EBSA (Formerly PWBA) Federal Register Notice Proposed Exemptions; Bank of America
Corporation (BAC) et al. [07/30/2001]
Proposed Exemptions; Bank of America Corporation (BAC) et al.
[07/30/2001]
Volume 66, Number 146, Page 39351-39372
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10848, et al.]
Proposed Exemptions; Bank of America Corporation (BAC) et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ____, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5638, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Bank of America Corporation (BAC) Located in Dallas, Texas
[Application No. D-10848]
Proposed Exemption
Section I--Exemption for In-Kind Redemption of Assets
The restrictions of section 406(a) and 406(b) of ERISA 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, effective August 1, 2001,\1\ to certain in-kind redemptions (the
Redemptions) by the NationsBank Cash Balance Plan (the In-house Plan)
of shares (the Shares) of proprietary mutual funds (the Portfolios)
offered by investment companies for which Bank of America, N.A. (Bank
of America) or an affiliate thereof provides investment advisory and
other services (the Nations Funds), provided that the following
conditions are met:
(A) The In-house Plan pays no sales commissions, redemption fees,
or other similar fees in connection with the Redemptions (other than
customary transfer charges paid to parties other than Bank of America
and affiliates of Bank of America (Bank of America Affiliates));
(B) The assets transferred to the In-house Plan pursuant to the
Redemptions consist entirely of cash and Transferrable Securities.
Notwithstanding the foregoing, Transferrable Securities which are odd
lot securities, fractional shares and accruals on such securities may
be distributed in cash;
(C) With certain exceptions defined below, the In-house Plan
receives a pro rata portion of the securities of the Portfolio upon a
Redemption that is equal in value to the number of Shares redeemed for
such securities, as determined in a single valuation performed in the
same manner and as of the close of business on the same day in
accordance with the procedures set forth in Rule 17a-7 under the
Investment Company Act of 1940, as amended from time to time (the 1940
Act) (using sources independent of Bank of America and Bank of America
Affiliates);
(D) Bank of America, or any affiliate thereof, does not receive any
fees, including any fees payable pursuant to Rule 12b-1 under the 1940
Act in connection with any redemption of the Shares;
(E) Prior to a Redemption, Bank of America provides in writing to
an independent fiduciary, as such term is defined in Section II (an
Independent Fiduciary), a full and detailed written disclosure of
information regarding the Redemption;
(F) Prior to a Redemption, the Independent Fiduciary provides
written authorization for such Redemption to Bank of America, such
authorization being terminable at any time prior to the date of the
Redemption without penalty to the In-house Plan, and such termination
being effectuated by the close of business following the date of
receipt by Bank of America of written or electronic notice regarding
such termination (unless circumstances beyond the control of Bank of
America delay termination for no more than one additional business
day);
(G) Before authorizing a Redemption, based on the disclosures
provided by the Portfolios to the Independent Fiduciary, the
Independent Fiduciary determines that the terms of the Redemption are
fair to the participants of the In-house Plan, and comparable to and no
less favorable than terms obtainable at arms-length between
unaffiliated parties, and that the Redemption is in the best interest
of the In-house Plan and its participants and beneficiaries;
(H) Not later than thirty (30) business days after the completion
of a Redemption, the relevant Fund will provide to an independent
fiduciary acting on behalf of the Plan (the Independent Fiduciary) a
written confirmation regarding such Redemption containing:
[[Page 39352]]
(i) the number of Shares held by the In-house Plan immediately
before the Redemption (and the related per Share net asset value and
the total dollar value of the Shares held),
(ii) the identity (and related aggregate dollar value) of each
security provided to the In-house Plan pursuant to the Redemption,
including each security valued in accordance with Rule 17a-7(b)(4),
(iii) the current market price of each security received by the In-
house Plan pursuant to the Redemption, and
(iv) the identity of each pricing service or market-maker consulted
in determining the value of such securities;
(I) The value of the securities received by the In-house Plan for
each redeemed Share equals the net asset value of such Share at the
time of the transaction, and such value equals the value that would
have been received by any other investor for shares of the same class
of the Portfolio at that time;
(J) Subsequent to a Redemption, the Independent Fiduciary performs
a post-transaction review which will include, among other things, a
random sampling of the pricing information supplied by Bank of America;
and
(K) Each of the In-house Plan's dealings with: the Nations Funds,
the investment advisors to the Nations Funds (the Investment Advisers),
the principal underwriter for the Nations Funds, or any affiliated
person thereof, are on a basis no less favorable to the In-house Plan
than dealings between the Nations Funds and other shareholders holding
shares of the same class as the Shares;
(L) The Bank maintains, or causes to be maintained, for a period of
six years from the date of any covered transaction such records as are
necessary to enable the persons described in paragraph (M) below to
determine whether the conditions of this exemption have been met,
except that (i) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Bank of
America, the records are lost or destroyed prior to the end of the six-
year period, (ii) no party in interest with respect to the In-house
Plan other than Bank of America 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 such records are not
maintained or are not available for examination as required by
paragraph (M) below.
(M)(1) Except as provided in subparagraph (2) of this paragraph
(M), and notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (L) above are
unconditionally available at their customary locations for examination
during normal business hours by (i) any duly authorized employee or
representative of the Department of Labor, the Internal Revenue
Service, or the Securities and Exchange Commission, (ii) any fiduciary
of the In-house Plan or any duly authorized representative of such
fiduciary, and (iii) any participant or beneficiary of the In-house
Plan or duly authorized representative of such participant or
beneficiary.
(2) None of the persons described in paragraphs (M)(1)(ii) and
(iii) shall be authorized to examine trade secrets of Bank of America
or the Nations Funds, or commercial or financial information which is
privileged or confidential.
Section II--Definitions
For purposes of this proposed exemption,
(A) The term ``affiliate'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(B) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(C) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Portfolio's
prospectus and statement of additional information, and other assets
belonging to the Portfolio, less the liabilities charged to each such
Portfolio, by the number of outstanding shares.
(D) The term ``Independent Fiduciary'' means a fiduciary who is:
(i) Independent of and unrelated to Bank of America and its affiliates,
and (ii) appointed to act on behalf of the In-house Plan with respect
to the in-kind transfer of assets from one or more Portfolios to or for
the benefit of the In-house Plan. For purposes of this exemption, a
fiduciary will not be deemed to be independent of and unrelated to Bank
on America if: (i) Such fiduciary directly or indirectly controls, is
controlled by or is under common control with Bank of America, (ii)
such fiduciary directly or indirectly receives any compensation or
other consideration in connection with any transaction described in
this exemption; except that an independent fiduciary may receive
compensation from Bank of America in connection with the transactions
contemplated herein if the amount or payment of such compensation is
not contingent upon or in any way affected by the independent
fiduciary's ultimate decision, and (iii) more than 1 percent (1%) of
such fiduciary's gross income, for federal income tax purposes, in its
prior tax year, will be paid by Bank of America and its affiliates in
the fiduciary's current tax year.
(E) The term ``Transferable Securities'' shall mean securities (1)
for which market quotations are readily available as determined under
Rule 17(a)-7 of the 1940 Act; and (2) which are not: (i) Securities
which may not be publicly offered or sold without registration under
the 1933 Act; (ii) securities issued by entities in countries which (a)
restrict or prohibit the holding of securities by non-nationals other
than through qualified investment vehicles, such as the Nations Funds,
or (b) permit transfers of ownership or securities to be effected only
by transactions conducted on a local stock exchange; (iii) certain
portfolio positions (such as forward foreign currency contracts,
futures and options contracts, swap transactions, certificates of
deposit and repurchase agreements) that, although they may be liquid
and marketable, involve the assumption of contractual obligations,
require special trading facilities or can only be traded with the
counter-party to the transaction to effect a change in beneficial
ownership; (iv) cash equivalents (such as certificates of deposit,
commercial paper and repurchase agreements; and (v) other assets which
are not readily distributable (including receivables and prepaid
expenses), net of all liabilities (including accounts payable).
(F) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of ERISA (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
sister, or a spouse of a brother or a sister.
Summary of Facts and Representations
1. BAC is a bank holding company headquartered in Charlotte, North
Carolina and organized as a Delaware corporation. Bank of America, a
federally chartered bank and trust company also headquartered in
Charlotte, North Carolina, is an indirect, wholly-owned subsidiary of
BAC. As of August 31, 1999, Bank of America had approximately
$231,300,000 in total fiduciary assets under management.
[[Page 39353]]
2. Bank of America is the trustee of the In-house Plan. The In-
house Plan is a cash balance plan maintained by BAC for certain current
and former employees of BAC and Bank of America Affilates. As of April
14, 2000, the In-house Plan had approximately 204,000 participants and
$8.2 billion in assets.
3. According to the applicant, in 1992, BAC's Corporate Benefits
Committee (the Committee) determined that the In-house Plan would
benefit from the investment of its assets in the Portfolios. The
Portfolios are mutual fund portfolios organized within the Nations
Funds. The Nations Funds are open-end investment companies registered
under the 1940 Act with respect to which a BAC subsidiary acts as an
investment adviser and an investment sub-adviser.
At the time, the Committee considered the Portfolios to be an
appropriate vehicle for diversifying the In-House Plan's assets. In
addition, the Committee determined that investment in the Portfolios by
the In-house Plan would allow the In-house Plan to continue to use
certain in-house investment management services which otherwise might
not have been available. As a result, the Committee decided to invest
In-house Plan assets in the Portfolios in accordance with Prohibited
Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734 (1977)).\2\
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\2\ The applicant has not requested exemptive relief with
respect to any investment in the Nations Funds by the In-house Plan.
The applicant notes that the In-house Plan may acquire or redeem
shares in the Nations Funds pursuant to PTE 77-3. In this regard,
PTE 77-3 permits the acquisition or sale of shares of a registered,
open-end investment company by an employee benefit plan covering
only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met. The Department is expressing no opinion
in this proposed exemption regarding whether any transactions with
the Nations Funds by the In-house Plan is covered by PTE 77-3.
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4. The applicant states that the Committee recently decided to
reconsider the investment strategy implemented on behalf of the In-
house Plan. Such reconsideration was the result, in large part, of a
substantial increase in the total amount of assets held by the In-house
Plan. In this regard, the applicant states that several defined benefit
plans have recently merged into the In-house Plan. For example, on
December 31, 1998, the Bank America Pension Plan merged with the In-
house Plan, nearly doubling the amount of assets held by the In-house
Plan.
Ultimately, the Committee and Bank of America determined that given
the current size of the In-house Plan's assets, Bank of America may now
separately manage the assets underlying the Shares on a cost-effective
basis.\3\ Such management would avoid, the applicant notes, the mutual
fund fees and regulatory costs paid by the In-house Plan in association
with its investment in SEC-registered mutual fund portfolios. Thus,
following a Redemption, Bank of America intends to provide direct in-
house investment management services with respect to the In-house
Plan's assets.
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\3\ BAC represents that in the event that this exemption is not
granted, or in the event that the Independent Fiduciary does not
give a favorable opinion with respect to the Redemptions, BAC
intends to proceed with a redemption of the Shares for cash, and,
thereafter, BAC intends to subsequently reinvest the proceeds.
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5. The applicant represents that the Redemptions, as proposed, are
the appropriate means of effectuating this shift in investment
strategy. In this regard, the applicant represents that effecting
redemptions of the Shares for cash, as provided for in PTE 77-3,
followed by the reinvestment of such cash for securities similar to the
securities underlying the redeemed Shares, would cause the In-house
Plan to incur certain costs, including potentially large brokerage
expenses. As a result, BAC represents that the proposed Redemptions,
being on an in-kind basis having no associated brokerage commission or
other fees or expenses (other than customary transfer charges paid to
parties other than Bank of America Affiliates), are a cost-effective
means of implementing the investment strategy sought by Bank of
America.
6. If this proposed exemption is granted, BAC anticipates the
immediate Redemption of certain Portfolio Shares offered by two of the
Nations Funds. Such Portfolios are both advised and subadvised by a BAC
subsidiary. In this regard, Bank of America Advisors, Inc. (BAAI), a
wholly-owned subsidiary of BAC, serves as investment adviser to each of
the affected Portfolios, and TradeStreet Investment Associates, Inc.
(TradeStreet), another wholly-owned subsidiary of BAC, serves as
investment sub-adviser to each of the affected Portfolios. BAAI and
TradeStreet (collectively, the Investment Advisers) are each registered
under the Investment Advisers Act of 1940 (the Advisers Act). The
applicant describes these immediately affected Nations Funds and
Portfolios as follows:
(A) The Nations Fund Trust (NFT), a Massachusetts business trust,
is an open-end management investment company registered under the 1940
Act. NFT is currently comprised of 37 portfolios including the
following seven Portfolios:
(i) Nations Capital Growth Fund
(ii) Nations Value Fund
(iii) Nations Disciplined Equity Fund
(iv) Nations Managed Index Fund
(v) Nations Equity Index Fund
(vi) Nations Emerging Growth Fund
(vii) Nations Managed SmallCap Value Index Fund
(B) The Nations Fund, Inc. (NFI), a Maryland corporation, is an
open-end management investment company registered under the 1940 Act.
NFI is currently comprised of seven portfolios including the following
Portfolio:
(i) Nations Small Company Growth Fund
As previously noted, BAAI serves as investment adviser and
TradeStreet serves as investment subadviser to each of the Portfolios
listed above. The applicant represents that, in addition, Bank of
America and Bank of America Affiliates provide other services to the
Nations Funds and the Portfolios, including co-administration and sub-
transfer agency services.
7. The applicant also represents that, as of August 31, 1999:
(i) A total of approximately $144,071,000 in In-house Plan assets
was invested in the Nations Capital Growth Fund (representing a 17%
ownership in such Portfolio);
(ii) A total of approximately $364,266,000 in In-house Plan assets
was invested in the Nations Value Fund (representing a 17% ownership
interest in such Portfolio);
(iii) A total of approximately $215,182,000 in In-house Plan assets
was invested in the Nations Disciplined Equity Fund (representing a 40%
ownership interest in such Portfolio);
(iv) A total of approximately $320,642,000 in In-house Plan assets
was invested in the Nations Managed Index Fund (representing a 45%
ownership interest in such Portfolio);
(v) A total of approximately $424,183,000 in In-house Plan assets
was invested in the Nations Equity Index Fund (representing a 41%
ownership interest in such Portfolio);
(vi) A total of approximately $112,622,000 in In-house Plan assets
was invested in the Nations Emerging Growth Fund (representing a 50%
ownership interest in such Portfolio);
(vii) A total of approximately $40,322,000 in In-house Plan assets
was invested in the Nations Managed SmallCap Value Index Fund
(representing a 20% ownership interest) in such Portfolio; and
(viii) A total of approximately $216,341,000 in In-house Plan
assets
[[Page 39354]]
was invested in the Nations Small Company Growth Fund representing a
43% ownership interest in such Portfolio).\4\
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\4\ As previously noted, the Department is expressing no opinion
regarding the applicability of PTE 77-3 to the acquisition of the
Shares by the In-house Plan. In addition, the Department is
expressing no opinion as to the applicability of section 404 of
ERISA to the acquisition of the Shares by the In-house Plan. In this
regard, the Department directs the applicant's attention to an
advisory opinion issued to Federated Investors [Advisory Opinion 98-
06A (July 30, 1998)], in which the Department noted that if the
decision by a plan fiduciary to enter into a transaction is not
``solely in the interest'' of the plan's participants and
beneficiaries, e.g., if the decision is motivated by the intent to
generate seed money that facilitates the marketing of the mutual
fund, then the plan fiduciary would be liable for any loss resulting
from such breach of fiduciary responsibility, even if the
acquisition of mutual fund shares was exempt by reason of PTE 77-3.
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8. BAC represents that it is possible that the In-house Plan
fiduciaries may at a later date determine that it is in the best
interest of the In-house Plan and its participants and beneficiaries to
redeem the In-house Plan's interest in Portfolios, other than those
described in Paragraphs 6 and 7 above, for which a BAC subsidiary
provides investment advisory services. Consequently, in the event that
this proposed exemption is granted, and to the extent that all of the
terms and conditions of the exemption, as granted, are met, the relief
requested herein shall apply to any such future redemption.
9. The applicant states that the proposed Redemptions involve
ministerial transactions to be performed in accordance with pre-
established objective procedures. As a result, the applicant represents
that the proposed transactions do not permit the trustee or any
affiliate of the trustee to use its influence or control to purchase
particular securities from the Portfolios.\5\ In addition, the
applicant states that all Portfolio Shares are offered and sold
exclusively through the use of prospectuses and materials provided
pursuant to the requirements of the Securities Act of 1933 and the 1940
Act and the rules and regulations thereunder.
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\5\ BAC represents that Bank of America's predecessor,
NationsBank, N.A., determined to discontinue offering discretionary
trustee and investment management services to third party employee
benefit plans in September of 1997. As a result, all but a de
minimus amount of third party employee plan assets have been
redeemed from the Nations Funds.
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10. The applicant states that, to the extent possible, the In-house
Plan will transfer Shares in return for a proportionate share of the
securities held by each Portfolio. According to the applicant, the In-
house Plan will receive only cash and Transferrable Securities pursuant
to any Redemption. In this regard, each Transferrable Security subject
to a Redemption will be transferred in-kind to the In-house Plan.
However odd lot securities, fractional shares and accruals on such
securities may be transferred in cash. In addition, securities which
are not Transrrable Securities will be transferred in cash. The
applicant states that the proposed Redemptions will be therefore be
carried out, to the extent possible, on a pro rata basis as to the
number and kind of securities transferred to the In-house Plan.\6\
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\6\ According to the applicant, the securities actually
transferred from any particular Portfolio may have different
purchase dates and tax bases attached to them as compared with
otherwise identical securities remaining in the Portfolio.
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11. The applicant represents that, for purposes of the Redemptions,
the values of the Portfolio securities will be determined based on the
current market price of such securities as of the close of business on
the date of the Redemption request (the Valuation Date). The value of
the securities in each Portfolio will be determined by using the
valuation procedures described in Rule 17a-7 under the 1940 Act. In
this regard, the ``current market price'' for specific types of
securities held by the Nations Funds will be determined as follows:
a. If the security is a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the
1934 Act), the last sale price with respect to such security reported
in the consolidated transaction reporting system (the Consolidated
System) for the Valuation Date; or, if there are no reported
transactions in the Consolidated System that day, such price will equal
the average of the highest current independent bid and the lowest
current independent offer for such security (reported pursuant to Rule
11Ac1-1 under the 1934 Act), as of the close of business on the
Valuation Date.
b. If the security is not a reported security, and the principal
market for such security is an exchange, the ``current market price''
will equal the price of the last sale on such exchange on the Valuation
Date or, if there were no reported transactions on such exchange that
day, such price will equal the average of the highest current
independent bid and lowest current independent offer on the exchange as
of the close of business on the Valuation Date.
c. If the security was not a reported security and was quoted in
the NASDAQ system, the ``current market price'' will equal the average
of the highest current independent bid and lowest current independent
offer reported on NASDAQ as of the close of business on the Valuation
Date.
d. For all other securities, the ``current market price'' will
equal the average of the highest current independent bid and lowest
current independent offer, as of the close of business on the Valuation
Date, determined on the basis of reasonable inquiry. For securities in
this category, BAC intends to obtain quotations from at least three
sources that are broker-dealers or pricing services independent of and
unrelated to BAC. When more than one valid quotation is available, BAC
intends to use the average of the quotations to value the securities,
in conformance with interpretations by the SEC and practices under Rule
17a-7.
12. The applicant represents that, not later than 30 business days
after completion of a Redemption, the Nations Funds will confirm in
writing to the Independent Fiduciary the following: (i) The number of
Portfolio shares held by the In-house Plan immediately before the
Redemption (and the related per Share net asset value and the aggregate
dollar value of the shares held); (ii) the identity (and related
aggregate dollar value) of each security provided to the In-house Plan
upon the Redemption, including each security that was valued in
accordance with Rule 17a-7(b)(4), as described above; (iii) the price
of each such security for purposes of the Redemption; and (iv) the
identity of each pricing service or market-maker consulted in
determining the value of such securities. In accordance with the
conditions of this proposed exemption, similar procedures will be
implemented with respect to any future Redemptions of Shares of the
Portfolios by an employee benefit plan maintained by BAC for the
benefit of certain of its employees or the employees of its affiliates.
13. BAC represents that Independent Fiduciary Services, Inc. (IFS),
a registered investment adviser under the 1940 Act, has confirmed its
independence from BAC and is qualified to serve as an independent
fiduciary as that term is defined in Section II. IFS, in turn,
represents that it understands and will accept the duties,
responsibilities and liabilities in acting as a fiduciary under the Act
for the In-house Plan.
IFS represents that, initially, it was responsible for: (i)
analyzing, from an investment perspective, the fairness and
reasonableness of the methodology used with respect to each Redemption,
and (ii) giving its opinion as to the fairness and reasonableness of
such
[[Page 39355]]
methodology, as compared with a redemption for cash and subsequent
reinvestment of such cash, based on such analysis. This analysis and
opinion was set forth in a written report (the Report) dated March 1,
2000.\7\ Specifically, in the Report, IFS stated that:
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\7\ The Redemptions, as originally proposed and with respect to
which IFS expressed an opinion, included the redemption of In-house
Plan shares of the International Growth Fund (offered by NFI) and
the International Value Fund (offered by Nations Reserves, an open
end investment management company advised by BAAI). Bank of America
subsequently determined not to include the redemption of such shares
as part of the proposed Redemptions.
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(a) the Redemptions would likely avoid certain transactions costs
otherwise incurred in a cash redemption; \8\
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\8\ The Report states that if the In-house Plan were to receive
cash rather than securities pursuant to the transaction,
substantially all of that cash would be reinvested in securities
which would result in brokerage commissions and a buy-sell spread,
the costs of which would be incurred by the Plan. The Report states
further that depending on the form and timing of the Redemptions,
part of the Portfolios' selling costs might be absorbed by the In-
house Plan as a shareholder in the Portfolios. Therefore, according
to IFS, to the extent that the In-house Plan effects the Redemption
for retained securities, those costs will be avoided. IFS notes,
however, that the In-house Plan may sell up to $400 million of the
redeemed securities within a few months of the Redemptions. In this
regard, the Department notes that the fiduciaries must determine,
consistent with their fiduciary duties under section 404 of ERISA,
whether it is prudent to accept an in-kind redemption of Shares of
the Portfolios where the In-house Plan may incur transaction costs
in connection with the disposition of such redeemed securities
shortly after receipt.
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(b) The Shares and cash associated with the proposed Redemptions
will be calculated based on the Portfolios' respective statements of
assets and liabilities, valued in accordance with Rule 17a-7. In this
regard, IFS has reviewed a sample spreadsheet developed by BAC to
calculate the exact number of Shares and the residual cash to be
transferred, and believes the information provided to be conceptually
and mathematically correct;
(c) All securities held by the Portfolios, other than the non-
Transferrable Securities, are qualifying securities. The securities
held by the Portfolios will be identified from a listing supplied by
the Nations Funds' custodian, the Bank of New York. The Bank of New
York has stated that the Portfolios that will be subject to the
Redemptions currently holds no bonds or other securities (that are not
non-Transferrable Securities) whose value is normally quoted as a
percent of par, or in any way other than price per share.
(d) The proposed transactions would be in compliance with the In-
house Plan's investment guidelines.
The Independent Fiduciary represents that, if this proposed
exemption is granted and the Redemptions are thereafter undertaken, it
will be responsible for updating its findings and opinions to confirm
whether such findings and opinions are applicable as of the anticipated
date(s) of the Redemptions. In this regard, IFS states that it will
review each Redemption and confirm in writing whether such Redemption
was effectuated consistent with the required criteria and procedures
set forth in the Report. In carrying out this duty, IFS represents
that, if the proposed exemption is granted, it will conduct a post-
exemption review, which will include: (i) Reviewing the In-house Plan's
current investment policy guidelines, (ii) reviewing the In-house
Plan's investment portfolio and the Portfolios' assets as of the most
recent common date for which such data is available, (iii) estimating
whether the Excluded Assets are consistent with the types of securities
so defined, and whether the amount of these securities might be
material, and (iv) ascertaining whether the policies, procedures and
controls established for effectuating the transfers remain unchanged.
Moreover, IFS represented that it will conduct a post-transfer review
to provide an additional safeguard to the In-house Plan. In this
regard, IFS will evaluate and test whether the transfer was effectuated
consistent with the required criteria and procedures and confirm this
in writing. Consistent with this, IFS represents that if exemption is
granted, it will update the findings and opinions as set forth in the
Report so as to confirm whether they still apply as of the expected
date(s) of the transfer(s).
In the Report, IFS stated its opinion that the proposed Redemption
methodologies are fair to the In-house Plan and reasonable in all
material respects. In addition, IFS stated that the proposed
Redemptions are in the interests of the participants and beneficiaries
of the In-house Plan since the anticipated costs savings is likely to
be material. IFS concluded that if the exemption is granted, and all
other essential facts and circumstances of the Redemptions remain
materially unchanged at the time Bank of America seeks to effectuate
the Redemptions, it will issue a favorable recommendation regarding the
commencement of such effectuation.
13. In summary, it is represented that the proposed Redemptions
satisfy the statutory criteria for an exemption under section 408(a) of
the Act for the following reasons:
(A) The In-house Plan pays no sales commissions, redemption fees,
or other similar fees in connection with the Redemptions (other than
customary transfer charges paid to parties other than Bank of America
and Bank of America Affiliates);
(B) The assets transferred to the In-house Plan pursuant to the
Redemptions consist entirely of cash and Transferrable Securities.
Notwithstanding the foregoing, odd lot securities, fractional shares
and accruals on such securities may be distributed in cash;
(C) With certain exceptions defined below, the In-house Plan
receives a pro rata portion of the securities of the Portfolio upon a
Redemption that is equal in value to the number of Shares redeemed for
such securities, as determined in a single valuation performed in the
same manner and as of the close of business on the same day in
accordance with the procedures set forth in Rule 17a-7 under the 1940
Act (using sources independent of Bank of America and Bank of America
Affiliates);
(D) Bank of America, or any affiliate thereof, does not receive any
fees, including any fees payable pursuant to Rule 12b-1 under the 1940
Act, in connection with any redemption of the Shares.
(E) Prior to a Redemption, Bank of America provides in writing to
IFS a full and detailed written disclosure of information regarding the
Redemption;
(F) Prior to a Redemption, IFS provides written authorization for
such Redemption to Bank of America, such authorization being terminable
at any time prior to the date of the Redemption without penalty to the
In-house Plan, and such termination being effectuated by the close of
business following the date of receipt by Bank of America of written or
electronic notice regarding such termination (unless circumstances
beyond the control of Bank of America delay termination for no more
than one additional business day);
(G) Before authorizing a Redemption, based on the disclosures
provided by the Portfolios to IFS, IFS determines that the terms of the
Redemption are fair to the participants of the In-house Plan, and
comparable to and no less favorable than terms obtainable at arms-
length between unaffiliated parties, and that the Redemption is in the
best interest of the In-house Plan and its participants and
beneficiaries;
(H) Not later than 30 business days after the completion of a
Redemption, the relevant Fund will provide to IFS a written
confirmation regarding such Redemption containing:
[[Page 39356]]
(i) the number of Shares held by the In-house Plan immediately
before the Redemption (and the related per Share net asset value and
the total dollar value of the Shares held),
(ii) the identity (and related aggregate dollar value) of each
security provided to the In-house Plan pursuant to the Redemption,
including each security valued in accordance with Rule 17a-7(b)(4),
(iii) the current market price of each security received by the In-
house Plan pursuant to the Redemption, and
(iv) the identity of each pricing service or market-maker consulted
in determining the value of such securities;
(I) The value of the securities received by the In-house Plan for
each redeemed Share equals the net asset value of such Share at the
time of the transaction, and such value equals the value that would
have been received by any other investor for shares of the same class
of the Portfolio at that time;
(J) Subsequent to a Redemption, IFS performs a post-transaction
review which will include, among other things, a random sampling of the
pricing information supplied by Bank of America; and
(K) Each of the In-house Plan's dealings with: the Nations Funds,
the Investment Advisers, the principal underwriter for the Nations
Funds, or any affiliated person thereof, are on a basis no less
favorable to the In-house Plan than dealings between the Nations Funds
and other shareholders holding shares of the same class as the Shares.
Notice to Interested Persons: The applicant represents that because
those potentially interested participants and beneficiaries cannot all
be identified, the most practical means of notifying such participants
and beneficiaries of this proposed exemption, in addition to the
publication of this notice in the Federal Register, is by notifying
active participants by an individual direct interoffice mailing, and by
notifying participant retirees in pay status. The applicant represents
such notification covers more than 160,000 of the In-house Plan's
204,000 and that the time and expense of notifying the remaining
participants would be substantial. Comments and requests for a hearing
must be received by the Department not later than 60 days from the date
of publication of this notice of proposed exemption in the Federal
Register.
For Further Information Contact: Mr. Christopher J. Motta of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Sierra Health Services, Inc. Profit Sharing Plan (the Plan) Located
in Las Vegas, Nevada
[Applicant No. D-10884]
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 to the proposed sale by the Plan of certain
limited partnership interests (collectively, the Interest(s)) to Sierra
Health Services, Inc., (the Employer) the sponsor of the Plan and a
party in interest with respect to the Plan, provided that the following
conditions are met:
(a) The sale is a one-time transaction for cash;
(b) The Plan pays no commissions or any other expenses relating to
the sale;
(c) The sales price is the greater of (i) the fair market value of
the Interests as determined by a qualified, independent, appraiser (ii)
the value of the Interests, as determined by the general partner of
each partnership and reported on the most recent account statements
available at the time of the sale or
(iii) the Plan's original acquisition and holding costs.
(d) The Plan suffers no loss, as a result of its acquisition and
holding of the Interests, taking into account all cash distributions
received by the Plan as a result of owning the Interests.
Summary of Facts and Representations
1. The Employer is a diversified health care company that, through
its subsidiaries, provides and administers the delivery of managed care
benefit plans for employers, government groups, and individuals. The
Employer is the sponsor of the Plan. The Plan is a defined contribution
profit sharing plan. The Plan has 4,570 participants with account
balances and approximately $70,964,714.73 in total assets, as of
September 30, 2000. The non-liquid assets consist of the four limited
partnership units, the Interests.
2. Prior to the second quarter of 1999, Dreyfus Management, Inc.
(Dreyfus) acted as the trustee of the Plan holding only the employees'
contributions while the Employer acted as the trustee of the Plan
holding the Employer's contributions to the Plan. During the second
quarter of 1999, assets held in the Employer directed account were
transferred to Dreyfus. As of December 1999, the Employer combined the
previously segregated Employer contributions with employee's
contributions into a single fund under the control of an independent
trustee, with the exception of the Interests. A group of employees
makes up the 401(k) committee, which approves the guidelines for
investment of the Employer directed fund. The 401(k) committee retains
control over the assets involved in the proposed exemption transaction.
The Employer and the 401(k) committee represents that there is no
ready market for the Interests. The trustee fees for holding the
Interests temporarily until they can be disposed of is $15 per
participant, per year, which amounts to $29,190 annually based upon
1,946 participants as of December 31, 1998. Allowing the Employer to
purchase the Interests would eliminate the trustee fees to the
participants and the current administrative burden upon the Employer
caused by having to account for the illiquid assets outside of the Plan
administrator's custody. The Employer's efforts to find a buyer for the
Interests have been unsuccessful. As a result, the Plan now proposes to
sell the Interests for the greater of: (i) The ``adjusted cost basis''
of the Plan's investment in each Interest (the Adjusted Cost); (ii) the
fair market value of the Interests, as determined on the date of the
proposed sale by an independent, qualified, appraiser; or (iii) the
estimated value of the Interests, as determined by the general partner
of each partnership and reported on the most recent account statements
available at the time of the sale. The partnerships and their general
partners are unrelated to the Employer.
3. The Interests consist of:
(a) A 4.92% interest in the Centennial Parkway/Buffalo Drive
Limited Partnership (Centennial LP), holding 10 acres of unimproved
land in Clark County, Nevada. The Interest has not been used by the
Plan. The Interest was acquired by the Plan for investment purposes on
October 1, 1983 for $13,548.54 from the Centennial LP, an unrelated
party. The Centennial LP has generated $8,359 in income and incurred a
total of $3,422 in expenses. Therefore, the Adjusted Cost of Centennial
LP is $18,485.54 as of June 26, 2000 ($13,548.54 + $8,359 - $3,422 =
$18,485.54);
(b) A 5.74% interest in the Great North Limited Partnership (Great
North LP) holding 37.66 acres of unimproved
[[Page 39357]]
land in Clark County, Nevada. The Interest has not been used by the
Plan. The Interest was acquired by the Plan for investment purposes on
August 12, 1981 for $41,670 from the Great North Limited Partnership,
an unrelated party. The Great North LP has generated $19,057 in income
and incurred a total of $9,137 in expenses. Therefore, the Adjusted
Cost of Great North LP is $51,590 as of June 26, 2000 ($41,670 +
$19,057 - $9,137 = $51,590); and
(c) A 4.92% interest in the Nevada Rainbow Limited Partnership
(Nevada Rainbow LP) holding 38.39 acres of unimproved land in Clark
County, Nevada. The Interest has not been used by the Plan. The
Interest was acquired by the Plan for investment purposes on October 1,
1983 for $43,891.18 from the Nevada Rainbow Limited Partnership, an
unrelated party. The Plan received $30,000 on December 31, 1999. The
Nevada Rainbow LP has generated $6,155 in income and incurred a total
of $8,767 in expenses. Therefore, the Adjusted Cost of Nevada Rainbow
LP is $41,279.18 as of June 26, 2000 ($43,891.18 + $6,155 - $8,767 =
$41,279.18).
The value of the Interests, as determined by the Adjusted Cost is
$111,354.72 ($18,485.54 + $51,590 + $41,279.18 = $111,354.72).
4. William P. Geary (Mr. Geary), an accredited appraiser with
R.O.I. Appraisal, Ltd., located in Henderson, Nevada, performed the
appraisal (the Appraisal) of the Interest on June 26, 2000. Mr. Geary
states that he is a full time qualified, independent, appraiser, as
demonstrated by his status as a Certified General Appraiser, licensed
by the State of Nevada. In addition, Mr. Geary represents that both he
and his firm are independent of the employer.
In the Appraisal, Mr. Geary estimated the fair market value of each
of the Interests, taking into account commissions, expenses, and
discounts for the partial interest nature of these assets. Mr. Geary
analyzed the net asset value of each of the real estate limited
partnerships, based upon standard deductions for expenses, including
commissions, return of principal, preferred returns to limited
partners, preferred returns to general partners, and the remaining
profits to limited partners. Mr. Geary also analyzed the net asset
value on a per unit basis for each of the Interests owned by the Plan.
After analyzing all relevant data, Mr. Geary determined that the fair
market value of Centennial LP is $57,210, the fair market value of
Great North LP is $114,450, and the fair market value of Nevada Rainbow
LP is $112,990. Therefore, the Appraisal value is $284,650 as of June
26, 2000 ($57,210 + $114,450 + $112,990 = $284,650).
5. The value of the Interests, as determined by the general
partners (GPs) of each partnership as of December 31, 1999 is the
following:
(a) Centennial LP = $73,250;
(b) Great North LP = $111,056; and
(c) Nevada Rainbow LP = $121,500.
Therefore the price of Interests as valued by the GPs is $305,806
($73,250 + $111,056 + $121,500 = $305,806).
6. The Interests have been evaluated as follows:
----------------------------------------------------------------------------------------------------------------
Adjusted cost Appraisal GPs valuation
----------------------------------------------------------------------------------------------------------------
Centennial LP................................................... $18,485.54 $57,210 $73,250
Great North LP.................................................. 51,590 114,450 111,056
Nevada Rainbow LP............................................... 41,279.18 112,990 121,500
----------------------------------------------------------------------------------------------------------------
7. After selecting the greater price of the (i) the Appraisal, (ii)
the GPs valuation, or (iii) the Adjusted Cost, the sales price of the
Interests is $309,200 ($73,250 + $114,450 + $121,500 = $309,200).
8. The Employer represents that the subject transaction is in the
interest of the Plan because the Plan could not at this time sell the
Interests to an unrelated third party at other than a substantial
discount.
9. In summary, the Employer represents that the subject transaction
satisfies the statutory criteria for an exemption under section 408 of
the Act for the following reasons: (a) The sale will be a one-time
transaction for cash; (b) the Plan will not pay commissions nor other
expenses relating to the sale; (c) the Plan suffers no loss, as a
result of its acquisition and holding of the Interests, taking into
account all cash distributions received by the Plan as a result of
owning the Interests; and (d) the sale price for each Interest will be
the greater of: (i) The fair market value of the Interests as
determined by a qualified, independent, appraiser, (ii) the value as
determined by the general partner of each partnership and reported on
the most recent account statements available at the time of the sale,
or (iii) the Adjusted Cost.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons by personal delivery and by
first-class mail within 10 days of publication of the notice of
pendency in the Federal Register. Such notice shall include a copy of
the notice of prosed exemption as published in the Federal Register and
shall inform interested persons of their right to comment and/or
request a hearing with respect to the proposed exemption. Comments and
requests for a hearing are due within 40 days of the date of
publication of the notice in the Federal Register.
For Further Information Contact: Mr. Khalif I. Ford of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
Riggs Bank N.A., Located in Washington, D.C.
[Exemption Application No. D-10928]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act, and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply to: (a) The extension of credit (the Advance or
Advances) by Riggs Bank N.A. (Riggs) to a participant-directed
individual account plan (Plan); and (b) the Plan's repayment of an
Advance or Advances, plus accrued interest.
Section II--Conditions
The relief provided under Section I is available only if the
following conditions are met:
(a) Each Advance is made in connection with the administration of a
portion of the Plan's assets by Riggs as a unitized fund (Unitized
Fund) in order to facilitate redemptions from the Unitized Fund.
(b) Each Advance is made in accordance with the terms of a written
agreement (the Agreement) that describes terms and procedures for the
[[Page 39358]]
Advances, including standing instructions addressing the initiation,
amount, repayment and formula or method for determining the interest
rate payable with respect to each Advance and is approved in writing by
a fiduciary of the Plan who is independent of and not an affiliate of
Riggs (Independent Plan Fiduciary).
(c) Interest payable by the Plan on each Advance is determined in
accordance with an objective formula or method described in the
Agreement.
(d) The Plan repays each Advance and accrued interest in accordance
with the terms of the Agreement within ten (10) business days after the
initiation of the Advance.
(e) Each Advance is unsecured.
(f) The aggregate amount advanced on any business day that an
Advance is initiated does not, after the Advance is made, exceed 25% of
the total market value of the Unitized Fund.
(g) On the date that an Advance is initiated, Riggs provides the
Independent Plan Fiduciary with notice of the amount of the Advance and
the actual interest rate to be applied.
(h) Within ten (10) days after an Advance is fully repaid, Riggs
provides the Independent Plan Fiduciary with a confirmation statement
which includes the date of repayment, the amount of the Advance, the
actual interest rate applied, and the total amount of interest paid by
the Plan.
(i) The Agreement may be terminated by the Independent Plan
Fiduciary at any time, subject to the Plan's repayment of any
outstanding Advances.
(j) The Advances are made on terms at least as favorable to the
Plan as those the Plan could obtain in an arm's-length transaction with
an unrelated party.
(k) Neither Riggs nor its affiliate has or exercises any
discretionary authority or control with respect to the initiation of an
Advance, the amount of an Advance, the interest rate payable on an
Advance, or the repayment of the Advance.
(l) The fair market value of the assets in the Unitized Fund is
determined by an objective method specified in the Agreement. In the
case of employer stock, such stock must be stock for which market
quotations are readily available from independent sources.
(m) Riggs or its affiliate is not (i) a trustee of the Plan (other
than a nondiscretionary trustee who does not render investment advice
with respect to the assets of the Unitized Fund), (ii) a plan
administrator (within the meaning of section 3(16)(A) of the Act and
Code section 414(g)), (iii) a fiduciary who is expressly authorized in
writing to manage, acquire or dispose of on a discretionary basis any
assets of the Unitized Fund, or (iv) an employer any of whose employees
are covered by the Plan.
(n) (a) Riggs will maintain or cause to be maintained for a period
of six years from the date of the granting of the exemption proposed
herein the records necessary to enable the persons described in
paragraph (b) to determine whether the conditions of this exemption
have been met, except that:
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Riggs, the
records are lost or destroyed prior to the end of the six-year period;
and
(2) No party in interest, other than Riggs, 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 (b); and
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act,
the records referred to in paragraph (a) are unconditionally available
at their customary location for examination during normal business
hours by: (A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service; (B) Any fiduciary of the
Plan, or any duly authorized employee or representative of such
fiduciary; and (C) Any participant or beneficiary of the Plan or duly
authorized representative of such participant or beneficiary.
(2) None of the persons described in paragraph (b)(1)(B) and
(b)(1)(C) shall be authorized to examine trade secrets of Riggs or
commercial or financial information which is privileged or
confidential.
Section III--Definitions
(a) The term ``affiliate'' means (i) any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such other person; (ii) any officer,
director, or partner, employee or relative (as defined in section 3(15)
of the Act) of such other person; and (iii) any corporation or
partnership of which such other person is an officer, director or
partner.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Effective Date: If the proposed exemption is granted, the exemption
will be effective as of September 11, 2000.
Summary of Facts and Representations
1. Riggs is a wholly-owned subsidiary of Riggs National
Corporation, a Washington, DC-based financial services holding company
incorporated in the State of Delaware. Riggs provides diverse products
and services within the financial services industry, including
traditional banking services to retail, corporate and commercial
customers, international banking, trust services, and investment
management services. In 1999, Riggs earned $31.6 million in net income
and had total assets of $5.7 billion at year-end, with more than 1,500
employees.
In addition to its traditional banking services, Riggs provides
fiduciary and administrative services to employee benefit plans through
its financial services division, Riggs & Company. Riggs's employee
benefit plan customers include tax-qualified defined benefit plans and
welfare plans, and, as here relevant, tax-qualified defined
contribution plans (e.g., 401(k) plans) that offer participants the
opportunity to direct the investment of their individual accounts among
a selection of investment options (Plans). Riggs's services to Plans
include trustee and custodial services, recordkeeping, and other
administrative services, including as here relevant, unitization
services.
As described more fully below, unitization services facilitate
daily trading between investment options offered under a plan by
permitting daily trading of plan investment options that would
otherwise not be able to be traded or settled within one day. A
Unitized Fund would generally consist of an investment that is not
traded on a daily basis (e.g., company stock) and liquid investments
(e.g., money market fund shares). Unitization services permit daily
transactions by establishing ``units'' representing undivided interests
in all of the assets of the Unitized Fund. Riggs establishes a daily
unit value by dividing the market value of the Unitized Fund by the
number of units held by participants, and on a daily basis, processes
participant contributions to and withdrawals from the Unitized Fund as
purchases and sales of units at the daily unit value. When cash is
required to settle transactions in units resulting from participant
withdrawals and exchanges of units from the Unitized Fund, the cash
requirements are satisfied first from the liquid investments of the
Unitized Fund and then, shares of the
[[Page 39359]]
Unitized Fund investments may be sold to restore the liquidity. Riggs
proposes to offer Plans the opportunity to receive short-term cash
advances (Advance or Advances) from Riggs if the cash portion of a
Unitized Fund is insufficient to cover unit redemption requests on a
particular business day.
2. Riggs's services to participant-directed Plans are provided
primarily in connection with the DCXchange trading system.
DCXchange is a proprietary system owned by PFPC Inc., the
fund servicing subsidiary of PNC Bank Corp., and is unrelated to Riggs.
DCXchange is maintained and operated by PFPC Distributors, a
registered broker-dealer and a PFPC Inc. affiliate.
Generally, Plans participate in DCXchange through a
third-party administrator or other service provider that performs the
Plan's recordkeeping services (the recordkeeper). DCXchange
provides an automated link between the recordkeeper's participant
recordkeeping system and mutual fund transfer agents. This linkage
allows participant investment transactions (e.g., contributions,
withdrawals and exchanges between investment options) to be transmitted
to and processed by mutual funds on a daily basis.
DCXchange is linked to more than 700 different mutual
funds and also can be linked to other types of investments, if the
investment is administered to permit daily trading. For example,
investments available for daily trading through DCXchange
include interests in certain collective trust funds maintained by
banks. In providing unitization services, Riggs administers other types
of Plan investments to permit daily trading on DCXchange.
3. Riggs provides a variety of services to Plans participating in
DCXchange. Where a Plan engages Riggs to serve as a trustee
or custodian and as recordkeeper to provide participant recordkeeping
services, Riggs uses DCXchange to process the Plan's
investment transactions. Plans receiving trust or custodial and
recordkeeping services from Riggs may invest among a broad selection of
mutual funds, including mutual funds advised by Riggs Investment
Management Corporation (RIMCO), a Riggs affiliate, as well as mutual
funds not affiliated with Riggs.
In other cases, Riggs may be engaged as trustee or custodian to a
Plan that has engaged a recordkeeper that is not affiliated with Riggs.
In still other cases, another bank or trust company that maintains the
direct contractual relationship with the Plan and provides participant
recordkeeping (or engages a recordkeeper for the Plan) may subcontract
with Riggs to provide custodial services.\9\ In these cases, the
recordkeeper maintains participant records, receives participant
investment instructions, and submits the Plan's investment transactions
through DCXchange. Riggs, as trustee or custodian, holds the
Plan's assets and transfers and receives Plan funds as needed to settle
the Plan's investment transactions in accordance with
DCXchange procedures.\10\
---------------------------------------------------------------------------
\9\ Banks and trust companies ``outsource'' custody and
settlement responsibilities to Riggs because Riggs has developed
computer systems and internal expertise that allow Riggs to provide
custody and transaction settlement services efficiently in
connection with DCXchange trading platform.
\10\ Riggs also serves as a ``master custodian'' for Plan assets
as funds are transferred between Plans and mutual funds to settle
investment transactions through DCXchange. In this regard,
trustees of Plans that participate in DCXchange engage
Riggs to act as master custodian under a standardized master custody
agreement to hold Plan funds in certain ``master'' accounts
maintained in connection with DCXchange. A master
contributions account temporarily holds new contributions pending
investment (DCXchange does not process orders for
purchases of mutual funds shares unless the purchase amount is on
deposit in the contributions account). A master disbursement account
holds redemption proceeds from mutual funds temporarily until the
proceeds are reinvested or forwarded to a Plan trustee for
distribution to participants in accordance with the Plan terms.
Riggs's services as master custodian are separate and apart from its
provision of unitization and other services to Plans.
---------------------------------------------------------------------------
Riggs may provide unitization services to Plans where Riggs is a
trustee or custodian (whether or not Riggs is recordkeeper). In some
cases, Riggs may be engaged by the Plan solely to provide unitization
services and Riggs would have custody of the Plan's assets only to the
extent required for the administration of the Unitized Fund.
4. Because participant-directed Plans generally offer mutual funds
as investment options, procedures for investments, exchanges and
redemptions under these Plans (including procedures established for
DCXchange) accommodate mutual fund trading practices. Under
procedures established for DCXchange, participant investment
transactions would generally be processed as follows:
(a) After the close of business on each trade date, mutual fund
transfer agents calculate the daily net asset value (NAV) at which
shares may be purchased or redeemed for each mutual fund; recordkeepers
receive the daily NAV for each mutual fund through the
DCXchange system;
(b) The recordkeeper processes participant instructions for
exchanges between investment options and Plan withdrawals that are
submitted to the recordkeeper before a cut-off time (e.g., 3 p.m.) on
any business day (the trade date or T), and purchase orders resulting
from new Plan contributions received on the trade date, using the daily
NAV provided for each mutual fund at the close of business on that
trade date;
(c) The recordkeeper aggregates participant transaction information
to create a single Plan purchase or redemption order for each mutual
fund offered as a Plan investment option. The recordkeeper submits
these orders to the mutual funds through DCXchange during the
night, or possibly, very early on the next business day (T+1);
(d) On T+1, the purchase and redemption transactions are settled
through DCXchange by the transfer of money from the master
contributions account for purchases to the mutual funds and the
collection of the redemption proceeds from the mutual funds which are
held in the master disbursement account. Redemption proceeds are
reinvested on T+1 if the redemption transaction is processed as part of
an exchange between Plan investment options, or transferred to the Plan
trustee if withdrawn from the Plan;
(e) In the case of an exchange between investment options offered
under a Plan, the recordkeeper may process the exchange as a
simultaneous redemption and purchase transaction on T, and both
transactions are settled on T+1.
These procedures are successful because mutual funds meet two
important requirements: The transfer agent establishes a daily NAV for
processing purchases and redemptions; and mutual funds maintain
liquidity that permits payment of redemption proceeds on T+1. Interests
in collective trust funds also may be traded on a daily basis under
these procedures if administered to allow daily contributions and
withdrawals.
Some investment options that Plan sponsors may wish to offer
participants do not meet requirements for daily trading. For example:
(a) Purchase and sale transactions involving employer stock owned
by a Plan typically settle on a ``T+3'' basis, which means that
proceeds upon the sale of employer stock may not be received for three
business days after the day of a sale transaction.
(b) ``Stable value funds'' typically hold insurance company
guaranteed investment contracts (GICs) or other investments that
provide a benefit-responsive guarantee (e.g., so-called ``alternative''
stable value contracts, such as ``synthetic GICs''), which may require
up to ten (10) days notice for withdrawals.
[[Page 39360]]
(c) Withdrawals from a Plan account managed by an investment
manager within the meaning of section 3(38) of the Act (managed
account) might require sales of securities owned in the managed
account. Like employer stock, sales of securities from a managed
account generally would settle on a ``T+3'' basis.
Unitization services provided by Riggs allow participants to engage
in daily transactions involving these types of Plan investment options
by providing a daily price and liquidity that permits withdrawals on
any business day.
5. Unitized Fund administration is a ministerial service that Riggs
performs under specific instructions from a Plan fiduciary independent
of Riggs (Independent Plan Fiduciary). The Independent Plan Fiduciary
may be the Plan administrator described in section 3(16)(A) of the Act,
another Plan fiduciary responsible for determining the Plan's
investment options, or an investment manager described in section 3(38)
of the Act appointed for a Plan. All of the Independent Plan
Fiduciary's instructions are provided in, or in accordance with, a
written unitization agreement (the Agreement) made between Riggs and
the Independent Plan Fiduciary. Among other things, the Agreement
provides standing instructions addressing the initiation, amount,
repayment and formula or method for determining the interest rate
payable with respect to each Advance. The terms of the Agreement are
approved in writing by the Independent Plan Fiduciary.
Riggs has developed criteria to determine when unitization is
appropriate, which include factors such as Plan asset size, number of
Plan participants, the size of the Unitized Fund, and the type and
nature of the Unitized Fund assets (e.g., whether exchange-traded and
readily available, or less liquid). In the case of employer stock, the
stock must be a ``qualifying employer security'' as described in
section 407(d)(5) of the Act and the Plan's ownership of the employer
stock must be permitted under section 407 of the Act. Additionally,
such employer stock must be stock for which market quotations are
readily available from independent sources.
Under the Agreement, the Independent Plan Fiduciary directs Riggs
to establish a Unitized Fund consisting of the assets that are the
primary investment under the Plan investment option to be unitized and
cash, or cash equivalent investments, that provide liquidity for the
Unitized Fund (the cash portion) in order to facilitate daily trading.
For example, a unitized employer stock fund would consist of shares of
employer stock and a cash portion; a unitized stable value fund would
consist of GICs and/or alternative stable value contracts and a cash
portion, and a unitized managed account would consist of investments
selected and managed by the Plan's investment manager and a cash
portion. In addition, if a Plan wishes to offer a mutual fund that does
not participate in DCXchange, the Independent Plan Fiduciary
may direct Riggs to establish a Unitized Fund consisting of shares of
the mutual fund and a cash portion.
In most cases, the Independent Plan Fiduciary directs Riggs to
invest the cash portion in shares of the Riggs Prime Money Market Fund
(the RIMCO Money Market Fund), a unit investment trust managed by
RIMCO. In this regard, Riggs is able to submit redemption orders for
shares of the RIMCO Money Market Fund on any business day and receive
cash on the Plan's behalf on the same business day, which allows Riggs
to transfer funds to settle redemptions from the Unitized Fund on T+1
as required under the DCXchange procedures. The Independent
Plan Fiduciary may direct Riggs to invest the cash portion of a
Unitized Fund in investments other than the RIMCO Money Market Fund,
provided that the investment offers similar liquidity.
Riggs's fees for unitization services are also described in the
Agreement. Generally, the fees may include an initial set-up charge and
an annual administration charge which may be a fixed amount, a fee
based on the value of assets in the unitized account, or a combination
of both.
In no event will Riggs have any discretionary authority or control
or provide any investment advice (as described by section 3(21) of the
Act and regulations thereunder) with respect to the selection of the
assets of a Unitized Fund. In this regard, the Independent Plan
Fiduciary or an investment manager appointed in accordance with Plan
terms and independent of Riggs would be solely responsible for
determining the investments of the Unitized Fund, and as further
described below, providing Riggs with specific instructions regarding
the operation of the Unitized Fund. In addition, Riggs does not provide
any asset allocation or other services that may affect or influence
participant transactions involving a Unitized Fund.
6. To establish a Unitized Fund, the Independent Plan Fiduciary
directs Riggs in the Agreement to calculate the market value of assets
owned by the Plan in connection with the investment option to be
unitized (e.g., the employer stock or other investments of the option
and the cash portion) on the first day that the option is unitized (the
unitization date) and then establish ``units'' of the Unitized Fund by
dividing the market value by a proposed initial unit value. Typically,
an initial number of units is determined by dividing the current market
value of the combined assets by $10. On the unitization date, the
recordkeeper allocates the units to participant accounts based on each
participant's pro rata interest in the Unitized Fund.
Each business day after the unitization date, the Agreement
requires Riggs to establish a daily unit price based on the current
market value of the Unitized Fund. Procedures for determining current
market value are specified in the Agreement and would require an
objective method so that Riggs does not have any discretion in
determining the market value of the Unitized Fund or unit price. For
example, in the case of employer stock, the Agreement may require Riggs
to value the stock at the closing price on the New York Stock Exchange.
Securities issued by mutual funds would be valued at the daily net
asset value published by the mutual fund. In the case of GICs or
alternative stable value contracts, the Agreement would generally
direct Riggs to use book value as reported by the contract issuer. In
the case of a managed account, the investment manager may value the
managed account, or Riggs may determine the value if Riggs has custody
of the managed account assets.
Riggs provides the daily unit price for each Unitized Fund to
DCXchange after the close of each business day.
DCXchange makes the unit price available to the Plan's
recordkeeper for purposes of processing new participant investments in
the Unitized Fund, withdrawals from the Unitized Fund, and participant-
directed exchanges involving the Unitized Fund.
7. Each business day, the Plan's recordkeeper aggregates all
participant investment transactions involving the Unitized Fund to
create a Plan purchase and redemption order for units of the Unitized
Fund. The recordkeeper submits the purchase and redemption orders to
DCXchange on the same basis that the recordkeeper submits
orders for the mutual fund investment options offered under the Plan.
DCXchange then transmits the orders to Riggs.\11\
---------------------------------------------------------------------------
\11\ Generally, the Plan's recordkeeper is party to the
Agreement and agrees to process participant investment transactions
involving the Unitized Fund in accordance with requirements that
accommodate Riggs's provision of unitization services, as described
by the Agreement. In the case of a managed account, the investment
manager may also be party to the Agreement and would agree to assist
Riggs in providing untization services by, e.g., providing daily
valuation information and selling assets of the managed account when
required for liquidity purposes.
---------------------------------------------------------------------------
[[Page 39361]]
Upon receipt of a purchase order through DCXchange ,
Riggs increases the total number of units of the Unitized Fund by the
number of units purchased and accepts funds transferred to Riggs to pay
for the units purchased. Upon receipt of a unit redemption order, Riggs
reduces the number of units accordingly and forwards funds to settle
the unit redemptions.
8. The Agreement includes specific instructions for the management
of liquidity of a Unitized Fund. Specifically, the Independent Plan
Fiduciary must specify a ``target liquidity,'' which specifies the
intended size of the cash portion in comparison with the total assets
of a Unitized Fund. The target liquidity would be established at a
level that reasonably provides enough cash to accommodate the expected
volume of redemption transactions generated by participants in the
ordinary course. A typical target liquidity may range from 1% to 10%,
depending on factors such as the size of the Unitized Fund, the average
trading volume of assets held in the Unitized Fund, the number of
participants with an interest in the Unitized Fund, and the relative
size of each participant's interest in the Unitized Fund.
The Agreement also specifies a ``liquidity variance'' that defines
the range within which the actual value of the cash portion as compared
to total value of the Unitized Fund (actual liquidity) may vary from
the target liquidity. If the actual liquidity exceeds the target
liquidity by more than the liquidity variance, excess amounts must be
immediately invested. If the actual liquidity is less than the target
liquidity by more than the target variance, then some Unitized Fund
investments must be liquidated to increase the cash portion.
The Agreement always provides Riggs with specific instructions for
making new investments on behalf of the Unitized Fund or liquidating
investments of a Unitized Fund. In the case of employer stock, Riggs is
generally directed to place a purchase or sell order to restore the
Unitized Fund to target liquidity on the business day that the excess
liquidity or liquidity shortfall is identified. For unitized stable
value funds, the Independent Plan Fiduciary must provide Riggs with
specific instructions as to which contracts Riggs should make deposits
to or request withdrawals from. In the case of a managed fund, the
Agreement generally requires Riggs to notify the Plan's investment
manager of excess liquidity or a liquidity shortfall and the manager is
responsible for buying or selling account assets to restore the actual
liquidity of the managed account to the permitted range.
9. Whenever the actual liquidity of a Unitized Fund falls below the
target liquidity by more than the liquidity variance, assets of the
Unitized Fund must be liquidated to restore the target liquidity. If
employer stock or other securities, which settle on a ``T+3'' basis,
are sold, the sale proceeds usually would be received after three
business days. Some transactions may take longer to settle, for
example, withdrawals from GICs or alternative stable value contracts
may require up to ten days. Nevertheless, as long as the cash portion
of the Unitized Fund is sufficient to cover unit redemption requests
submitted to Riggs on each business day, unit redemptions can be
processed and settled on a daily basis in accordance with DCXchange
procedures.
From time to time, the actual liquidity of a Unitized Fund may not
provide sufficient liquidity for the unit redemption requests on a
business day. If requests for redemptions exceed the actual liquidity
of the Unitized Fund, the Agreement generally requires Riggs to reject
all requests for unit redemptions submitted to the Unitized Fund for
that business day and immediately proceed to sell assets to obtain the
liquidity necessary to satisfy the rejected requests. Once actual
liquidity is increased to the amount required to satisfy the rejected
unit redemption requests, Riggs notifies the recordkeeper to resubmit
the redemption orders through DCXchange . The redemptions are
processed at the unit price established the business day on which the
redemptions are resubmitted.\12\
---------------------------------------------------------------------------
\12\ Generally, the Agreement would instruct Riggs to continue
to accept unit purchase orders even if unit redemption orders have
been rejected.
---------------------------------------------------------------------------
Riggs's experience is that it is expensive and burdensome to Plans
and participants to reject unit redemptions due to insufficient
liquidity for several reasons. First, the reversal of a transaction is
an exception from typical administrative procedures and, therefore,
must be processed and reconciled manually rather than on automated
recordkeeping systems; this increases recordkeeping expenses incurred
by Plans and participants and increases the opportunity for
recordkeeping and reconciliation errors. Second, until the reversed
transaction is posted to participant accounts, participant account
records (which are available to participants on a daily basis) will be
inaccurate.
Most important, the unit redemption requests are likely to be
requested in connection with a participant's request for an exchange
from a Unitized Fund to another Plan investment option. If the Unitized
Fund redemption requests cannot be settled, the corresponding purchases
of shares or units of the other Plan investment options also must be
reversed. As noted, Riggs does not receive unit redemption orders from
DCXchange until T+1, by which time, a corresponding purchase
order would also have been received by the mutual fund transfer agent.
In many cases, it is not possible to stop a purchase of mutual fund
shares. Instead, the shares must be resold at the then current market
price. If there has been a one-day change in share price, the Plan may
be liable for the difference.
One way to reduce the risk that any unit redemptions may be
rejected is to increase the Unitized Fund's target liquidity. In this
regard, the Agreement generally requires Riggs to notify the
Independent Plan Fiduciary each time that unit redemptions are rejected
so that the Independent Plan Fiduciary can evaluate whether target
liquidity is appropriate and increase target liquidity as needed.
However, increasing target liquidity affects the risk and return
characteristics of the Unitized Fund, which is an undesirable result in
the view of many Plan fiduciaries. In many cases, increases in the
portion of a fund invested in cash and cash equivalents reduces the
fund's investment return over the long-term as compared to the return
that could be obtained by a fund with a smaller cash portion.
10. To avoid the administrative difficulties and expense that may
result from rejecting unit redemptions and reversing corresponding
purchases from a mutual fund or Unitized Fund, Riggs proposes to offer
Plans Advances from Riggs if the cash portion of a Unitized Fund is
insufficient to cover unit redemption requests on a particular business
day. The proposed exemption requires the Plan to repay the principal
amount of an Advance and accrued interest within ten business days
after the initiation of the Advance.
As a service provider to Plans, Riggs is a party in interest to
such Plans. Therefore, Riggs represents that Advances by Riggs to Plans
in connection with its unitization services, and the receipt by Riggs
of interest
[[Page 39362]]
thereon, may raise issues under section 406(a) of the Act. To resolve
this issue, Riggs is requesting an exemption from the prohibitions of
section 406(a) of the Act that would permit Riggs to make Advances to
Plans to facilitate the administration of a Unitized Fund, and to earn
interest on the Advances.
11. The Advances would be available under procedures reviewed and
approved by the Independent Plan Fiduciary and incorporated into the
Agreement. The Agreement will describe the terms and procedures for the
Advances, including standing instructions addressing the initiation,
amount, repayment and formula or method for determining the interest
rate payable with respect to each Advance. For example, the Agreement
might specify a formula for determining the interest on Advances based
on a published indexed interest rate established by an independent
third party (e.g., the London Interbank Offered Rate or the U.S.
Federal Reserve's Cost of Funds Index) and provide for daily accrual of
interest until the Advance is repaid. Riggs will not have or exercise
any discretion with respect to how the rate is determined under the
formula or method. Interest on Advances will be an operating expense of
a Unitized Fund and will be paid from the assets of the Unitized Fund.
12. The Agreement governing the Advances will limit the total
amount that Riggs may advance to a Plan to 25% of the total market
value of the Unitized Fund on the business day that any Advance is
made. Such limits will be imposed because Advances are intended to
facilitate the administration of a Unitized Fund in the ordinary course
of business. If the liquidity needed to settle redemption requests on a
particular business day exceeds a limit set on Advances, Plan
fiduciaries would wish to review whether the Plan should continue
``daily trading'' in participant interests in the Unitized Fund. The
fair market value of the assets of the Unitized Fund is determined by
an objective method specified in the Agreement.
13. Advances will not be secured or collateralized. Riggs will
generally be directed under the Agreement to automatically sell or
redeem assets of a Unitized Fund on any business day that the actual
liquidity of a Unitized Fund falls below the target liquidity by more
than the liquidity variance. Further, Riggs generally will be directed
by the Agreement to automatically collect the amount of an Advance and
accrued interest from proceeds received upon the sale or redemption of
those assets.
14. The Agreements are not expected to include provisions governing
actions to be taken if an Advance is not repaid. Riggs does not
anticipate that a situation would arise in which Riggs would not be
repaid from the proceeds of the sale or redemption of assets for the
unitized account in accordance with the Agreement.
15. Riggs will provide notice to the Independent Plan Fiduciary
about each Advance at the time the Advance is made and after the
Advance is repaid. Specifically, on the date that an Advance is
initiated, Riggs will notify the Independent Plan Fiduciary of the
principal amount of the Advance and the interest rate to be applied.
Within ten days after an Advance is fully repaid, Riggs will provide
the Independent Plan Fiduciary with a confirmation including the date
of repayment, the amount of the Advance, the actual interest rate
applied, and the total amount of interest paid by the Plan.
16. The Agreement may be terminated by the Independent Plan
Fiduciary at any time, subject to the Plan's repayment of any
outstanding Advances made as required by the terms of the Agreement.
The Advances will be made on terms at least as favorable to the Plan as
those the Plan could obtain in an arm's-length transaction with an
unrelated party.
17. Neither Riggs nor an affiliate may have or exercise any
discretionary authority or control with respect to the initiation of an
Advance, the amount of an Advance, the interest rate payable on an
Advance, or the repayment of an Advance. These circumstances are
determined by the Independent Plan Fiduciary and are set forth in the
Agreement. In addition, Riggs or an affiliate may not be (i) a trustee
of the Plan (other than a nondiscretionary trustee who does not render
investment advice with respect to the assets of the Unitized Fund),
(ii) a Plan administrator, (iii) a fiduciary who is expressly
authorized in writing to manage, acquire, or dispose of, on a
discretionary basis, any assets of the Unitized Fund, or (iv) an
employer any of whose employees are covered by the Plan.
18. In summary, the applicant represents that the subject
transactions satisfy the criteria contained in section 408(a) of the
Act for the following reasons:
(a) The requested exemption will be administratively feasible
because the Advances will be monitored by the Independent Plan
Fiduciary of each Plan. Thus, the level of oversight required by the
Department will be minimal.
(b) The requested exemption will be in the interests of Plan
participants and beneficiaries because it will allow Plans to avoid
rejections of the Unitized Fund redemption transactions because of
insufficient liquidity. This will protect Plan participants and
beneficiaries from the expense, inconvenience, possible recordkeeping
errors, and potential Plan exposure for trading losses on corresponding
purchase transactions for other Plan investments, which could result if
Unitized Fund liquidity is insufficient to settle the redemption on a
requested business day.
(c) The requested exemption will protect participants' and
beneficiaries' rights because (i) the terms and conditions of Advances
will be clearly disclosed in a written Agreement between Riggs and an
Independent Plan Fiduciary, which will specifically describe the
procedures under which Advances will be made and repaid, the amount of
each Advance, and the formula or method for determining interest; (ii)
the terms on which Advances would be made must be at least as favorable
to the Plan as a similar third-party arm's-length transaction; (iii)
the Agreement permitting the Advances can be terminated by the
Independent Plan Fiduciary at any time, without penalty; (iv) Riggs
will provide to the Independent Plan Fiduciary on the business day that
an Advance is made, a notice describing the amount of the Advance and
the interest rate payable, and within 10 business days of the repayment
of each Advance, notice confirming the amount of the Advance, the date
of repayment and the actual amount of interest paid by the Plan. These
notices provide an Independent Plan Fiduciary the ability to monitor
each Advance and ensure the Advances are appropriate and in the best
interest of the Plan's participants and beneficiaries; and (v) Riggs
will not have or exercise any discretionary authority or control over
the assets of the Plan invested in a Unitized Fund and will act solely
at the direction of an Independent Plan Fiduciary. In addition, Riggs
may not have a relationship to a Plan receiving Advances that might
provide Riggs any discretionary authority or control with respect to
the investment of the assets of the Unitized Fund or Advances to be
made to the Plan.
FOR FURTHER INFORMATION CONTACT: Karen Lloyd of the Department,
telephone (202) 219-8194. (This is not a toll-free number).
[[Page 39363]]
The Savings Plan for Employees of Florida Progress Corporation (the
Plan) Located in St. Petersburg, FL
[Application No. D-10953]
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 (or ERISA) 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) and section 407(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply,
effective November 30, 2000, to (1) the receipt, by the Plan, of
contingent value obligations (the CVOs), as a result of the Plan's
ownership of certain common stock (the Florida Progress Stock) in
Florida Progress Corporation (Florida Progress), the Plan sponsor; (2)
the continued holding of the CVOs by the Plan; and the (3) potential
resale of the CVOs by the Plan to Progress Energy, Inc. (Progress
Energy), a party in interest with respect to the Plan.
This proposed exemption is subject to the following conditions:
(a) The Plan received one CVO for each share of Florida Progress
Stock on the effective date of the share exchange between Florida
Progress and CP&L Energy, Inc. (CP&L Energy), the predecessor entity to
Progress Energy.
(b) All Florida Progress shareholders, including Plan participants,
received the CVOs in the same manner, so that the Plan participants and
beneficiaries were not in a less advantageous position than other
Florida Progress shareholders.
(c) The Plan's receipt of the CVOs, including other share exchange
consideration consisting of cash and/or shares of CP&L Energy stock
(the CP&L Energy Stock), resulted from shareholder approval and did not
relate to any unilateral exercise of discretion by a Plan fiduciary.
(d) Salomon Smith Barney, Inc. (Salomon Smith Barney) advised
Florida Progress that the consideration to be received by Florida
Progress shareholders in exchange for their shares of Florida Progress
Stock was ``fair,'' from a financial point of view.
(e) The Plan did not pay any fees or commissions in connection with
the acquisition of the CVOs, nor will it pay any fees or commissions in
connection with the holding or potential sale of the CVOs to Progress
Energy.
(f) An independent fiduciary, United States Trust Company, N.A.
(U.S. Trust)--
(1) Has overseen, and continues to oversee, the Plan's holding or
disposition of any CVOs for which the Plan does not receive any
investment direction and determines whether it is appropriate for the
Plan to sell the CVOs; and
(2) Retains the services of an independent appraiser to calculate
the price at which the CVOs are sold to Progress Energy in order to
ensure that adequate consideration is received.
(g) Plan participants have the same rights and flexibility as
unrelated parties and they may sell their CVOs at any time.
Effective Date: If granted, this proposed exemption will be
effective as of November 30, 2000.
Summary of Facts and Representations
1. Florida Progress is a Florida corporation with its principal
offices located in St. Petersburg, Florida. Florida Progress is a
diversified electric utility holding company. Florida Power Corporation
(Florida Power), a subsidiary of Florida Progress, is a regulated
public utility that is engaged in the generation, purchase,
transmission, distribution and sale of electricity. Florida Power
provides electric services to approximately of 1.3 million customers in
central and north Florida. In 1999, Florida Power accounted for 68
percent of the consolidated revenues of Florida Progress, 77 percent of
that company's assets and 84 percent of its net income. As of March 31,
2000, Florida Progress had total consolidated assets of approximately
$6.5 billion and total consolidated common stock equity of
approximately $2.0 billion. In addition, as of September 30, 2000,
Florida Progress had 98,616,919 shares of Florida Progress Stock issued
and outstanding.
Besides Florida Power, Florida Progress has diversified, non-
utility operations which are owned, directly or indirectly, through
Progress Capital Holdings, Inc., a Florida corporation and another
wholly owned subsidiary of Florida Progress. The diversified, non-
utility operations segment includes Electric Fuels Corporation, an
energy and transportation company, which owns and operates four
synthetic fuel plants (the EARTHCO Plants).
2. The Plan, which is sponsored by Florida Progress, is a defined
contribution plan. As of September 30, 2000, the Plan had 6,471
participants and assets having an aggregate fair market value of the
$624.6 million. Of the Plan's total assets, $152.8 million (24.5
percent) consisted of 2,887,714 shares of Florida Progress Stock which
represented 2.9 percent of the shares of such stock that were issued
and outstanding.
The trustee (the Trustee) of the Plan is The Vanguard Group, Inc.,
a mutual fund company, which provides trustee services to the Plan
through its affiliate, the Vanguard Fiduciary Trust Company. A Plan
investment committee, comprised of principals of Florida Progress, has
the authority to manage and control the assets, operation and
administration of the Plan.
The Plan provides participants with a variety of investment
options, one of which is a fund invested solely in Florida Progress
Stock (the Florida Progress Stock Fund). Each participant may direct
the Trustee to invest or reinvest his or her account in each available
fund on a daily basis.
3. Progress Energy, which was formerly known as ``CP&L Energy,
Inc.'' (or CP&L Energy as otherwise defined herein), is a North
Carolina corporation and the holding company for Carolina Power & Light
Company (CP&L). Progress Energy is engaged in the utility business and
it operates primarily through various direct and indirect subsidiaries.
At the time of the share exchange transaction described in this
proposed exemption, Progress Energy, then known as CP&L Energy,
operated through three subsidiaries, CP&L, North Carolina Natural Gas
Corporation (NCNGA), and Interpath Communications, Inc. (ICI). Also,
prior to the closing date of the transaction, none of these entities
were related to Florida Progress or its affiliates.
CP&L, which currently has a 90 percent interest in two of the
EARTHCO Plants, is a North Carolina public service corporation that
provides electricity and energy-related services to more than 1.2
million customers in North Carolina and South Carolina. NCNGC, a wholly
owned subsidiary of CP&L, provides natural gas, propane and related
service to approximately 178,000 customers in south-central and eastern
North Carolina. ICI, also a wholly owned subsidiary of CP&L, is
primarily engaged in providing internet-based services.
As of March 31, 2000, CP&L Energy had total consolidated assets of
approximately $9.4 billion and total consolidated shareholders' equity
of approximately $3.4 billion.
4. On March 3, 2000, Florida Progress entered into an Amended and
Restated Agreement and Plan of Exchange (the
[[Page 39364]]
Exchange Agreement) with CP&L Energy and CP&L. The Exchange Agreement
provided for the acquisition, by CP&L Energy, of all of the outstanding
shares of Florida Progress Stock pursuant to a statutory share
exchange. The share exchange was structured so that Florida Progress
and its affiliates would all become subsidiaries of Progress Energy.
The terms of the Exchange Agreement were negotiated on an arm's length
basis by the parties and approved by the shareholders of both Florida
Progress and CP&L Energy.
5. In accordance with the terms of the Exchange Agreement, each
Florida Progress shareholder could elect to receive (for each share of
Florida Progress Stock he or she owned) (a) $54.00 per share in cash;
or (b) a specified number of shares of CP&L Energy Stock equal to an
exchange ratio (the Exchange Ratio) \13\ designed to provide Florida
Progress shareholders with CP&L Energy Stock having a fair market value
of $54.00, subject to certain adjustments; or (c) a combination of cash
and CP&L Energy Stock.
---------------------------------------------------------------------------
\13\ According to the Joint Proxy Statement/Prospectus issued by
CP&L Energy and Florida Progress, the Exchange Ratio was determined
by dividing $54.00 by the average of the closing sale price per
share of CP&L Energy Stock as reported on the New York Stock
Exchange Composite Tape on each 20 consecutive trading days ending
with the fifth trading day before the closing of the share exchange.
The Exchange Ratio was also subject to adjustment if the average
closing price of CP&L Energy Stock exceeded $45.39 or fell below
$37.13. However, the 20 day average closing price of CP&L Energy
Stock was $40.08. This amount was well within the high and low
figures. Thus, the Exchange Ratio was determined by dividing $54 by
$40.08, i.e., 1.3473. On November 30, 2000, the closing price for
CP&L Energy Stock on the New York Stock Exchange was $43 per share.
---------------------------------------------------------------------------
In addition to the cash and/or stock consideration, each Florida
Progress shareholder would be entitled to receive one CVO for each
share of Florida Progress Stock surrendered. The CVOs are general,
unsecured, contingent payment obligations of CP&L Energy and its
successor, Progress Energy, that are subordinate in right of payment to
all senior indebtedness of these entities. The CVOs were issued in
accordance with the terms of the Contingent Value Obligation Agreement
(the CVO Agreement) which was entered into between CP&L Energy and The
Chase Manhattan Bank, N.A. (Chase), as CVO trustee on November 30,
2000. Each CVO represents the right of its holder to receive contingent
payments based on the net after-tax cash flow to CP&L Energy and its
affiliates (and later, to Progress Energy and its affiliates) that is
generated by the EARTHCO Plants. As noted in the exemption application,
both Florida Progress and CP&L Energy believed that the EARTHCO Plants
were qualifying synthetic fuel plants which would entitle their owners
to federal income tax credits based on the barrel of oil equivalent of
the synthetic fuel produced and sold by the plants.
6. Although it was not possible to calculate precisely the value of
the CVOs at the time of the share exchange (a per unit value of $0.545
was ultimately determined \14\) or to predict their potential
marketability, in the aggregate, the holders of the CVOs would be
entitled to receive payments equal to 50 percent of any net after-tax
cash flow generated by the EARTHCO Plants in excess of $80 million per
year for each of the years 2001 through 2007. However, the total amount
of the net after-tax cash flow for any year would depend upon the final
determination of the income tax savings realized and income taxes
incurred after completion of income tax audits of CP&L Energy and its
affiliates (and later, Progress Energy and its affiliates), as owners
of the EARTHCO Plants.
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\14\ The CVO value of $0.545 on November 30, 2000 represented
the average of the reported high and low trading prices on the OTC
Bulletin Board on that date.
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As of March 15 of each year from 2002 through 2008, Progress Energy
will estimate the total net after-tax cash flow attributable to the
EARTHCO Plants for the prior year and will deposit with Chase an amount
equal to 50 percent of the excess of that amount over $80 million.
After Progress Energy files its tax returns for the prior year, both it
and Chase will adjust the amount on deposit with Chase. Holders of CVOs
will be entitled to receive accumulated earnings on the amounts held on
deposit with Chase and quarterly reports describing the results of
operations for the EARTHCO Plants for the prior quarter and updating
material developments.
In the event Progress Energy fails to pay amounts when due on the
CVOs, all unpaid amounts will bear interest at a rate equal to the
three month London Interbank Offered Rate (as published in The Wall
Street Journal) plus 300 basis points. Except for payments made as a
result of the sale of all or a portion of the EARTHCO Plants, payments
on the CVOs will not be made until Progress Energy's tax audit matters
are resolved. Progress Energy anticipates payments on the CVOs will not
begin before 2007.
The CVOs are generally freely tradable by their holders. Although
there is no commitment to have the CVOs listed on a national stock
exchange or to cause them to be included in any interdealer quotation
system, until issued on the effective date of the share exchange (i.e.,
November 30, 2000, as discussed in Representation 8), the CVOs were
traded on a ``when, as and if issued'' basis on the OTC Bulletin
Board.\15\ The CVOs are not subject to redemption, in whole or in part.
Progress Energy may, however, acquire the CVOs on the open market or in
privately-negotiated purchases.
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\15\ According to Florida Progress, the phrase ``when, as and if
issued'' and its abbreviated form ``when issued,'' refers to a
conditional transaction wherein a security is authorized for
issuance but is not actually issued. Because the CVOs were issued in
connection with the closing, Florida Progress represents that the
term no longer applies.
Florida Progress states that the OTC Bulletin Board is a
regulated quotation service that displays real-time quotes, last-
sale prices and volume information in over-the-counter equity
securities. An OTC equity security generally includes any equity
that is not listed or traded on the NASDAQ or a national securities
exchange. The OTC Bulletin Board, which was approved by the
Securities and Exchange Commission on a permanent basis in April
1997, provides access to more than 6,500 securities, includes more
than 400 participating market makers, electronically transmits real-
time quote, price and volume information on domestic securities,
foreign securities and American Depository Receipts, and displays
indications of interest.
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7. An independent investment banking firm, i.e., Salomon Smith
Barney, advised Florida Progress that the consideration, consisting of
cash and/or CP&L Energy Stock, and CVOs, which was to be received by
Florida Progress shareholders in exchange for their shares of Florida
Progress Stock was ``fair,'' from a financial point of view.\16\ In
making its determinations, Salomon Smith Barney, among other things,
(a) reviewed the Exchange Agreement and the CVO Agreement; (b) held
discussions with senior officers, directors, representatives and
advisers of Florida Progress, and CP&L concerning the respective
businesses, operations and prospects of Florida Progress and CP&L; (c)
examined financial forecasts and other information and data for both
companies; (d) reviewed the financial terms of the share exchange as
set forth in the Exchange Agreement and the CVO Agreement; (e) reviewed
current and historical market prices and trading volumes of both
Florida Progress Stock and CP&L Energy Stock; (f) reviewed the
historical and projected earnings and other operating data of both
entities; (g) reviewed the capitalization and financial condition of
Florida Progress and CP&L; and (g) conducted other analyses and
examinations and considered other financial, economic
[[Page 39365]]
and market criteria as it deemed appropriate in arriving at is opinion.
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\16\ Similarly, Merrill Lynch, Pierce, Fenner & Smith
Incorporated advised CP&L Energy and CP&L that the consideration to
be paid by CP&L Energy pursuant to the exchange was ``fair,'' from a
financial point of view to these entities.
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In rendering its opinion, Salomon Smith Barney assumed and relied,
without independent verification, upon the accuracy and completeness of
all information provided. Salomon Smith Barney also assumed, with the
consent of Florida Progress, that the exchange with CP&L Energy and
CP&L would be effected in accordance with its terms and that in the
course of obtaining regulatory approvals from various federal and state
governmental agencies for the share exchange, no limitations,
restrictions or conditions would be imposed that would have an adverse
material effect on the contracting parties or to the combined company.
Further, Salomon Smith Barney assumed that the terms of the CVOs would
not differ materially from the terms set forth in a draft CVO
Agreement. Finally, Salomon Smith Barney did not make (and it was not
provided with) an independent evaluation of the financial status of
Florida Progress or CP&L or did it physically inspect the properties or
assets owned by these entities.
Salomon Smith Barney's opinion and analyses were one of the many
factors considered by Florida Progress' Board of Directors in its
evaluation of the merits of the share exchange. The Board of Directors
ultimately voted that the stock exchange was fair and in the best
interests of the shareholders, and recommended that the shareholders
approve the exchange transaction.
8. Thus, as a result of approval by the shareholders of the share
exchange, on November 30, 2000, each holder of Florida Progress Stock
received cash and/or CP&L Energy Stock consideration, plus one CVO for
each share of Florida Progress Stock tendered. A total of 87,191,315
shares of Florida Progress Stock was actually tendered by Florida
Progress shareholders. Those shareholders who elected ``all cash''
consideration received cash while those shareholders who elected stock
consideration, received an approximately 94.7 percent distribution of
CP&L Energy Stock and the remainder in cash. Those shareholders who did
not submit an election received ``all cash'' consideration.\17\
However, as noted above, all shareholders received CVOs in addition to
cash and/or CP&L Energy Stock.
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\17\ For those shareholders not tendering their Florida Progress
Stock at the time of the share exchange, the amount of cash and CVOs
attributable to such shareholders was placed in an escrow account.
This amount is to be paid out upon the actual tender of shares of
Florida Progress Stock.
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Plan participants were given the same consideration options as the
other shareholders of Florida Progress. At the time of the share
exchange, the Plan received $84,970,701.43 in cash, 1,247,340 shares of
CP&L Energy Stock (valued at approximately $67.3 million, and 2,499,339
CVOs (valued at approximately $1.3 million). Of the total consideration
received, it is estimated that approximately 40 percent of the Plan
participants elected to receive CP&L Energy Stock and approximately 60
percent of the participants elected (either by an actual election or by
a failure to return the election form in a timely manner) to receive
cash. It is further represented that the Plan's receipt of the share
exchange consideration resulted from shareholder approval of the
Exchange Agreement and it did not result from a unilateral exercise of
discretion by any Plan fiduciary.
9. However, prior to the share exchange, each individual
participant who had invested in Florida Progress Stock through the Plan
received a notice, dated September 28, 2000. The special notice
explained that on the effective date of the share exchange, any Florida
Progress Stock held on behalf of the participant in the Plan would be
exchanged, in accordance with the election of the participant \18\ for
the right to receive one CVO and either (a) cash, (b) shares of CP&L
Energy Stock, or (c) a combination of cash and CP&L Energy Stock. The
notice to participants further explained that for each share of Florida
Progress Stock held on the effective date of the exchange, the
participant would receive one CVO.
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\18\ In accordance with the terms of the Exchange Agreement, all
Florida Progress shareholder elections regarding whether the
shareholder wished to receive cash, CP&L Energy Stock or a
combination thereof in exchange for Florida Progress Stock was
subject to allocation and proration to achieve an overall mix of 65
percent cash and 35 percent CP&L Energy Stock. Such proration would
not have any impact on the receipt of CVOs by Florida Progress
shareholders on the date of the exchange.
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After receipt of the September 28, 2000 notice and prior to the
effective date of the exchange, Plan participants had the opportunity,
to transfer funds held on their behalf in the Florida Progress Stock
Fund to other investment funds under the Plan if the participant did
not wish to receive the CVOs and the CP&L Energy Stock. Because no
other investment funds hold shares of Florida Progress Stock, no CVOs
could be received by such funds.
10. Accordingly, an administrative exemption is requested on behalf
of the Plan \19\ and the Investment Committee for the Plan (together,
the Applicants) with respect to (a) the receipt by the Plan of the CVOs
as a result of its ownership of Florida Progress Stock; (b) the
continued holding of the CVOs by the Plan; and
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\19\ For purposes of this exemption, the term ``Plan'' is meant
to include The Savings Plan for Employees of Florida Progress
Corporation and any successors to the current Plan that may be
established by Progress Energy or an entity within Progress Energy's
controlled group, into which the Plan is merged or which receives a
transfer of accounts (including CVOs) from the Plan. Progress Energy
and Florida Progress are contemplating the transfer of some accounts
from the plan to another qualified plan maintained by Progress
Energy. To simplify administrative and employee communication
issues, both Progress Energy and Florida Progress would like the
ability to transfer CVOs to the new plan.
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(c) the potential resale of the CVOs to Progress Energy. The
Applicants are not requesting exemptive relief for the receipt of the
CP&L Energy Stock by the Plan because, at the time of the share
exchange, CP&L Energy and its affiliates were not parties in interest
with respect to the Plan.\20\ Therefore, exemptive relief is requested
effective November 30, 2000.
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\20\ The Applicants note, however, that after the share
exchange, CP&L Energy and its successor, Progress Energy, would be
considered parties in interest with respect to the Plan and that the
CP&L Energy Stock received by the Plan, which is currently referred
to as ``Progress Energy, Inc. common stock,'' would constitute a
``qualifying employer security'' within the meaning of section
407(d)(5) of the Act, as stock.
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The Applicants also represent that it is unclear whether the
statutory exemption contained in section 408(e) of the Act, which
permits plans to acquire and sell qualifying employer securities,\21\
would apply to the Plan's receipt of the CVOs.\22\ Although a CVO would
likely qualify as a ``security,'' as such term is defined in section
2(1) of the Securities Exchange Act of 1933 (the 1933 Act) and section
3(20) of the Act, the Applicants represent that it is not clear whether
such securities would fall
[[Page 39366]]
within the definition of ``qualifying employer securities,'' as defined
in section 407(d)(5) of the Act.\23\
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\21\ In relevant part, section 408(e) of the Act provides that
sections 406 and 407 of the Act shall not apply to the acquisition
or sale by a plan of qualifying employer securities (as defined in
section 407(d)(5) if such acquisition is for adequate consideration
(or in the case of a marketable obligation, at a price not less
favorable to the plan than the price determined under section
407(e)(1)), (2) if no commission is charged with respect thereto,
and (3) if--(A) the plan is an eligible individual account plan (as
defined in section 407(d)(3)), or (B) in the case of an acquisition
by a plan which is not an eligible individual account plan, the
acquisition is not prohibited under section 407(a) of the Act.
\22\ Section 3(20) of the Act states that the term ``security''
has the same meaning as such term has under section 2(1) of the (the
1933 Act) [15 U.S.C. 77b(1)]. The term ``security'' is defined in
the Securities Act as ``any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, * * * or, in general, any
interest or instrument commonly known as a `security'.''
\23\ As noted in part previously, a ``qualifying employer
security'' means an employer security which is either ``stock,'' a
``marketable obligation,'' or an ``interest in a publicly-traded
partnership,'' under section 407(d)(5) of the Act. Section 407(e) of
the Act defines the term ``marketable obligation'' to mean a bond,
debenture, note, certificate, or other evidence of indebtedness, if
such obligation is acquired: (A) On the market, either (i) at the
prevailing price of a national securities exchange, or (ii) if the
obligation is not traded on a national securities exchange, at a
price not less favorable to the plan than the offering price for the
obligation as established by current bid and asked prices quoted by
persons independent of the issuer; (B) from an underwriter, at a
price (i) not in excess of the public offering price for the
obligation as set forth in a prospectus or offering circular filed
with the Securities and Exchange Commission, and (ii) at which a
substantial portion of the same issue is acquired by persons
independent of the issuer; or (C) directly from the issuer, at a
price not less favorable to the plan than the price paid currently
for a substantial portion of the same issue by persons independent
of the issuer.
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According to the Applicants, the CVOs do not constitute ``shares of
stock, or a bond, debenture, note, certificate or other evidence of
indebtedness'' but represent a right to receive certain contingent
payments based upon the net after-tax cash flow to CP&L Energy (and
later to Progress Energy) generated by the EARTHCO Plants. Therefore,
the Applicants do not believe the CVOs can be characterized as a
``qualifying employer security.'' Thus, the Applicants believe that the
acquisition and holding of the CVOs by the Plan would violate sections
406 and 407 of the Act.
11. Following the exchange and receipt of the CVOs by the Plan,
participants have been given the opportunity to direct the Trustee to
sell the CVOs held on their behalf, at any time. In this regard, an
independent fiduciary, U.S. Trust, has been appointed by the Trustees
to oversee the Plan's holding or sale of any CVOs for which the Plan
does not receive any investment direction from the participants. The
CVOs are being held by the Trustee in a separate unitized fund (the CVO
Fund) for which U.S. Trust will determine liquidity needs based on
information provided by Florida Progress and to effect such liquidity
when it reasonably deems it prudent.
The CVO Fund will be valued and traded on a periodic basis by U.S.
Trust. If a CVO is to be sold at a time when there is no liquid market,
as determined by U.S. Trust, Progress Energy has agreed to purchase
CVOs to be sold by the Plan. Under such circumstances, U.S. Trust will
retain an independent appraiser to determine the fair market value of
the CVOs in order to ensure that the Plan receives adequate
consideration for any CVOs sold. It is possible that, in the future,
Progress Energy may purchase directly CVOs being sold by the Plan,
whether at the direction of a Plan participant or U.S. Trust. If a
participant receives a cash distribution in the future related to the
holding of the CVO, the cash received will be invested in a separate
money market fund. The Plan will not be required to pay any fees or
commissions in connection with any sales of the CVOs to Progress
Energy.
12. Because the Plan r |
