions of the Act for any loss, or by reason of
any breach, which results from such participant's or beneficiary's
exercise of control.
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Because section 404(c) of the Act applies only to the provisions of
Part 4 of Title I, there is no provision in the Code corresponding to
section 404(c). Thus, there is no statutory exemption from the excise
taxes imposed under section 4975 of the Code with respect to prohibited
transactions involving a Section 404(c) Plan. In this regard, the
Department notes that the authority to grant administrative exemptions
for such prohibited transactions remains with the Treasury Department
pursuant to the Reorganization Plan No. 4 of 1978 (43 FR 47713, October
17, 1978). Accordingly, the Department has no authority to provide
relief from section 4975 of the Code with respect to a transaction that
results from a participant's or a beneficiary's exercise of control
within the meaning of section 404(c) and applicable regulations. The
applicants have represented that they are aware of the limitation on
the jurisdiction of the Department under the Reorganization Plan.
However, the applicants maintain that the transactions for which relief
is requested, herein, should not be viewed as ``participant-directed,''
because the fiduciaries of plans (not the participants of such plans)
will be responsible for selecting and purchasing an Insurance Contract
for a plan and selecting the NYLife Funds offered under a plan.
Accordingly, the applicants have requested relief from the provisions
of both the Act and the Code.
2. The application was filed on behalf of NYLIC and its direct or
indirect wholly-owned subsidiaries, New York Life Trust Company
(NYLTC), New York Life Benefit Services (NYLBS), NYLIFE Distributors
Inc. (NYLIFE Distributors), MacKay-Shields Financial Corporation
(MacKay-Shields), Monitor Capital Advisors, Inc. (Monitor Capital), and
NYLIFE Securities Inc. (NYLIFE Securities).
3. NYLIC is an insurance company organized and operated under the
laws of the State of New York. As of December 31, 1996, NYLIC had total
consolidated assets of approximately $78.8 billion and net policy
reserves of $74.8 billion. It is represented that NYLIC offers to
employee benefit plans covered by Title I of the Act a variety of
insurance products, including e.g., group fixed and variable annuities
and GICs. Group annuities serve primarily as funding vehicles for
retirement plan benefits. It is represented that all insurance products
offered by NYLIC are reviewed and approved by the New York Insurance
Department under New York insurance laws and under the applicable
insurance laws of any other state where such products are marketed and
sold. It is represented that all such insurance contracts are sold by
sales agents, which include licensed sales employees, agents, and
brokers of NYLIC. In connection with sales of insurance contracts, such
sales agents may receive commissions or other compensation.
4. NYLTC, an affiliate of NYLIC and a trust company chartered and
operating under the banking laws of the State of New York, provides a
variety of fiduciary services for individuals, institutions, and plan
accounts covered by the Act. In this regard, it is represented that
NYLTC already serves as a nondiscretionary trustee to employee benefit
plans. Certain plans may also obtain directed trustee services provided
by NYLTC.
5. NYLBS, another affiliate of NYLIC, provides administrative
services to NYLIC, to NYLTC, and to plans covered by the Act. Such
services include actuarial consulting, daily-valued record-keeping, and
other plan administrative services. In this regard, it is represented
that NYLBS offers ``401 (k) Complete,'' a bundled services program to
participant-directed defined contribution plans which combines plan
administration, record-keeping services, and a selection of investment
options, including insurance contracts and mutual funds, such as the
NYLife Funds. Further, these services include providing participants
with required plan information (e.g., summary plan descriptions) and
investment education, including asset allocation ``tools.'' It is
represented that investment education materials provided by NYLBS,
including asset allocation tools, comply with the safe harbor for
investment information and education, as described in Interpretive
Bulletin 96-1. NYLBS does not charge a separate fee for the asset
allocation tools and does not provide any specific/individualized asset
allocation recommendations to participants. In addition to materials
provided by NYLBS to participants, it is represented that NYLBS may in
the future enter an arrangement under which one or more third party
assets allocation service providers would provide a formal asset
allocation program to participants of plans receiving services from
NYLBS. If such a program were made available to plans, the asset
allocation services would be provided solely by a third party service
provider that is a registered investment adviser and wholly independent
of NYLIC and its affiliates. The asset allocation program would be
available only if a plan fiduciary (independent of NYLIC) elects to
offer the program to participants; and no employee or other person
representing NYLIC or any of its affiliates (including NYLBS) would
have any role in reviewing, approving, or providing asset allocations
to participants in connection with the program.\5\
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\5\ The applicants do not believe that the limited investment
education and assets allocation tools that NYLIC may provide give
rise to any transaction that would require exemptive relief, and
NYLIC is not seeking any relief for these activities. The Department
is offering no relief, herein, for transactions other than those
proposed, nor is the Department expressing an opinion, herein, as to
the applicability of Interpretive Bulletin 96-1 to the facts of this
case.
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6. The NYLife Funds are open-end investment companies registered
with the Securities and Exchange Commission (SEC) under the Investment
Company Act of 1940. The NYLife Funds are offered to plans directly and
through variable life and annuity contracts issued by NYLIC. Currently,
the NYLife Funds include the MainStay Funds, which are available to
retail and institutional investors (including defined contribution
plans) and the MainStay Institutional Funds Inc., which are only
available to institutional investors and to group individual retirement
account customers. The MainStay Funds, organized as a Massachusetts
business trust, currently include fourteen (14) separate funds, each of
which has its own investment objectives and policies. MainStay
Institutional Funds Inc. currently include eleven (11) separate funds.
NYLIC provides a broad range of services to NYLife Funds.
Specifically, the NYLife Funds are managed by MacKay-Shields or Monitor
Capital, both of which are registered investment advisers and indirect
wholly-owned subsidiaries of NYLIC. NYLIC is the administrator to each
of the NYLife Funds and provides various services,
[[Page 10518]]
including administration, accounting, and other similar services and
shareholder administration and sub-accounting for which NYLIC and/or
its affiliates may receive management fees, administrative fees, and/or
shareholder services fees.
7. NYLIFE Distributors, the principal underwriter and distributor
of the NYLife Funds, is responsible for distributing shares of NYLife
Funds, as agent or as principal. NYLIFE Distributors receives sales
commissions, including 12b-1 Fees for sales of some classes of shares
issued by NYLife Funds paid under a plan of distribution, pursuant to
Rule 12b-1 under the Investment Company Act of 1940.\6\
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\6\ The Department notes that the relief provided by this
exemption does not preclude the receipt of 12b-1 Fees by NYLIC or
its affiliates to the extent that the payment of such 12b-1 Fees
cannot be functionally distinguished from the payment of a sales
commission in connection with the purchase, with plan assets, of
securities issued by a NYLife Fund.
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8. The NYLife Funds are sold to plans by NYLIFE Securities, an
affiliate of NYLIC and a registered broker-dealer and a member of the
National Association of Securities Dealers. Subject to applicable SEC
regulations, NYLIFE Securities may act as broker for the NYLife Funds
for which it receives fees for brokerage services. It is further
represented that in connection with the sales of NYLife Funds to plans,
certain sales agents that are registered representatives of NYLIFE
Securities may receive sales commission. It is represented that these
payments may be made by NYLIFE Distributors from amounts it receives as
sales commissions, or by NYLIC from its general assets. It is
represented that the prospectus materials for each of the NYLife Funds
fully disclose the fees and expenses charged against the assets of each
of the NYLife Funds, including fees paid to NYLIC.
9. The applicants have requested an exemption which would permit
under certain conditions NYLIC and Sales Agents to receive sales
commissions in connection with purchases by plans of Insurance
Contracts issued by NYLIC and shares of NYLife Funds underwritten by
NYLIC, in situations where such plans also participate in a collective
or group trust maintained by NYLTC. In this regard, NYLIC intends to
establish such a collective trust (the Collective Trust) to serve as an
investment vehicle for contract holders under benefit responsive
synthetic or traditional GICs.
The assets of the Collective Trust will be selected and actively
managed by NYLTC. In this regard, it is represented that NYLIC will
advise NYLTC in connection with the management of the Collective Trust,
although NYLTC will have final decision making authority. Subject to
certain investment guidelines, the assets of the Collective Trust will
consist of a portfolio of fixed income securities. It is represented
that generally the value of the assets held in the Collective Trust
will be based upon readily attainable market valuations published by
independent sources. If no market value of an asset is readily
available, NYLIC represents that it will obtain a fair value in
accordance with commercially acceptable practices and applicable laws
and regulations.
The investment guidelines of the Collective Trust also incorporate
procedures for identifying and liquidating impaired securities and
procedures for establishing priorities for the liquidation of portfolio
securities. It is further represented that the guidelines of the
Collective Trust prohibit the transfer, purchase, or sale of Collective
Trust portfolio assets from or to NYLIC or any affiliate or to any
account for which NYLIC or any affiliate has discretionary management
authority.
All of the assets of the Collective Trust will be held in a
custodial account (the Custodial Account) by a financial institution
unrelated to NYLIC. The Custodial Account will be owned by NYLTC, as
trustee for the participants in the Collective Trust. It is represented
that the participants in the Collective Trust, not NYLIC, will be the
beneficial owners of a pro rata share of the assets in the Custodial
Account.
It is anticipated that initially there will only be two (2)
investors in the Collective Trust.\7\ In this regard, the Collective
Trust will serve as a funding vehicle: (1) For contributions made under
the Anchor Retirement Trust Synthetic GIC Participating Group Annuity
Contract (the Anchor Synthetic GIC), a group annuity contract approved
by the New York State Insurance Department; \8\ and (2) For
contributions made under certain other guaranteed investment contracts
(the SA 25 GICs) which have also been approved by the New York State
Insurance Department.
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\7\ NYLIC represents that it is possible certain tax-qualified
plans or a trust or other entity holding qualified plan assets could
participate in the Collective Trust sometime in the future.
\8\ See footnote 2.
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10. It is represented that the SA 25 GICs have already been issued
by NYLIC to various employee benefit plans (the SA 25 Plans) which
participate in a pooled separate account (Separate Account 25) and may
in the future be offered to other plans.\9\ Separate Account 25 is a
book value separate account established under Section 4240(a)(5)(ii) of
the New York Insurance Law and valued on an amortized cost basis in
accordance with Section 4240(a)(10) of the New York Insurance Law.
NYLTC, as trustee for participating plans, is the group contract holder
for the pooled group annuity contract issued in connection with
Separate Account 25. In this regard, it is represented that NYLTC does
not have any discretionary responsibility or authority with respect to
the administration or management of the assets invested under such
group contract.
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\9\ The applicants believe that the initial purchase of a SA 25
GIC by an SA 25 Plan before Separate Account 25 begins participating
in the Collective Trust should be exempted by Section III(d) of
Class Exemption 84-24 (PTCE 84-24), because NYLTC will not at the
time of the initial purchase be a trustee (other than a
nondiscretionary trustee) with respect to the purchasing plans. The
Department, herein, is offering no view as to the applicability of
PTCE 84-24 under the circumstances described above.
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NYLIC is the investment manager of Separate Account 25. As such,
NYLIC decided to invest the Separate Account 25 assets in the
Collective Trust, because Separate Account 25 had the same investment
objectives as the Collective Trust and because NYLIC believes that
increasing the size of the asset portfolio would provide a more stable,
less volatile, daily interest rate on amounts contributed under the SA
25 GICs. In addition, no SA 25 Plan paid or will pay any additional
management fees in connection with the investment of assets of Separate
Account 25 into the Collective Trust.\10\
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\10\ The Department, herein, is offering no view as to whether
any of the relevant provisions of Part 4, subpart B, of Title I have
been violated, regarding the investment of the assets of the
Separate Account 25 in the Collective Trust.
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11. As mentioned above, the Collective Trust will also serve as a
funding vehicle for contributions made under the Anchor Synthetic GIC.
In this regard, NYLIC represents that it may offer the Anchor Synthetic
GIC to any employee benefit plan subject to Title I of the Act (the
Anchor Plans).\11\ Specifically, NYLIC intends to market the Anchor
Synthetic GIC primarily to participant-directed defined contribution
plans that participate in the bundled services program offered by
NYLBS.\12\ It is represented that an
[[Page 10519]]
Independent Plan Fiduciary will determine whether or not a plan will
invest in the Anchor Synthetic GIC, including whether the Anchor
Synthetic GIC is appropriate as an investment option under the plan.
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\11\ It is represented that plans sponsored by NYLIC or any of
its affiliates will not invest in the Anchor Synthetic GIC.
\12\ The applicants have not requested administrative exemptive
relief for the initial purchase by plans of the Anchor Synthetic GIC
in reliance on PTCE 84-24, because at the time of the initial
purchase of such contract, NYLTC will not yet be a trustee (other
than a nondiscretionary trustee) with respect to the purchasing
plans. The Department, herein, is offering no view as to the
applicability of PTCE 84-24 under the circumstances described above.
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The applicants maintain that the Anchor Synthetic GIC has features
that will be advantageous to a plan and its participants. Such features
include: (a) A fully benefit-responsive book value guarantee protecting
participants against loss of the principal amount of contributions and
accumulated interest, and (b) an opportunity to fully participate in
the return on a portfolio of fixed income securities.
The Anchor Synthetic GIC does not prospectively guarantee the rate
at which interest will be credited on balances held under the contract.
In this regard, the credited interest rate is objectively determined
under a formula that takes investment performance into account and is
disclosed to plans. Under the terms of the Anchor Synthetic GIC, the
interest rate will reflect the investment experience of the Anchor
Trust and will be at variable rates, calculated daily by NYLIC as the
weighted average of book yields \13\ on the portfolio of assets held in
the Collective Trust, adjusted for realized capital gains and losses,
but not less than zero.
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\13\ It is represented that the ``weighted average of book
yields'' would be determined as the ratio of: (a) the aggregate
interest income (``book value'' times ``book yield'') for all
securities in the Collective Trust; to (b) the aggregate ``book
value'' for all such securities. For this purpose, ``book yield'' is
the yield that equates the present value of future cash flows to the
cost of the security, assuming that the security is held to
maturity. ``Book value'' is the cost of a security plus interest
accruals, plus or minus amortization of a discount or premium, minus
repayment of principal and interest payments.
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Under the contract terms, amounts credited as interest are subject
to the guarantee as soon as the interest is actually credited on the
contract balance. The daily crediting interest rate will be available
to plan fiduciaries and participants through participant communication
services provided by NYLBS. Plan participants will receive benefit
distributions or may transfer amounts allocated to the Anchor Synthetic
GIC investment option to another investment option at ``book value'' on
any day (subject to certain limits on transfers to competing options
and employer-initiated events). Plans will be able to withdraw their
investment in the Anchor Synthetic GIC at ``book value'' on twelve (12)
months'' notice without any penalty, or on any business day without
notice at the lesser of ``book value'' or market value. The investment
guidelines for the Anchor Synthetic GIC specify: (a) The type and
minimum standards for portfolio securities, (b) objective procedures
for liquidating securities to fund withdrawals or in the case of
impaired securities, and (c) procedures for valuing assets based on
independent sources.
It is represented that contributions under the Anchor Synthetic GIC
will be maintained separately from the assets of NYLIC through a two-
layer structure. Specifically, contributions will be credited first to
the Anchor Retirement Trust (the Anchor Trust), a bank collective trust
that qualifies as a group trust under Revenue Ruling 81-100, maintained
exclusively for the Anchor Plans by NYLTC. Thereafter, all of the
assets of the Anchor Trust will be invested and held in the Collective
Trust, in accordance with the provisions of the Anchor Synthetic
GIC.\14\ It is represented that all investments from Anchor Trust into
the Collective Trust will be in cash.
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\14\ The applicants believe that investments by the Anchor Plans
in the Anchor Trust and in the Collective Trust do not appear to
involve any non-exempt prohibited transactions, and accordingly have
not requested individual administrative exemptive relief. In this
regard, the applicants believe that the Anchor Trust should not be
deemed to be a party in interest with respect to plans that purchase
the Anchor Synthetic GIC. However, if the investments by Anchor
Plans in the Anchor Trust are deemed to involve a prohibited
transactions, the applicants believe that a statutory exemption
would be available under section 408(b)(8) of the Act. The
Department, herein, is offering no view as to whether any of the
relevant provisions of Part 4, subpart B, of Title I have been
violated regarding the investment by the Anchor Plan in the Anchor
Trust and in the Collective Trust, nor is the Department expressing
an opinion as to the applicability of statutory exemptive relief
under section 408(b)(8) of the Act.
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NYLTC will be trustee with investment management responsibility for
both the Anchor Trust and the Collective Trust. It is represented that
an Independent Plan Fiduciary to each Anchor Plan will approve the
investment of plan assets in the Anchor Trust and the Collective Trust
by virtue of accepting the terms of the Anchor Synthetic GIC. The terms
of the Anchor Synthetic GIC will specifically describe the Anchor Trust
and the Collective Trust and all fees and other charges that would be
paid from plan assets (including amounts payable to NYLIC and NYLTC) in
connection with the two trusts.
12. NYLTC would be a party in interest and fiduciary with respect
to the Anchor Plans and the SA 25 Plans by virtue of being a
discretionary trustee to the Collective Trust and the Anchor Trust in
which the Anchor Plans invest. Similarly, NYLIC would be a fiduciary
and a party in interest to the Anchor Plans and SA 25 Plans by virtue
of providing investment advisory services to the Collective Trust.
Further, NYLIC would be a fiduciary and a party in interest with
respect to SA 25 Plans, as investment manager of Separate Account 25.
Finally, in connection with one or more of the other products and
services that NYLIC and its affiliates offer to employee benefit plans
in the ordinary course of business, NYLIC or one of its affiliates, as
a service provider to plans, may already be a fiduciary and/or party in
interest to plans that may participate in the proposed transactions.
13. It is represented that where NYLIC and/or its affiliates are
parties in interest with respect to a plan, the applicants generally
rely on the class exemption provided under PTCE 84-24 in effecting such
plan's purchases of insurance contracts and shares of NYLife Funds and
for the receipt of commissions and other fees by NYLIC and its sales
employees and agents in connection with such transactions. In this
regard, PTCE 84-24, subject to certain conditions, provides relief from
the prohibitions of sections 406(a)(1)(A) through (D) and 406(b) of the
Act, and from the taxes imposed by section 4975 of the Code for certain
classes of transactions involving purchases by plans of insurance or
annuity contracts and purchases by plans of securities issued by
registered investment companies, and the receipt of sales commissions
in connection therewith by an insurance agent, broker, pension
consultant, or investment company principal underwriter. However, PTCE
84-24 is not available, if an insurance agent, broker, pension
consultant, or an investment company principal underwriter or its
affiliate is a plan trustee, other than a non-discretionary trustee who
does not render investment advice with respect to any assets of the
plan.
According to the applicant, no exemptive relief is needed or
requested for a plan's initial purchases of the Anchor Synthetic GIC or
the SA 25 GICs, because at the time of such purchases, NYLTC is not yet
a trustee (other than a non-discretionary trustee) with respect to the
purchasing plans. In this regard, NYLIC represents that it has complied
with the applicable disclosures and other conditions of
[[Page 10520]]
PTCE 84-24.\15\ However, the applicants are uncertain as to whether
PTCE 84-24 would be available for subsequent purchases by the Anchor
Plans and/or the SA 25 Plans of Insurance Contracts or shares of NYLife
Funds, where NYLTC is a discretionary trustee for plan assets in the
Collective Trust, even though NYLTC would not provide investment advice
(as described by section 3(21) of the Act), or exercise or have any
discretionary authority or control over plans' purchases of such
insurance products or shares of a NYLife Fund. Accordingly, the
applicants have requested individual relief from section 406(a) and (b)
of the Act for the proposed transactions under conditions similar to
those provided by PTCE 84-24.
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\15\ The Department, herein, is offering no view as to: (a) The
applicability of PTCE 84-24 under the circumstances described above,
or (b) whether NYLIC has satisfied or will satisfy all of the terms
and conditions, as set forth in PTCE 84-24.
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14. As of the filing of the application, NYLIC had not yet
established the Collective Trust nor offered the Anchor Synthetic GIC
to the Anchor Plans. However, it is represented that on or after the
date of the filing of the application, NYLIC and NYLTC intend to
establish the Collective Trust, to invest Separate Account 25 assets in
the Collective Trust, and to offer the Anchor Synthetic GIC to plans.
Accordingly, the applicants have requested retroactive relief,
effective as of February 12, 1998, the date of the filing of the
application for exemption.
15. In support of their request for individual exemption, the
applicants represent that the transactions are on terms which are at
least as favorable to each plan that participates, as those negotiated
at arm's length with an unrelated party. It is further represented that
such transactions are effected by NYLIC or a Sales Agent in the
ordinary course of business. With respect to the receipt of sales
commissions by NYLIC or a Sales Agent for the provision of services to
a plan, and in connection with a purchase of an Insurance Contract or
securities issued by an NYLife Fund, the combined total of all fees,
sales commissions, and other consideration received by NYLIC or a Sales
Agent will not be in excess of ``reasonable compensation'' within the
contemplation of section 408(b)(2) and (c)(2) of the Act and section
4975(d)(2) and (d)(10) of the Code.
16. The requested exemption is administratively feasible, because
compliance with the terms of the exemption will be monitored by an
Independent Plan Fiduciary of each plan that participates in the
proposed transactions, so that the level of oversight required by the
Department is minimal. Further, NYLIC will maintain records necessary
to verify compliance with the conditions of this exemption.
17. The applicants believe that the requested exemption provides
adequate safeguards for the protection of plan participants in that the
proposed transactions do not appear to involve the types of abuse that
the Department intended to address by limiting the availability of PTCE
84-24 where a party in interest or its affiliate is a trustee to a
plan. With regard to the terms of the proposed exemption, the influence
of NYLTC will be limited by conditions comparable to those set forth in
PTCE 84-24, such that NYLTC would not have an opportunity to use its
position as trustee to the Anchor Trust or the Collective Trust to
improperly influence or control a plan's purchase of Insurance
Contracts or shares of NYLife Funds. Moreover, it is represented that
NYLTC will not provide any investment advice or have or exercise any
discretionary authority or control with respect to plan assets involved
in the purchase of Insurance Contracts or NYLife Funds. In this regard,
an Independent Plan Fiduciary of each Plan that purchases an Anchor
Synthetic GIC or holds or participated in a SA 25 GIC will receive
written disclosures before the plan purchases an Insurance Contract or
purchases shares of the NYLife Funds. Further, prior to entering a
transaction, the Independent Plan Fiduciary will review and approve
such transactions on behalf of the plan.
18. The applicants maintain that the proposed exemption is in the
interest of the plans which participate in the subject transactions,
because such plans will be able to take advantage of the full range of
insurance and investment products offered by NYLIC. Moreover, NYLIC
anticipates that the investment of assets in the Collective Trust will
benefit the plans participating in Separate Account 25, as well as
those plans that participate under the Anchor Synthetic GIC, by
obtaining economies and efficiencies of scale and, more importantly, by
increasing the size of the asset portfolio. In this regard, a larger
portfolio size should result in a more stable, less volatile, daily
interest rate on amounts contributed under the SA 25 GICs and the
Anchor Synthetic GIC, because of the lesser impact of a withdrawals on
a larger pool of assets.
Further, the proposed investment structure will not involve any
doubling of fees. In this regard, no additional management fees will be
charged by NYLTC or NYLIC for managing the Collective Trust assets.
Instead, the plans will only pay the management and other fees
specified by the Anchor Synthetic GIC and the SA 25 GICs, respectively.
Management fees under all of the contracts will be determined based on
the stable value account, not the market value of Collective Trust
assets held in connection with the contracts.
19. In summary, the applicants represent that the proposed
transactions meet the statutory criteria for an exemption under section
408(a) of the Act and 4975(c)(2) of the Code because:
(a) Plans can take advantage of the full range of insurance and
investment products offered by NYLIC and its affiliates;
(b) The transactions are effected by NYLIC or by a Sales Agent in
the ordinary course of business;
(c) The transactions are on terms at least as favorable to a plan
as an arm's length transaction with an unrelated party;
(d) The combined total of all fees, sales commissions, and other
consideration received by NYLIC or a Sales Agent for the provision of
services to a plan, and in connection with the proposed transactions is
not in excess of ``reasonable compensation'' within the contemplation
of section 408(b)(2) and (c)(2) of the Act and section 4975(d)(2) and
(d)(10) of the Code;
(e) Neither NYLIC nor the Sales Agent is a trustee of a plan (other
than a non-discretionary trustee who does not render investment advice
with respect to any assets of the plan or a trustee to a Pooled Trust);
(f) With respect to the proposed transactions, NYLIC provides each
Independent Plan Fiduciary with certain disclosures in writing and in a
form calculated to be understood by a plan fiduciary who has no special
expertise in insurance or investment matters; and provides disclosure
in a written document separate from the prospectus of information
regarding specific types of fees or expenses paid from the assets of a
NYLife Fund and the rate or amount of each fee or expense charged for a
specified period;
(g) Following receipt of the required disclosures and prior to
entering the transaction, an Independent Plan Fiduciary approves the
transaction on behalf of a plan; and
(h) NYLIC shall retain or cause to be retained certain records for
a period of six (6) years from the date of any transaction covered by
this exemption.
Notice to Interested Persons
Because of the large number of potentially interested persons, the
applicants maintain that it is not
[[Page 10521]]
possible to provide a separate copy of the Notice of Proposed Exemption
(the Proposed Exemption) to each plan eligible to engage in the
transactions covered by the requested exemption. In this regard
however, NYLIC intends to provide notice in writing (by first-class
mail or another method reasonably calculated to ensure that the notice
is received) to an Independent Plan Fiduciary of each plan that
participates in the Anchor Synthetic GIC or any of the SA 25 GICs
within fifteen (15) days of the date of publication of the Notice in
the Federal Register, a copy of the Proposed Exemption, as published in
the Federal Register, and a copy of the supplemental statement, as
required, pursuant to 29 CFR 2570.43(b)(2). The notification will
inform such interested persons of their right to comment and/or request
a hearing within thirty (30) days of receipt of a copy of the Proposed
Exemption.
Apart from the notification described in the paragraph above, the
applicants represent that the only practical form of providing notice
to interested persons is by means of publication of the Proposed
Exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (This is not a toll-free number.)
Salomon Smith Barney Inc. (SSB), Citigroup Inc. (Citigroup) and
Their Affiliates, (Collectively, the Applicants) Located in New
York, New York
[Application Number D-10760]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975 (c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\16\
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\16\ For purposes of this proposed exemption, references to
Title I of the Act, unless otherwise noted herein, refer also to
corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to: (1) The
proposed purchase or sale by employee benefit plans (the Plans), other
than Plans sponsored and maintained by the Applicants, of publicly-
traded debt securities (the Debt Securities) issued by the Applicants;
and (2) the extension of credit by the Plans to the Applicants in
connection with the holding of the Debt Securities.
This proposed exemption is subject to the general conditions that
are set forth below in Section II.
Section II. General Conditions
(a) The Debt Securities are made available by the Applicants in the
ordinary course of their business to Plans as well as to customers
which are not Plans.
(b) The decision to invest in the Debt Securities is made by a Plan
fiduciary (the Independent Plan Fiduciary) or a participant in a Plan
that provides for participant-directed investments (the Plan
Participant), which is independent of the Applicants.
(c) The Applicants do not have any discretionary authority or
control or provide any investment advice, within the meaning of 29 CFR
2510.3-21(c), with respect to the Plan assets involved in the
transactions.
(d) The Plans pay no fees or commissions to the Applicants in
connection with the transactions covered by the requested exemption,
other than the mark-up for a principal transaction permissible under
Part II of Prohibited Transaction Class Exemption (PTCE) 75-1 (40 FR
50845, October 31, 1975).\17\
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\17\ The Department is providing no opinion herein as to whether
any principal transactions involving debt securities would be
covered by PTCE 75-1, or whether any particular mark-up by a broker-
dealer for such transaction would be permissible under Part II of
PTCE 75-1.
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(e) Citigroup agrees to notify Plan investors in the prospectus
(the Prospectus) for the Debt Securities that, at the time of
acquisition, no more than 15 percent of a Plan's assets should be
invested in any of the Debt Securities.
(f) The Debt Securities do not have a duration which exceeds 9
years from the date of issuance.
(g) Prior to a Plan's acquisition of any of the Debt Securities,
the Applicants fully disclose, in the Prospectus, to the Independent
Plan Fiduciary or Plan Participant, all of the terms and conditions of
such Debt Securities, including, but not limited to, the following:
(1) A statement to the effect that the return calculated for the
Debt Securities will be denominated in U.S. dollars;
(2) The specified index (the Index) or Indexes on which the rate of
return on the Debt Securities is based;
(3) A numerical example, designed to be understood by the average
investor, which explains the calculation of the return on the Debt
Securities at maturity and reflects, among other things, (i) a
hypothetical initial value and closing value of the applicable Index,
and (ii) the effect of any adjustment factor on the percentage change
in the applicable Index;
(4) The date on which the Debt Securities are issued;
(5) The date on which the Debt Securities will mature and the
conditions of such maturity;
(6) The initial date on which the value of the Index is calculated;
(7) Any adjustment factor or other numerical methodology that would
affect the rate of return, if applicable;
(8) The ending date on which interest is determined, calculated and
paid;
(9) Information relating to the calculation of payments of
principal and interest, including a representation to the effect that,
at maturity, the beneficial owner of the Debt Securities is entitled to
receive the entire principal amount, plus an amount derived directly
from the growth in the Index (but in no event less than zero);
(10) All details regarding the methodology for measuring
performance;
(11) The terms under which the Debt Securities may be redeemed;
(12) The exchange or market where the Debt Securities are traded or
maintained; and
(13) Copies of the proposed and final exemptions relating to the
exemptive relief provided herein, upon request.
(h) The terms of a Plan's investment in the Debt Securities are at
least as favorable to the Plan as those available to an unrelated non-
Plan investor in a comparable arm's length transaction at the time of
such acquisition.
(i) In the event the Debt Securities are delisted from any
nationally-recognized securities exchange, Citigroup will apply for
trading through the National Association of Securities Dealers
Automated Quotations System (NASDAQ), which requires that there be
independent market-makers establishing a market for such securities in
addition to Citigroup. If there are no independent market-makers, the
exemption will no longer be considered effective.
(j) The Debt Securities are rated in one of the three highest
generic rating categories by at least one nationally-recognized
statistical rating service at the time of their acquisition.
(k) The rate of return for the Debt Securities is objectively
determined and, following issuance, the Applicants retain no authority
to affect the determination of the return for such security, other than
in connection with a ``market disruption event'' (the Market
[[Page 10522]]
Disruption Event) that is described in the Prospectus for the Debt
Securities.
(l) The Debt Securities are based on an Index that is--
(1) Created and maintained \18\ by an entity that is unrelated to
the Applicants and is a standardized and generally-accepted Index of
securities; or
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\18\ For purposes of this exemption, the term ``maintain'' means
that all calculations relating to the securities in the Index, as
well as the rate of return of the Index, are made by an entity that
is unrelated to the Applicants.
---------------------------------------------------------------------------
(2) Created by the Applicants, but maintained by an entity that is
unrelated to the Applicants,
(i) Consists either of standardized and generally-accepted Indexes
or an Index comprised of publicly-traded securities that are not issued
by the Applicants, are designated in advance and listed in the
Prospectus for the Debt Securities (Under either circumstance, the
Applicants may not unilaterally modify the composition of the Index,
including the methodology comprising the rate of return.),
(ii) Meets the requirements for an Index in Rule 19b-4 (Rule 19b-4)
under the Securities Exchange Act of 1934 (the 1934 Securities Act),
and
(iii) The index value (the Index Value) for the Index is publicly-
disseminated through an independent pricing service, such as Reuters
Group, PLC (Reuters) or Bloomberg L.P. (Bloomberg), or through a
national securities exchange.
(m) The Applicants do not trade in any way intended to affect the
value of the Debt Securities through holding or trading in the
securities which comprise an Index.
(n) The Applicants 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 this proposed exemption
have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Applicants,
the records are lost or destroyed prior to the end of the six year
period; and
(2) No party in interest other than the Applicants shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the records are not maintained, or are not available for examination as
required by paragraph (o) below.
(o)(1) Except as provided in section (o)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (n) 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 (the SEC);
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any Plan Participant or beneficiary of any participating Plan,
or any duly authorized representative of such Plan Participant or
beneficiary.
(o)(2) None of the persons described above in subparagraphs (B)-(D)
of paragraph (o)(1) are authorized to examine the trade secrets of the
Applicants or commercial or financial information which is privileged
or confidential.
Summary of Facts and Representations
1. Citigroup is a diversified holding company whose businesses
provide a broad range of financial services to consumer and corporate
customers around the world. Citigroup's activities are conducted
through Global Consumer, Global Corporate and Investment Bank, Global
Investment Management and Private Banking, and Investment Activities.
As of December 31, 1999, Citigroup and its subsidiaries had total
consolidated assets of approximately $717 billion.
2. Citigroup's Global Consumer segment includes a global, full-
service consumer franchise encompassing, among other things, branch and
electronic banking, consumer lending services, investment services,
credit and charge card services, and life, auto and homeowner
insurance. The businesses included in Citigroup's Global Corporate and
Investment Bank segment serve corporations, financial institutions,
governments, and other participants in developed and emerging markets
throughout the world. These businesses provide, among other things,
investment banking retail brokerage, corporate banking, cash management
products and services, and commercial insurance. Global Investment
Management and Private Banking includes asset management services
provided to mutual funds, institutional and individual investors, and
personalized wealth management services for high net worth clients. The
Investment Activities segment includes Citigroup's venture capital
activities, the realized investment gains and losses related to certain
corporate- and insurance-related investments and the results of certain
investments in countries that refinanced debt under the 1989 Brady Plan
or plans of a similar nature.
3. Salomon Smith Barney Holdings Inc. (Holdings) operates through
its subsidiaries in two business segments, Investment Services and
Asset Management. It provides investment banking, securities and
commodities trading, capital raising, asset management, advisory,
research and brokerage services to its customers, and executes
proprietary trading strategies on its own behalf. Holdings is a global,
full-service investment banking and securities brokerage firm with more
than 11,300 Financial Consultants in 476 offices across the United
States. Holdings provides a full range of financial advisory, research
and capital raising services to corporations, governments and
individuals. Its Financial Consultants in the United States service
approximately 6.6 million client accounts, representing approximately
$965 billion in assets. The primary broker-dealer subsidiaries of
Holdings include SSB and The Robinson-Humphrey Company, LLC.
4. The Plans will consist of employee benefit plans that are
covered under the provisions of Title I of the Act, as amended, and
subject to section 4975 of the Code. For purposes of this proposed
exemption, the Plans will not consist of plans that are sponsored and
maintained by the Applicants for their own employees. In the case of
the Applicants' in-house plans, Citigroup represents that the
acquisition and holding of the Debt Securities by such plans would be
covered under the statutory exemption that is provided under section
408(e) of the Act.\19\
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\19\ The Department expresses no opinion herein on whether the
acquisition and holding of the Debt Securities by the Applicants'
in-house plans are covered under the provisions of section 408(e) of
the Act. In this regard, interested persons should refer to the
conditions contained in section 408(e), as well as the definitions
of the terms ``qualifying employer security'' (see section 407(d)(5)
of the Act) and ``marketable obligations'' (see section 407(e) of
the Act).
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5. The Applicants represent that broker-dealers routinely need
additional capital in order to maintain inventories of securities for
their market-making and other business activities. As a result, the
Applicants maintain a continuous need to borrow funds from various
institutional and individual investors for use in their business
operations. In response to this need, certain of the Applicants may
from time to time issue (the Issuers) various high-quality, publicly-
offered debt securities
[[Page 10523]]
(i.e., the Debt Securities), rated in one of the three highest generic
rating categories by nationally recognized rating firms, offering
varying levels of risk and potential return. Among the debt securities
offered by the Applicants are publicly-offered, unsecured, SEC-
registered Debt Securities, with terms that are no longer in duration
than nine (9) years. The Debt Securities will be U.S. dollar-
denominated so that no foreign currency conversions will be required in
the calculation of the rate of return. Further, the Debt Securities
will offer varying levels of risk and rates of return. The Debt
Securities would be listed on at least one major stock exchange, and
they would be issued in denominations of $10 per principal unit, with
the minimum purchase being one unit.
The Debt Securities may be offered on a variety of terms and
formulas under which rates of return are objectively determined in
accordance with certain Indexes by the calculation agent. A registered
broker-dealer Applicant would act as calculation agent. The Applicants
represent that since small Plans will likely invest in the Debt
Securities, the formulas used to calculate the rates of return will be
designed to be understood by the average investor and clearly described
in the ``plain English'' summary of the Debt Securities in the
Applicants'' prospectus.
6. The Applicants represent that their activities are subject to
various levels of oversight and regulation. In this regard, SSB
represents that, as a registered broker-dealer and investment adviser,
its activities are subject to the oversight and regulation of the
Securities and Exchange Commission (SEC), the Commodities Futures
Trading Commission (CFTC), and other federal and state regulatory
agencies. The Applicants represent that their activities are also
subject to the oversight of self-regulatory organizations (SROs) such
as the New York Stock Exchange (NYSE), other principal United States
securities exchanges, and the National Association of Securities
Dealers, Inc. The Applicants represent that SSB, as a registered
broker-dealer and member of the NYSE, is additionally subject to both
the Net Capital Rule 15c3-1 of the 1934 Securities Act (which specifies
the minimum net capital requirements of a broker-dealer), and the net
capital requirements of the CFTC and other commodity exchanges.
7. Due to the affiliation between an Issuer and SSB or its
Affiliates, as a service provider to the Plans, the Applicants
represent that they are likely to be parties in interest, as defined in
section 3(14)(B) or (H) of the Act, with respect to a high percentage
of Plans that purchase, sell, or hold these Debt Securities regardless
of whether the Debt Securities are purchased directly from the
Applicants.\20\ Thus, the Applicants represent that an Issuer may be a
party in interest to a Plan solely because of its affiliation with a
service provider to the Plan, and as the counterparty to the Plan in a
transaction where the Plan holds a Debt Security issued by an
Affiliate. Further, other Affiliates may be service providers to Plans
on account of their roles as trustees, custodians, investment advisors,
or broker-dealers for such Plans. These relationships would make an
Issuer a party in interest to those Plans and would create potential
prohibited transactions in the event such Plans acquire and hold the
Debt Securities.\21\
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\20\ In this regard, the Applicants represent that PTCE 75-1
does not directly address transactions where, as here, there is a
continuing extension of credit as a result of a sale to a plan by a
broker-dealer of debt securities issued by the broker-dealer's
affiliates.
\21\ In ERISA Advisory Opinion 88-09A (April 15, 1988), a bank
that sponsored self-directed master and prototype IRAs requested an
opinion from the Department as to whether purchases of stock issued
by the parent corporation of the bank directly from such parent by
the self-directed IRAs would violate section 4975 of the Code.
Section 4975 of the Code prohibits, in part, the sale or
exchange of property between a plan and a party in interest
(4975(c)(1)(A)) and the use by or for the benefit of a disqualified
person of the income or assets of a plan (4975(c)(1)(D)). Section
4975(e)(2) of the Code defines the term ``disqualified person'' to
include a plan fiduciary and a person providing services to a plan.
ERISA Advisory Opinion 88-09A concluded that, although the bank
is a disqualified person with respect to the IRAs by reason of the
provision of services, the corporate parent of the bank is not a
disqualified person with respect to the IRAs solely by reason of its
ownership of the bank. In this regard, interested persons should
contrast section 3(14)(H) of the Act with section 4975(e)(2)(H) of
the Code. The question of whether the corporate parent is a
disqualified person under any other provision of section 4975(e)(2)
of the Code would require an examination of the particular facts and
circumstances. The Advisory Opinion further concluded that, to the
extent that the corporate parent is not a disqualified person with
respect to the IRAs, purchases of stock from the parent by the bank
on behalf of the IRAs, at the direction of the IRA participant,
would not involve transactions described in section 4975(c)(1)(A) of
the Code. However, while the corporate parent of such bank may not
be a disqualified person with respect to the IRAs, purchases of
parent stock by the IRAs would raise issues under section
4975(c)(1)(D) of the Code if a transaction was part of a broader
overall agreement, arrangement or understanding designed to benefit
disqualified persons.
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The Applicants are requesting an administrative exemption to enable
Plans to invest in the Debt Securities, under the terms and conditions
described herein, and to avoid liability for prohibited transactions
resulting from investment by Plans in the Debt Securities.
8. The Applicants believe that while Part II of PTCE 75-1 provides
relief for principal transactions between a broker-dealer and a Plan,
and would cover a purchase of the broker-dealer affiliates' securities
by such Plans (if the conditions required therein were met), it is
questionable whether that class exemption would cover the continuing
extension of credit related to the holding of any Debt Securities by a
Plan.\22\
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\22\ The Department is providing no opinion herein as to whether
any principal transaction involving Debt Securities would be covered
by PTCE 75-1, or whether any particular mark-up by a broker-dealer
for such transaction would be permissible under Part II of PTCE 75-
1.
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The Applicants note that some independent Plan fiduciaries have
expressed concern regarding the application of PTCE 75-1 to broker-
dealer sales of broker-affiliated debt to Plans either as a part of an
original issue of the securities or in the secondary market. Moreover,
the Applicants represent that PTCE 96-23 (61 FR 15975, April 10, 1996)
\23\ is unavailable to participant-directed, defined contribution Plans
and other small Plans because these Plans, due to their size, are
unlikely to have INHAMs responsible for making investment decisions
relating to the acquisition, holding and disposition of securities in
which the Plans invest.
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\23\ PTCE 96-23 permits various transactions involving employee
benefit plans whose assets are managed by an in-house asset manager
(the INHAM). An INHAM is an entity which is generally a subsidiary
of an employer sponsoring the plan. It is also a registered
investment adviser with management and control of total assets
attributable to plans maintained by the employer and its affiliates
which are in excess of $50 million.
---------------------------------------------------------------------------
Similarly, the Applicants note that while PTCE 84-14 \24\ minimizes
the risk of inadvertent prohibited transactions for Plans whose assets
are managed by a QPAM, they believe it is unlikely that participant-
directed, defined contribution Plans or small Plans would incur the
expense of a QPAM for the purchase and continued holding of the Debt
Securities. The Applicants also believe that the additional cost of a
QPAM for a small Plan with a small investment would not be cost-
effective.
[[Page 10524]]
The Applicants further explain that this cost would be uneconomical
here because the QPAM would be required to continue its services for
the entire period during which the Debt Securities are held by the Plan
since the potential prohibited transaction is not just a sale or
exchange under section 406(a)(1)(A) of the Act, but is also an
extension of credit under section 406(b) of the Act. Accordingly, the
Applicants state that the absence of a QPAM would preclude small Plans
from being able to purchase the Debt Securities without creating the
risk of a prohibited transaction.
---------------------------------------------------------------------------
\24\ PTCE 84-14 provides a class exemption for transactions
between a party in interest with respect to an employee benefit plan
and an investment fund (including either a single customer or pooled
separate account) in which the plan has an interest, and which is
managed by a qualified professional asset manager (the QPAM),
provided certain conditions are met. QPAMs (e.g., banks, insurance
companies, registered investment advisers with total client assets
under management in excess of $50 million) are considered to be
experienced investment managers for plan investors that are aware of
their fiduciary duties under the Act.
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9. The Applicants propose to offer the Debt Securities to non-Plan
investors and maintain that these investors will continue to constitute
a substantial market for such securities. However, for each Plan
investor, the Applicants represent that the terms of the Plan's
investment in the Debt Securities will be at least as favorable to the
Plan as those available to an unrelated non-Plan investor in a
comparable arm's length transaction at the time the Debt Securities are
acquired by the Plan. Additionally, the Applicants represent that no
Plan will pay the Applicants any fees or commissions in connection with
transactions involving the Debt Securities, except for the mark-up for
a principal transaction permitted under PTCE 75-1.
In addition to the aforementioned requirements, the Applicants
represent that a Plan's investment in the Debt Securities will be
restricted to those Plans for which the Applicants have no
discretionary authority and do not provide investment advice with
respect to the investment in the Debt Securities. In this regard, the
decision to invest in the Debt Securities will be made by an
Independent Plan Fiduciary or a Plan Participant, which is independent
of the Applicants. Moreover, the Applicants represent that the
Prospectus for each of the Debt Securities that are offered to the
Plans will contain a recommendation that no more than 15 percent of a
Plan's assets should be invested in the Debt Securities at the time
such security is acquired by a Plan.\25\
---------------------------------------------------------------------------
\25\ In this regard, the Applicants propose to include
substantially the following statement in the Prospectus for each of
the Debt Securities, under a heading entitled ``Employer-Sponsored
Plan Considerations'': ``These [Debt Securities] Securities are
being sold to Plans pursuant to an exemption issued by the
Department of Labor. In accordance with the terms of that exemption,
the Issuer is required to inform such Plans that no more than 15
percent of plan (or individual participant) assets, at the time of
acquisition, should be invested in the Debt Securities. Please note,
however, that it is the responsibility of the person making the
investment decision to determine whether the purchase is a prudent
investment for the plan (or participant-directed account).''
---------------------------------------------------------------------------
10. The Debt Securities will be rated in one of the three highest
generic rating categories by a nationally-recognized rating firm at the
time of acquisition by a Plan. There will be no triggering events or
early amortization events if the Applicants' credit rating drops below
a certain level established by a rating agency. Throughout the term of
any of the Debt Securities, the Plans will be able to access the latest
bid and asked price quotations for all of the Applicants' Debt
Securities by calling a broker or any electronic service with a
recognized price quotation delivery system. If a Plan wishes to
terminate any Debt Securities investment prior to maturity, such
investor may do so by selling the Debt Security on the open market at
the prevailing market price. However, the Issuer may not unilaterally
terminate the Debt Securities prior to maturity unless the Debt
Securities are callable at a specific price which will be disclosed in
the Prospectus. Assuming the Debt Securities are callable, the
Applicants represent that there will be no loss of principal.
11. The rate of return for the Debt Securities may be fixed or
variable. The prospectus or prospectus supplement covering the Debt
Securities would set forth the annual interest rate for fixed rate
Securities, and, for variable rate Securities, the formula to be
applied to determine the interest payable at maturity. The formula will
include identification of the specified Index for the Debt Securities.
Such Index may be either (a) created and maintained by an entity that
is unrelated to the Applicants or (b) created by the Applicants, but
maintained by an unrelated entity.
(a) Index created and maintained by an entity unrelated to the
applicants. This Index, which will be created by an entity that is
unrelated to the Applicants, will consist of a standardized and
generally-accepted index of securities, such as the Nikkei 225 Index
Tokyo Stock Exchange or the Standard & Poor's 500 Index. In addition,
this Index will be maintained by such unrelated entity. In other words,
all calculations relating to the securities in the Index, as well as
the rate of return of the Index, will be made by an entity other than
the Applicants.
(b) Index created by the applicants, but maintained by an unrelated
entity. This Index will be created by the Applicants. However, it must
be maintained by an entity that is unrelated to the Applicants, such as
the stock exchange on which the Debt Security is listed. In addition,
the Index will consist either of standardized and generally-accepted
Indexes or it will be an Index comprised of publicly-traded securities
that are not issued by the Applicants, are designated in advance and
listed in the Prospectus for the Debt Securities. Under either
circumstance, the Applicants will not be permitted to make any
modifications to the composition of the Index, including the
methodology comprising the rate of return, unilaterally.
Further, the Index will meet the requirements for an Index in
accordance with Rule 19b-4 of the 1934 Securities Act, which imposes
regulatory standards on the entity maintaining the Index. Under Rule
19b-4, a self-regulatory organization, such as a securities exchange,
is required to adopt trading rules, procedures and listing standards
for the product classes relating to any security that the exchange
proposes to list. In addition, the self-regulatory organization must
maintain a surveillance program for a class of securities. If the SEC
has not approved the self-regulatory organization's rules, procedures
and standards, the self-regulatory organization must make a filing with
the SEC prior to listing the security. According to the Applicants,
this procedure provides adequate safeguards so that any Debt Securities
that are created by the Applicants will meet the listing and trading
standards approved by the self-regulatory organization.
Finally, the Index Value of the Index will be publicly-disseminated
through an independent pricing service, such as Reuters or Bloomberg,
or through a national securities exchange.
12. Price quotations with respect to the Debt Securities will be
available on a daily basis from market reporting services, such as
Bloomberg or Reuters, and the daily financial press, such as The Wall
Street Journal. In the event the Debt Securities are delisted, the
Issuer(s) will apply for trading through the NASDAQ, which requires
that there be independent market-makers establishing a market for the
securities in addition to the Issuer(s). In the event there are no
independent market-makers, the Applicants represent that the exemption
will no longer be considered effective.
13. The terms of each of the Debt Securities will be set forth with
specificity. Therefore, in addition to the description of the formula
for computing the rate of return, the Prospectus will include, but will
not be limited to, the following information:
A statement to the effect that the return calculated for
the Debt Securities will be denominated in U.S. dollars;
[[Page 10525]]
The specified Index or Indexes on which the rate of return
on the Debt Securities is based;
A numerical example, designed to be understood by the
average investor, which explains the calculation of the return on the
Debt Securities at maturity and reflects, among other things, (i) a
hypothetical initial value and closing value of the applicable Index,
and (ii) the effect of any adjustment factor on the percentage change
in the applicable Index;
The date on which the Debt Securities will be issued;
The date on which the Debt Securities will mature and the
conditions of such maturity;
The initial date on which the value of the Index is
calculated;
Any adjustment factor or other numerical methodology that
would affect the rate of return, if applicable;
The ending date on which interest will be determined,
calculated and paid;
Information relating to the calculation of payments of
principal and interest, including a representation to the effect that,
at maturity, the beneficial owner of the Debt Securities will be
entitled to receive the entire principal amount, plus an amount derived
directly from the growth in the Index (but in no event less than zero);
All details regarding the methodology for measuring
performance;
The terms under which the Debt Securities may be redeemed;
The exchange or market where the Debt Securities are
traded or maintained; and
Copies of the proposed and final exemptions relating to
the exemptive relief provided herein, upon request.
Aside from the Prospectus, the Applicants do not contemplate making
any ongoing communications to the investors in the Debt Securities
except to the extent required under applicable securities laws.
14. With respect to variable rate Debt Securities, the Applicants
represent that the interest rate will be objectively determined. Where
SSB or an Affiliate acts as ``Calculation Agent'' for determining
applicable rates of return, such calculation will be made using a
formula fully disclosed in the prospectus or prospectus supplement
relating to the Debt Security. Following the issuance of such Debt
Security, SSB will retain no authority to affect the determination of
such interest rate absent a Market Disruption Event. The determination
that a Market Disruption Event may have occurred can have the effect of
eliminating the affected trading day from calculation of the value of
the underlying Index. The Calculation Agent is responsible for
determining whether such Event has, in fact, occurred. Where the
variable rate of a Debt Security is tied to a basket of equity
securities, for example, a ``Market Disruption Event'' is typically
defined as any of the following events, with certain exceptions:\26\
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\26\ For purposes of determining whether a Market Disruption
Event has occurred, a limitation on the hours in a trading day and/
or number of days of trading will not constitute a Market Disruption
Event if it results from an announced change in the regular business
hours of the relevant exchange.
---------------------------------------------------------------------------
(a) the suspension or material limitation of trading in 20% or more
of the underlying stocks which then comprise the Index, in each case,
for more than two hours of trading or during the one-half hour period
preceding the close of trading on the NYSE or any other applicable
organized U.S. exchange. For purposes of this definition, limitations
on trading during significant market fluctuations imposed pursuant to
NYSE Rule 80B (or any applicable successor or similar rule or
regulation promulgated by any self-regulatory organization or the SEC)
shall be considered ``material.''
(b) the suspension or material limitation, in each case, for more
than two hours of trading or during the one-half hour period preceding
the close of trading (whether by reason of movements in price otherwise
exceeding levels permitted by the relevant exchange or otherwise) in
(A) futures contracts related to the Index which are traded on the
Chicago Mercantile Exchange or any other major U.S. exchange, or (B)
options contracts related to the Index which are traded on any major
U.S. exchange.
(c) the unavailability, through a recognized system of public
dissemination of transaction information, for more than two hours of
trading or during the one-half hour period preceding the close of
trading, of accurate price, volume or related information in respect of
20% or more of the underlying stocks which then comprise the Index or
in respect of futures contracts related to the Index, options on such
futures contracts or options contracts related to the Index, in each
case traded on any major U.S. exchange.
15. The Applicants represent that the principal amount of the Debt
Securities that are the subject of this exemption, if granted, will be
protected regardless of the performance of the applicable Index.
Although the return on a Debt Security may go up or down in the same
direction as the performance of the applicable Index, the interest rate
floor is set at zero. Thus, even where the value of the applicable
Index decreases, there will be no invasion of principal if the Debt
Securities are held until maturity.\27\ However, if a Plan must sell
the Debt Securities on the open market prior to their maturity, the
market price will reflect the market's perception of the potential
yield on such securities based on the current yield and interest rates
for other debt securities of the same duration. This market price may
result in a loss of principal value of the investment in the Debt
Securities in the same fashion as would occur for other debt
securities.
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\27\ The Applicants have provided the following example to
illustrate this principle by describing the return at maturity on
each $10 principal investment in the Debt Securities that are the
subject of this proposed exemption:
Where the value of the applicable Index increases by 50
percent, the Plan is entitled to receive $15 at maturity ($10
principal plus $5 interest) because the rate of return moves in the
same direction as the growth in the applicable Index;
Where the value of the applicable Index remains
unchanged during the applicable period, the Plan is entitled to
receive $10 at maturity ($10 principal plus $0 interest) because the
rate of return moves in the same direction as the growth in the
applicable Index; and
Where the value of the applicable Index decreases by 50
percent, the Plan is entitled to receive $10 at maturity ($10
principal and $0 interest) because the rate of return moves in the
same direction as the growth in the applicable Index but in no event
drops below zero.
While the foregoing examples are simplistic, it should be noted
that for some of the Debt Securities, such as those tied to the
Standard & Poor's 500 Index, the interest payments shown above may
be reduced on a daily basis by an adjustment factor (the Adjustment
Factor), equal to a stated percent per year. On the maturity date of
the Debt Securities, the annual application of the Adjustment Factor
will reduce the Plan investor's overall interest payments. This
information will be disclosed prominently in the Prospectus.
---------------------------------------------------------------------------
16. The Applicants represent that they will exercise no discretion
with respect to the Indexes. Further, the Applicants represent that
they will not trade in any way intended to affect the value of the Debt
Securities through holding or trading in the securities which comprise
these Indexes. The securities of the Applicants may comprise part of
the Index (e.g., Citigroup's common stock is included in the S&P 500
Index, which is one of the Indexes that may be used in the Applicants'
variable rate Debt Securities). In addition, the Applicants may reserve
the right to purchase or sell positions in the Index, or in all or
certain of the assets by reference to which the Index is calculated
(Underlying Assets), or derivatives relating to the Index. The
Applicants do not believe, however, that their hedging activity will
have a material impact on the value of the Index, the Underlying
Assets, or any derivative or synthetic
[[Page 10526]]
instrument relating to the Index. The Applicants will maintain written
records of all of the Debt Securities transactions for a period of six
years.
17. In summary, the Applicants represent that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
(a) The Debt Securities will be made available by the Applicants in
the ordinary course of their business to customers which are not Plans.
(b) The Applicants will not have any discretionary authority or
control, or provide any ``investment advice,'' within the meaning of 29
CFR 2510.3-21(c), with respect to the assets of Plans which are
invested in the Debt Securities.
(c) The Plans will pay no fees or commissions to the Applicants in
connection with the transactions covered by the requested exemption,
other than the mark-up for a principal transaction permissible under
PTCE 75-1.
(d) The decision to invest in the Debt Securities will be made by
an Independent Plan Fiduciary or a Plan Participant, which is
independent of the Applicants.
(e) In connection with a Plan's acquisition of any of the Debt
Securities, the Applicants will disclose to the Independent Plan
Fiduciary, or, if applicable, the Plan Participant, in the Prospectus,
all of the material terms and conditions concerning the Debt
Securities.
(f) A Plan will acquire the Debt Securities on terms that are at
least as favorable to the Plan as those available to an unrelated non-
Plan investor in a comparable arm's length transaction.
(g) The Debt Securities will be rated in one of the three highest
generic rating categories by at least one nationally-recognized
statistical rating service at the time of such security's acquisition
by the Plan.
(h) The rate of return for the Debt Securities will be objectively
determined and the Applicants will retain no authority to affect the
determination of such return, other than in connection with a Market
Disruption Event that is described in the Prospectus for the Debt
Securities.
(i) The Index will be: (1) Created and maintained by an entity that
is unrelated to the Applicants and consist of a standardized and
generally-accepted Index; or (2) created by the Applicants, but
maintained by an entity that is unrelated to the Applicants, and (i)
will consist either of standardized and generally-accepted Indexes or
will be an Index comprised of publicly-traded securities that are not
issued by the Applicants, are designated in advance, and listed in the
Prospectus for the Debt Securities, (ii) will meet the requirements for
an Index as set forth in SEC Rule 19b-4, and (iii) the Index Value for
such Index will be publicly-disseminated through an independent pricing
service or a national securities exchange.
Notice to Interested Persons
The Applicants represent that because those potentially interested
Plans proposing to engage in the covered transactions cannot all be
identified, the only practical means of notifying Independent Plan
Fiduciaries or Plan Participants of such affected Plans is by
publication of the proposed exemption in the Federal Register.
Therefore, any comments from interested persons must be received by the
Department no later than 30 days from the publication of this notice of
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
The Joliet Medical Group, Ltd. Employees Retirement Plan & Trust
(the Plan), Located in Joliet, Illinois
[Application D-10888]
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, will not apply effective November 1, 1999 to the past and
continued leasing of a medical clinic (the Property) located at 2100
Glenwood Ave., Joliet, Illinois, from the Plan to Joliet Medical Group
Investment Partnership (the Employer), provided that the following
conditions have been and will be met:
(a) The independent fiduciary has determined that the transaction
is feasible, in the interest of, and protective of the Plan;
(b) The fair market value of the Property has not exceeded and will
not exceed twenty-five percent (25%) of the value of the total assets
of the Plan;
(c) The independent fiduciary has negotiated, reviewed, and
approved the terms of the lease of the Property with the Employer;
(d) The terms and conditions of the lease of the Property with the
Employer have been and will continue to be no less favorable to the
Plan than those obtainable by the Plan under similar circumstances when
negotiated at arm's length with unrelated third parties;
(e) An independent qualified appraiser has determined the fair
market rental value of the Property;
(f) The independent fiduciary has monitored and will continue to
monitor compliance with the terms of the lease of the Property to the
Employer throughout the duration of such lease and is responsible for
legally enforcing the payment of the rent and the proper performance of
all other obligations of the Employer under the terms of the lease on
the Property; and
(g) The Plan has not incurred and will not incur any fees, costs,
commissions, or other charges or expenses as a result of its
participation in the proposed transaction, other than the fee payable
to the independent fiduciary.
EFFECTIVE DATE: This exemption is effective as of November 1, 1999.
Summary of Facts and Representations
1. The Plan is a profit sharing plan which was created effective
January 1, 1975. As of August 29, 2000, the Plan had net assets valued
at approximately $20,075,282 and 165 participants.
2. The Employer is a general partnership organized and operating
under the laws of the State of Illinois, whose principal place of
business is Joliet, Illinois. The Employer's principal place of
business is the Property. The Employer is engaged in the general
practice of medicine.
3. The Property consists of a two story medical building located at
2100 Glenwood Avenue, Joliet Illinois. The Property contains
approximately 10,583 square feet on each floor for a total square
footage (above ground) of approximately 21,166 square feet. In
addition, there is a full basement which is finished and contains an
additional approximately 10,583 square feet. The fair market value of
the Property represents 15.94% of the total assets in the Plan.
The Plan initially leased the Property to the Employer for an
initial term of 18 years, which ended November 1, 1999. In response to
an exemption application filed by the Employer, the Department granted
an exemption covering the initial lease (the Initial Lease): Prohibited
Transaction Exemption 81-96 (PTE 81-96), 46 FR 53816 (October 30,
1981). It is represented that since the inception of the Initial Lease,
the
[[Page 10527]]
Employer has always paid its rent on time and otherwise complied with
all of the terms and conditions of the Initial Lease and PTE 81-96.
Furthermore, the independent fiduciary has continued to monitor and
oversee compliance with the conditions of the exemption after the
expiration of the lease because the parties determined to continue the
arrangement after November 1, 1999.
An independent party, the First Midwest Trust Company (the Bank)
has served and continues to serve as the independent fiduciary. The
Bank represents that since the inception of the Initial Lease, the
Employer has complied with all of the terms and conditions of the
Initial Lease and PTE 81-96. The Bank certifies that the transaction is
appropriate and in the best interests of the Plan and that the terms
and conditions of the proposed transactions are at least equal to what
the Plan would receive from an unrelated party in similar transaction.
In addition, the Bank will monitor the transaction and will have the
responsibility for exercising the Plan's rights in the proposed
transaction.
4. Joseph E. Batis, (Mr. Batis), an accredited appraiser with
Edward J. Batis & Associates, Inc., located in Joliet, Illinois,
appraised the Property on October 24, 2000. Mr. Batis states that he is
a full time qualified, independent appraiser, as demonstrated by his
status as a State Certified General Real Estate Appraiser licensed by
the State of Illinois. In addition, Mr. Batis represents that both he
and his firm are independent of the Employer.
In his appraisal, Mr. Batis relied primarily on the ``Appraisal
Process''. Included within the steps of this process are three
approaches to a value estimate: the Cost Approach, the Direct Sales
Comparison Approach and the Income Approach. According to Mr. Batis,
these methods best represent the actions of buyers and sellers in the
market place. After Mr. Batis independently applies each approach to
value, the three resultant value estimates are reconciled into an
overall estimate of value. In the reconciliation process, the appraiser
analyzes each approach with respect to its applicability to the
property being appraised. Also considered in the reconciliation process
is the strength and weakness of each approach with regards to
supporting market data. After inspecting the Property and analyzing all
relevant data, Mr. Batis determined that a fee simple interest in the
Property had a fair market value of approximately $3,200,000.
The Employer will enter into a five year, ``triple net'' lease with
the Plan leasing the Property to the Employer for a ``floating''
monthly rental of 1.5% of the current appraised value of the subject
realty ($3,200,000 x 1.5%= $480,000). A new appraisal by an
independent, qualified appraiser would be performed every other year to
update the rent. The minimum guaranteed rent (regardless of any
possible decrease in the appraisal) is $480,000. The terms of the lease
provide for a primary term of five years with an option to renew and
extend for two additional successive terms of five years each subject
to the approval of the independent fiduciary. In the event of a
default, the Employer is required to reimburse the Plan on demand for
all costs reasonably incurred by the Plan in connection therewith,
including attorney's fees, court costs and related costs plus a
reasonable rate of return on the amount of accrued but unpaid rent due
the Plan, as determined by an appropriate third party source.
Since the Initial Lease, the Employer has continued to pay rent to
the Plan in a timely manner without default or rental delinquencies.
However, the Employer is aware of the fact that a prohibited
transaction occurred in violation of the Act subsequent to the
expiration of the lease under PTE 81-96 (November 1, 1999). Therefore,
the Employer has requested exemptive relief with respect to the past
and continued leasing of the Property by the Plan to the Employer. If
granted, the proposed exemption will be retroactive to November 1,
1999.
In summary, the applicant represents that the proposed transaction
meets the statutory criteria of section 408(a) of the Act because:
(a) The independent fiduciary has determined that the transaction
is feasible, in the interest of, and protective of the Plan;
(b) The fair market value of the Property has not exceeded and will
not exceed twenty-five percent (25%) of the value of the total assets
of the Plan;
(c) The independent fiduciary has negotiated, reviewed, and
approved the terms of the lease with the Employer on the Property;
(d) The terms and conditions of the lease with the Employer on the
Property have been and will continue to be no less favorable to the
Plan than those obtainable by the Plan under similar circumstances when
negotiated at arm's length with unrelated third parties;
(e) An independent qualified appraiser has determined the fair
market rental value of the Property;
(f) The independent fiduciary has monitored and will continue to
monitor compliance with the terms of the lease of the Property to the
Employer throughout the duration of such lease and is responsible for
legally enforcing the payment of the rent and the proper performance of
all other obligations of the Employer under the terms of the lease; and
(g) The Plan has not incurred and will not incur any fees, costs,
commissions, or other charges or expenses as a result of its
participation in the proposed transactions, other than the fee payable
to the independent fiduciary.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department,
telephone (202) 219-8883 (this is not a toll-free number).
Texas Instruments Employees Pension Plan (the Plan), Located in
Dallas, Texas
[Application No. D-10918]
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
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (E) of the Code, shall not apply to the sale (the Sale) by the
Plan to Texas Instruments, Inc. (the Employer) of a parcel of improved
real property (the Property) located in Dallas, Texas. This exemption
is conditioned upon adherence to the material facts and representations
described herein and upon the satisfaction of the following
requirements:
(a) All terms and conditions of the Sale are at least as favorable
to the Plan as those which the Plan could obtain in an arm's-length
transaction with an unrelated party;
(b) The Sales price is the greater of $9,400,000 or the fair market
value of the Property as of the date of the Sale;
(c) The fair market value of the Property has been determined by an
independent, qualified appraiser;
(d) The Sale is a one-time transaction for cash; and
[[Page 10528]]
(e) The Plan does not pay any commissions, costs or other expenses
in connection with the Sale.
Summary of Facts and Representations
1. The Employer, the sponsor of the Plan, is a Delaware corporation
with offices at 13500 North Central Expressway, Dallas, Texas. The
Employer is engaged in the manufacture and sale of a variety of
products in the electrical and electronic industry for industrial,
consumer, and government markets. It is represented that the Employer
employs over 19,000 individuals and sponsors several employee benefit
plans.
2. The Plan is a defined benefit pension plan which, as of January
1, 1999, had participants and beneficiaries totaling approximately
19,377. The administrator of the Plan is a retirement committee
composed of three members who are officers of the Employer. As of July
21, 2000, the Plan's assets had an aggregate fair market value of
$637,999,647.
All the assets of the Plan are held in a single trust (the Trust)
for which the Northern Trust Company, an Illinois corporation, serves
as trustee (the Trustee). The assets of the Plan held in the Trust
consist of various securities and real property. Pursuant to a Subtrust
Agreement, dated November 1, 1990, Bank of America, N.A., was appointed
as subtrustee (the Subtrustee) to manage the Property and certain other
real property held by the Plan. The Subtrustee, who is the applicant
for the proposed transaction, has complete and full investment
discretion and authority with respect to the Sale of the Property in
the subtrust. Hence, the Trustee makes no representations in connection
with this proposed exemption transaction.
3. The Plan's real property holdings in the Trust include the
Property. The Property has an estimated value of $9,400,000 and
constitutes approximately 1.5% of the total value of the Plan's assets.
The lease of the Property was executed pursuant to an exemption
((Prohibited Transaction Exemption (PTE) 93-83 (58 FR 68964, December
29, 1993)) which granted relief for the lease of two parcels (the
Dallas Parcels) of improved real property to the Employer by the Plan
and the lease to the Employer by the Plan of another parcel located in
a suburb of Detroit, Michigan (the Michigan Parcel). The Michigan
Parcel, comprising a 16.5 acres of commercial property located in
Farmington Hills, a suburb of Detroit, contained a single building used
as an office facility. The Michigan parcel was sold on March 1, 1994 to
Wayne State University, a unrelated third party.
The Dallas Parcels consist of the Property and another parcel (the
Second Parcel). The Second Parcel is located on Lemmon Avenue in
Dallas, Texas, and consists of two adjacent tracts aggregating
approximately 14.4 acres with an office and industrial building. The
Second Parcel was assigned by the Employer to the Raytheon Company, a
unrelated third party, on July 11, 1997.\28\
---------------------------------------------------------------------------
\28\ The Department expresses no opinion herein regarding the
application of Title I of the Act as to the assignment of the Second
Parcel to the Raytheon Company.
---------------------------------------------------------------------------
4. The Property consists of a tract of approximately 13.2 acres of
land which is improved by an office/industrial facility, situated at
the intersection of Walnut Lane and Floyd Road in the northern portion
of Dallas, Texas. The Plan acquired the Property on July 23, 1979, from
the Royal Gorge Company, an unrelated third party, and completed
construction of the office/industrial facility on March 18, 1981, at a
total cost for the land and building of approximately $6 million.\29\
---------------------------------------------------------------------------
\29\ The Department expresses no opinion herein as to whether
the acquisition and holding of the Property by the Plan violated any
of the provisions of Part 4 of Title I of the Act.
---------------------------------------------------------------------------
The Property was appraised (the Appraisal) on January 14, 2000, by
Jan Whatley (Ms. Whatley), a Certified Residential Real Estate
Appraiser. Ms. Whatley is independent of the Employer and is an
appraiser with the Pyles Whatley Corporation located in Dallas, Texas.
Ms. Whatley determined the best use and highest value of the
Property was associated with valuing the Property with the so-called
direct sales comparison method. In this method, sales of similar use
land in the market area are compared to the subject to arrive at an
indication of value. In arriving at value conclusions the tracts are
compared as to the rights conveyed, financing terms, sale conditions,
market conditions, location, and physical characteristics. Therefore,
based on the valuation procedure, Ms. Whatley concluded that the fair
market value of the Property is $9,400,000 as of August 22, 2000.
The Property is leased to the Employer, pursuant to a lease
agreement which provided for an initial lease term of ten (10) years,
commencing on March 18, 1981, and expiring on March 17, 1991. During
the initial ten year term of the lease, the monthly lease rentals of
$61,904.32 provided the Plan with an annual return equal to
approximately 12.25% of the Plan's total investment in the Property.
Pursuant to the lease agreement, the lease has been renewed for two of
the three additional five year terms, the second of which will expire
on March 17, 2001, and the third of which will commence on March 18,
2001 and expire on March 17, 2006. At the commencement of each
additional five (5) year extended term, rent was determined by
reference to prevailing market rates at the beginning of each
subsequent five (5) year term, but such reference in no instance caused
a decrease in rent. During the first extended five year term, beginning
on March 18, 1991, the monthly lease rental of $61,904.32 provided the
Plan with an annual net return equal to approximately 12.25% of the
Plan's total investment in the Property. During the second extended
five year term, beginning on March 18, 1996, the monthly lease rental
of $68,186.05 provided the Plan with an annual net return equal to
approximately 13.49% of the Plan's total investment in the Property.
5. The applicant represents that the proposed exemption is in the
interest of the Plan, and its participants and beneficiaries. The
proposed exemption is designed to allow the Plan, and thus its
participants and their beneficiaries, to receive maximum value for the
Property due to the current favorable real estate market in the locale
of the Property. The Plan fiduciaries, other than the Subtrustee, also
recently have established new investment guidelines for the Plan under
which the Plan's real property holdings will be sold and the resulting
proceeds re-invested in other more liquid forms of investment. These
guidelines were formulated, in part, because the Property and the
remaining real property in the Plan are now in one geographic locale,
in or near Dallas, Texas. The sale of the Property will promote
diversification, maximize investment return for the Plan and improve
the Plan's liquidity. The resulting diversification and improved
liquidity will benefit and protect the Plan participants and their
beneficiaries. Furthermore, the Plan will not pay any commissions,
costs or other expenses in connection with the Sale.
6. In summary, the applicant represents that the subject
transaction satisfies the statutory criteria contained in section
408(a) of the Act and section 4975(c)(2) of the Code for the following
reasons:
(a) All terms and conditions of the Sale will be at least as
favorable to the Plan as those which the Plan could obtain in an arms-
length transaction with an unrelated party;
[[Page 10529]]
(b) The fair market value for the Property has been determined by
an independent, qualified appraiser;
(c) The Sale will be a one-time transaction for cash;
(d) The Plan will not pay any commissions, costs or other expenses
in connection with the Sale;
(e) The Plan will receive an amount equal to the greater of:
(i) $9,400,000; or
(ii) The fair market value of the Property, as of the date of the
Sale.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department,
telephone (202) 219-8883 (this is not a toll-free number).
UAM Fund Services, Inc., Located in Boston, MA
[Application No. D-10938]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I. Transactions
If the exemption is granted, the restrictions of section 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 (i) the acquisition of shares of
one or more of the UAM Funds (Shares) by a Plan for which a Fund
Adviser serves as investment manager, through the in-kind exchange of
the Plan's asse |
