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Secretary of Labor Thomas E. Perez
Proposed Class Exemption for Bank Collective Investment Fund Conversion Transactions [Notices] [11/13/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Class Exemption for Bank Collective Investment Fund Conversion Transactions [11/13/1996]

[PDF Version]

Volume 61, Number 220, Page 58224-58231

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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09988]

 
Proposed Class Exemption for Bank Collective Investment Fund 
Conversion Transactions

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Notice of Proposed Class Exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed class exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (the Act or ERISA) and from certain taxes 
imposed by the Internal Revenue Code of 1986 (the Code). If granted, 
the proposed exemption would permit an employee benefit plan (the 
Client Plan) to purchase shares of a registered investment company (the 
Fund), the investment adviser for which is a bank (the Bank) that 
serves as a fiduciary of the Client Plan, in exchange for plan assets 
transferred in-kind to the Fund from a collective investment fund (the 
CIF) maintained by the Bank. The proposed exemption, if granted, would 
affect participants and beneficiaries of the Client Plans that are 
involved in such transactions as well as the Bank and the Fund.

ADDRESSES: All written comments and requests for a public hearing 
(preferably 3 copies) should be sent to: Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, 200 Constitution Avenue N.W., Washington, DC 20210, (Attention: 
``CIF Conversion Class Exemption''). The application for exemption 
(Application No. D-09988) and all additional comments received from 
interested persons will be available for public inspection in the 
Public Documents Room, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, Room N-5638, 200 Constitution Avenue N.W., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady or Mr. E.F. 
Williams, Office of Exemption Determinations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, Washington, DC 20210 
at (202) 219-8881 or (202) 219-8194, respectively, or Ms. Susan E. 
Rees, Plan Benefits Security Division, Office of the Solicitor, U.S. 
Department of Labor, Washington, DC 20210 at (202) 219-4600, ext. 105. 
(These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: This document contains a notice of pendency 
before the Department of a proposed class exemption from the 
restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act 
and from the taxes imposed by section 4975 (a) and (b) of the Code by 
reason of section 4975(c)(1) (A) through (E) of the Code. The proposed 
exemption was requested in an application dated March 28, 1995 
submitted on behalf of Federated Investors (Federated) pursuant to 
section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR Part 2570, Subpart B 
(55 FR 32836, August 10, 1990).<SUP>1
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 USC App. 
1 (1996) generally transferred the authority of the Secretary of the 
Treasury to issue exemptions under section 4975(c)(2) of the Code to 
the Secretary of Labor.
    In the discussion of the exemption, references to specific 
provisions of the Act should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
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I. Paperwork Reduction Act Analysis

    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, provides the general public and 
Federal agencies with an opportunity to comment on proposed and/or 
continuing collections of information in accordance with the Paperwork 
Reduction Act of 1995 (PRA 95) (44 U.S.C. 3506(c)(2)(A). This program 
helps to ensure that requested data can be provided in the desired 
format, reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the impact of 
collection requirements on respondents can be properly assessed. 
Currently, the Pension and Welfare Benefits Administration is 
soliciting comments concerning the proposed new collection of 
information under the Proposed Class Exemption for Bank Collective 
Investment Fund Conversion Transactions.

DATES: Written comments must be submitted on or before January 13, 1996 
to Mr. Gerald B. Lindrew, Department of Labor, Pension and Welfare 
Benefits Administration, 200 Constitution Avenue, NW, Washington, D.C. 
20210. The Department of Labor is particularly interested in comments 
which:
    <bullet> Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    <bullet> Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    <bullet> Enhance the quality, utility, and clarify the information 
to be collected; and
    <bullet> Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other

[[Page 58225]]

technological collection techniques or other forms of information 
technology, e.g., permitting electronic submissions of responses.
    Title: Class Exemption for Bank Collective Investment Fund 
Conversion Transactions.
    Summary: The proposed exemption would permit employee benefit plans 
to purchase shares of a registered investment company in exchange for 
plan assets transferred in-kind from a bank maintained collective 
investment fund, where the bank that serves as a fiduciary of the plan 
is also the investment adviser for the investment company. The proposal 
is conditioned upon an independent fiduciary receiving advance notice 
concerning the transfer of assets and written confirmation after the 
completion of each transaction.
    Needs and Uses: ERISA requires that the Department make a finding 
that the proposed exemption meets the statutory requirements of section 
408(a) before granting the exemption. The Department therefore finds it 
necessary that certain information be provided to an independent 
fiduciary of each plan in advance of, and subsequent to, the proposed 
transaction, and that the independent fiduciary approve the proposed 
transaction.
    Respondents and Proposed Frequency of Response: The Department 
staff estimates that approximately 50 parties will seek to take 
advantage of the class exemption in any given year. The respondents 
will be banks and trust companies acting as fiduciaries of plans 
investing in collective investment funds maintained by such entities.
    Estimated Annual Burden: The Department staff estimates the annual 
burden for preparing the materials required under the proposed class 
exemption to be 892 hours. The total annual burden cost (operating/
maintenance) is estimated to be $113,772.00. There are estimated to be 
no capital/start-up burden costs. Comments submitted in response to 
this notice will be summarized and/or included in the request for 
Office of Management and Budget approval of the information collection 
request; they will also become a matter of public record.

II. Background

    The application contains facts and representations with regard to 
the requested exemption which are summarized below. Interested persons 
are referred to the application on file with the Department for the 
complete representations of the applicant. The applicant, Federated, 
requests retroactive and prospective exemptive relief for the in-kind 
transfer of assets from a CIF in which Client Plans invest to a Fund in 
exchange for shares of the Fund. The exemption is being requested in 
light of the Department's position that Prohibited Transaction 
Exemption (PTE) 77-4 (42 FR 18732, April 8, 1977) is unavailable for 
the purchase of shares in Funds other than for cash. In pertinent part, 
PTE 77-4 permits the purchase or sale by an employee benefit plan of 
shares of a Fund when a fiduciary with respect to the plan is also the 
investment adviser of the Fund.
    Federated represents that it advises, administers and distributes 
its own Funds and also administers, distributes and provides related 
services to Funds that are advised by other financial institutions, 
including many Banks. In total, Federated provides such services with 
respect to over $70 billion in assets.
    Since April 1989, Federated has assisted a number of Banks in 
establishing ``proprietary'' mutual funds, (i.e., mutual funds advised 
by the Bank and for which the Bank may provide other services, such as 
custody or shareholder recordkeeping). These Funds are often 
established through the complete or partial conversion of the Bank's 
CIFs into the Funds. Such conversions have been motivated by changes in 
the investment industry and the increasing trend toward the 
establishment of participant-directed plans under section 401(k) of the 
Code. Federated assists these Banks in the conversion process and may 
serve as administrator, as well as in other capacities (such as 
transfer agent and portfolio recordkeeper) with respect to such Funds.
    Federated explains that these in-kind transfers have been completed 
in compliance with the banking rules governing CIFs and the 
requirements of the Investment Company Act of 1940 (the '40 Act). To 
avoid engaging in a prohibited transaction, the Banks have sought in 
good faith to comply with PTE 77-4 and have relied on the availability 
of that class exemption. Federated states that the conditions of PTE 
77-4 (as they were interpreted by the banking industry at that time) 
were met, including the provision of disclosures regarding the Fund to 
an independent plan fiduciary (the Independent Fiduciary) and prior 
approval by that fiduciary. However, Federated notes that the 
Department's position that PTE 77-4 does not apply to in-kind exchanges 
of assets, such as occur in a CIF-to-Fund conversion, has created 
uncertainty as to what Banks should do with regard to past and future 
transactions. Therefore, Federated believes that class exemptive relief 
is warranted because of the large number of Banks that have entered 
into, or propose to enter into, such transactions. In Federated's view, 
the exemptive relief requested would reduce the burden that has been 
placed on Banks and would create certainty as to how such transactions 
may be structured to comply with provisions of the Act.

III. Discussion of the Application

    The applicant represents that, as part of the conversion process, 
assets representing the Client Plans' interests in the CIFs are being 
transferred to the Funds in exchange for which the Client Plans receive 
shares of the Funds. The in-kind transfers are subject to the prior 
approval of Independent Fiduciaries and a number of additional 
safeguards that are discussed below.
    The Banks that would be covered by the requested exemption include 
banks or trust companies that are regulated by federal or state law. 
The Banks may serve as trustees, investment managers or custodians for 
Client Plans that are subject to the Act. If a Bank has investment 
discretion over the assets of a Client Plan, it commonly manages such 
assets through CIFs. Where a Bank serves as a nondiscretionary trustee 
or a custodian, it has made CIFs available as investment options for 
participant-directed plans at the election of the plan sponsor. CIF 
investments have allowed Client Plans to pool their assets thereby 
permitting greater diversification and lower management fees than 
individually-managed portfolios.
    Federated represents that over the past 15 years mutual funds have 
become increasingly popular investments for plan investors. Among the 
advantages of Funds over CIFs are daily pricing and redemption, 
published prices available in newspapers of general circulation and 
greater portability. Daily pricing and redemption permits: (a) 
immediate investment of plan contributions in various types of 
investments; (b) greater flexibility in transferring assets from one 
type of investment to another; and (c) faster distributions. CIFs, by 
contrast, generally have been valued quarterly and have not permitted 
daily withdrawals or transfers. Because of the advantages offered by 
Funds, many Banks have been converting their CIFs into Funds by 
transferring the assets out of the CIFs and into the Banks' proprietary 
Funds. In some cases, the Banks have terminated their CIFs. In other 
cases, the CIFs have been partially converted and not terminated 
because one or more clients has preferred to remain invested in the 
CIFs.

[[Page 58226]]

    The applicant represents that the conversion transaction that is 
the subject of this exemption request is structured as an in-kind 
transfer of plan assets held by the CIF to the corresponding Funds, in 
exchange for shares of the Funds. This approach, according to the 
applicant, avoids incurring transaction costs in connection with 
liquidating the CIF investments and making the same investments for the 
Funds.
    It is represented that the process used by Banks assisted by 
Federated has been designed to comply with the '40 Act and PTE 77-4, as 
applicable. In this regard, Federated represents that the Bank obtains 
the approval of an Independent Fiduciary prior to investing a Client 
Plan's assets in a Fund. The Independent Fiduciary is generally the 
Client Plan's named fiduciary or plan sponsor. In requesting the 
Independent Fiduciary's approval, the Bank provides such fiduciary with 
a description of the transaction, information about each Fund into 
which assets would be transferred and a current prospectus. It is 
represented that all disclosures and the form of approval are designed 
to meet the requirements of PTE 77-4.<SUP>2
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    \2\ In pertinent part, PTE 77-4 requires that a fiduciary of a 
plan who is independent of and unrelated to the fiduciary/investment 
adviser, or any affiliate thereof, receive a prospectus issued by 
the investment company and full written disclosure of the investment 
advisory and other fees charged to, or paid by, the plan and the 
investment company. Such information should include: (a) the nature 
and extent of any differential between the rates of such fees; (b) 
the reasons why the fiduciary/investment adviser may consider such 
purchases of shares in the investment company to be appropriate for 
the plan; (c) whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested 
in shares of the investment company; and, if so, (d) the nature of 
such limitations.
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    To the extent that the Independent Fiduciary of a Client Plan 
approves the investment in the Funds, the purchase of Fund shares by 
the Client Plan is accomplished in accordance with Securities and 
Exchange Commission Rule 17a-7 (Rule 17a-7 or the Rule) under the '40 
Act (17 CFR 270.17a-7). Rule 17a-7 is an exemption from the prohibited 
transaction provisions of section 17(a) of the '40 Act (15 USC 80a-
17(a)), which prohibit, among other things, transactions between an 
investment company and its investment adviser or affiliates of its 
investment adviser. Thus, Rule 17a-7 permits transactions between the 
Funds and other accounts that use the same or affiliated investment 
advisers, subject to certain conditions that are designed to assure 
fair valuation of the assets involved in the transaction and fair 
treatment of both parties to the transaction. Among the conditions of 
Rule 17a-7 is the requirement that the transaction be effected at the 
``independent current market price'' for the security involved.<SUP>3 
In this regard, the ``independent current market price'' for specific 
types of CIF securities involved in the transactions is determined as 
follows:

    \3\ Rule 17a-7 also includes the following requirements: (a) the 
transaction must be consistent with the investment objectives and 
policies of the Fund, as described in its registration statement; 
(b) the security that is the subject of the transaction must be one 
for which market quotations are readily available; (c) no brokerage 
commissions or other remuneration may be paid in connection with the 
transaction; and (d) the Fund's board of directors (i.e., those 
directors who are independent of the Fund's investment adviser) must 
adopt procedures to ensure that the requirements of Rule 17a-7 are 
followed, and determine no less frequently than quarterly that the 
transactions during the preceding quarter were in compliance with 
such procedures.
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    (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 '34 Act) (17 CFR 240.11Aa3-1), the last sale price with respect 
to such security reported in the consolidated transaction reporting 
system (the Consolidated System); or, if there are no reported 
transactions in the Consolidated System that day, 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 
'34 Act) (17 CFR 240.11Ac1-1), as of the close of business on the 
CIF valuation date.
    (b) If the security is not a reported security, and the 
principal market for such security is an exchange, then the last 
sale on such exchange or, if there are no reported transactions on 
such exchange that day, the average of the highest current 
independent bid and lowest current independent offer on the exchange 
as of the close of business on the CIF valuation date.
    (c) If the security is not a reported security and is quoted in 
the NASDAQ system, then the average of the highest current 
independent bid and lowest current independent offer reported on 
Level 1 of NASDAQ as of the close of business on the CIF valuation 
date.<SUP>4
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    \4\ It is represented that Level 1 of NASDAQ provides the best 
bid and ask quotations for each NASDAQ security that has a minimum 
of two registered market-makers providing quotations. Level 2 
provides the current bid and ask prices for each market-maker in any 
available NASDAQ securities, not just the best prices. Level 3 
allows for market-makers instantaneously to insert new quotations 
into the system and is generally only used by market-makers and 
traders.
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    (d) For all other securities, the average of the highest current 
independent bid and lowest current independent offer determined on 
the basis of reasonable inquiry from at least three independent 
sources as of the close of business on the CIF valuation date.

Federated represents that these valuation conditions are objective and 
require documentation to permit review by independent parties.
    Federated represents that, in a conversion transaction, a portion 
of the plan assets in each CIF, representing the interests in the CIF 
of the Client Plans that approve the asset transfer, are transferred to 
the corresponding Funds using the then-current market value of the 
plans' assets in exchange for shares in the Fund. Simultaneously, each 
Client Plan's investment in the CIF is liquidated and Fund shares of 
equal value to the Client Plan's interest in the CIF are distributed to 
the Client Plan.
    Prior to the transfers, the applicant states that the CIF assets 
must be reviewed to determine whether they are appropriate investments 
for the corresponding Fund, consistent with the Fund's investment 
objectives and policies and applicable requirements under the '40 Act 
and the Code. In addition, Federated notes that Rule 17a-7 permits 
transfers only of securities for which market quotations are readily 
available and does not include restricted securities (such as those 
described by SEC Rule 144) or other securities for which market 
quotations are not readily available.<SUP>5 If the class exemption were 
not available, the transferring plans would request cash distributions, 
causing the CIF to incur higher transaction costs in liquidating a 
larger proportion of its securities holdings.
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     <SUP>5 The Department notes that the Bank retains ongoing 
responsibilities under ERISA's general standards of fiduciary 
conduct with respect to plans electing to remain as investors in the 
CIF and with respect to other aspects of the transfers.
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    Federated explains that if the CIF will be terminated, the Client 
Plans not transferring assets to a Fund will receive a distribution, 
prior to the transfer date, of their pro rata portions of each CIF 
asset. The remaining CIF assets are then transferred to the Funds on 
behalf of the Client Plans that approve the transaction. If the CIF 
will not be terminated, the assets of the CIF are divided, prior to the 
transfer, so that each Client Plan that chooses to remain invested in 
the CIF retains its pro rata share of the CIF assets.
    Although the Bank will generally divide the assets held in a CIF 
among the Client Plans on a pro rata basis, Federated explains that in 
some instances, the CIF may hold ``small investments'' in fixed-income 
securities that are not divisible, or that can be divided only at 
substantial cost. Federated states that these investments will 
typically be issued in units of $1,000 or more. For example, a CIF may 
have 5 bonds in $1,000 denominations, for an aggregate principal value 
of $5,000, and 50 percent of the Client Plans participating in the CIF 
may elect to transfer their investments to a Fund.

[[Page 58227]]

A strict pro rata allocation to each Client Plan would require that 
$2,500 of the principal value of these bonds be transferred to the 
Fund. However, a $1,000 bond cannot be divided into two segments of 
$500 each. Federated states that securities, such as the bond in this 
example, that are incapable of division could be liquidated for cash 
prior to the transfer but, if there are many such securities, the 
transaction costs may become significant.
    In these situations, solely for purposes of the prospective relief 
requested herein <SUP>6, Federated represents that the Banks will treat 
equivalent, ``small investment'' fixed-income securities as fungible 
for allocation purposes if such securities have the same coupon rates, 
maturities and credit ratings at the time of the transaction. For 
example, notes with variable interest rates will be treated as fungible 
only if they have the identical interest rate formulas. This 
requirement will ensure that all Client Plans receive securities that 
have equivalent terms and features. The Banks will allocate such fixed-
income securities among the Client Plans in a manner such that each 
receives its pro rata share of the value of such securities.<SUP>7 
Federated represents that providing Banks with the ability to allocate 
fixed-income securities other than on a strictly pro rata basis would 
permit the CIF, and, therefore, the Client Plans, to avoid the 
transaction costs involved in liquidating these small positions prior 
to maturity.
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    \6\ In this regard, the Department wishes to emphasize that the 
proposed class exemption would provide no retroactive relief for any 
past in-kind transfer of CIF assets to a Fund unless all or a pro 
rata portion of the assets of the CIF were transferred to the Fund 
in exchange for shares of such Fund. (See Section I(c) below.)
    \7\ The applicant represents that the valuation of fixed income 
securities will be performed in accordance with Rule 17a-7.
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    In order to establish what constitutes ``small investments,'' 
Federated proposes that this exception from the general pro rata 
division rule be available only for investment positions in fixed-
income securities which, in the aggregate, constitute no more than one 
(1) percent of the CIF's assets. This one (1) percent limit will ensure 
that the ``small investment'' positions in fixed-income securities will 
represent a de minimis portion of the overall assets held by the CIF at 
the time of the transactions.
    In implementing the asset transfers, Federated represents that the 
current market value of the assets of the CIFs have been and will be 
determined in accordance with Rule 17a-7 and the procedures adopted by 
the board of directors of the Fund pursuant to such Rule. The assets 
are valued by the CIF and the Fund in the same manner using the 
``independent current market price'' of the securities as defined in 
Rule 17a-7 as of the close of business on the same business day. In 
addition, no brokerage commissions or other remuneration is charged to 
the Client Plans in connection with the asset transfer and any such 
costs or expenses are paid by the Bank.
    Federated states that the same values are used for the securities 
both in determining the amount transferred from the CIF and the amount 
received by the Fund. Thus, the total net asset value of the Fund 
shares received by the Client Plan is equal in value to the Client 
Plan's share of the assets of the CIF exchanged for shares of the Fund 
on the date of transfer.
    The valuations are based on prices, bids and offers as of the close 
of business on the date of the asset transfer. Federated states that, 
in the transactions in which it has been involved, the asset transfers 
have primarily been scheduled to occur over a weekend to allow 
sufficient time for processing. As applicable, securities have been 
valued based on their closing prices, or the average of bid and ask 
quotations (or prices obtained from pricing services) obtained from at 
least three independent sources, as of the close of business on the 
Friday preceding the weekend of the asset transfers. The transfer of 
the securities has been completed by the following Monday, at which 
time the Client Plans whose assets were formerly invested in a CIF hold 
shares in the corresponding Fund of equal value to their units in the 
CIF as of the close of business the previous Friday.
    Subsequent to the transaction, Federated explains that compliance 
with Rule 17a-7 procedures of the Fund is reviewed by independent 
members of the Fund's board of directors and by independent auditors. 
In this regard, records pertaining to Rule 17a-7 transactions are 
reviewed by SEC staff during their periodic inspections of the Funds.
    Thus, in Federated's view, the asset transfer transactions are 
ministerial in nature because they are performed in accordance with 
procedures that are prescribed by Rule 17a-7 and approved by the Fund's 
board of directors. Further, Federated states that the pricing of all 
securities transferred to a Fund is accomplished by reference to 
independent sources. In each case, the affected Client Plans receive 
shares of the Funds that are of equal value to the previously-held CIF 
units.

IV. Description of the Proposed Exemption

    The proposed class exemption consists of four sections. Section I 
would provide conditional exemptive relief for transactions occurring 
from October 1, 1988 until the date the notice granting the final 
exemption is published in the Federal Register. Section II would 
provide prospective relief for transactions which must meet certain 
additional conditions which are described below. Section III provides 
that a transaction that meets the applicable conditions of the proposed 
exemption will be deemed a purchase by the Client Plan of shares of an 
open-end investment company registered under the Investment Company Act 
of 1940 for purposes of PTE 77-4. Accordingly, if the exemption is 
granted, a Bank that complies with the terms of this exemption and with 
the terms of PTE 77-4 would be able to receive investment management 
and investment advisory fees from the Fund and the Client Plan with 
respect to the plan's assets invested in shares of the Fund to the 
extent permitted under PTE 77-4. Section III also provides that 
compliance with the proposed exemption will constitute compliance with 
paragraphs (a), (d) and (e) of section II of PTE 77-4. Finally, Section 
IV contains definitions for certain terms used in the proposed 
exemption.
    Specifically, the proposed class exemption set forth in Section I 
would provide retroactive relief from the restrictions of sections 
406(a) and 406(b)(1) and (b)(2) of the Act for the purchase of Fund 
shares by an employee benefit plan, where a Bank that serves as 
investment adviser to the Fund is also a fiduciary with respect to the 
plan, in exchange for plan assets transferred in-kind to the Fund from 
a CIF maintained by the Bank. The exemption is generally similar to a 
number of individual exemptions that have been granted by the 
Department for such transactions, but the operative language of this 
proposal differs from that of the individual exemptions.<SUP>8 The 
principal purpose of the language in the proposal is to make clear that 
the class exemption would not provide relief for any prohibited 
transactions that may arise in connection with terminating a CIF, 
permitting certain plans to

[[Page 58228]]

withdraw from a CIF that is not terminating, or liquidating or 
transferring any plan assets held by the CIF. The class exemption would 
provide relief only for the purchase of Fund shares by a Client Plan in 
exchange for assets that are transferred from a CIF. Although the 
Department interprets the individual exemptions as being similarly 
limited in their scope, the language of the proposed class exemption is 
intended to clarify this limitation. The Department believes that the 
scope of the proposed class exemption is consistent with the 
applicant's request for relief based on the applicant's mistaken 
reliance on PTE 77-4. The Department, however, specifically solicits 
comments on whether the scope of the proposed exemption should be 
modified to include other aspects of in-kind transfers of CIF assets. 
The Department also notes that the proposal defines the term ``Client 
Plan'' in section IV so as to exclude exemptive relief for purchases of 
Fund shares by plans sponsored by the Bank for its own employees.
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    \8\ See, for example, PTE 94-82 involving Marshall & Ilsley 
Trust Company (59 FR 62422, December 5, 1994); PTE 94-86 involving 
The Bank of California, N.A. (59 FR 65403, December 19, 1994); PTE 
95-33 involving Bank South, N.A. (60 FR 20773, April 27, 1995); PTE 
95-48 involving Mellon Bank, N.A. (60 FR 32995, June 26, 1995); and 
PTE 95-49 involving Norwest Bank (60 FR 33000, June 26, 1995).
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    The conditions applicable to the retroactive exemption set forth in 
Section I of the proposal are described below.
    Under section I(a) of the proposal, no sales commissions or other 
fees are paid by Client Plan in connection with the transaction.
    Section I(b) and (c) of the proposed exemption requires that the 
transferred assets be securities for which market quotations are 
readily available and consist of the Client Plan's pro rata portion of 
all the transferable assets held by the CIFs immediately prior to the 
transfer. Under section I(d), the Client Plan must receive shares of a 
Fund to which the CIF assets have been transferred that have a total 
net asset value that is equal to the value of the Client Plan's pro 
rata portion of the transferred assets on the date of the transfer, 
based on the current market value of such assets, as determined in a 
single valuation for each asset, with all valuations performed in the 
same manner at the close of the same business day, in accordance with 
Rule 17a-7 of the '40 Act (using sources independent of the Bank) and 
the procedures established by the Funds pursuant to Rule 17a-7 for the 
valuation of such assets. The same valuation must be used for each 
asset in determining the amount transferred from the CIF and the amount 
received by the Fund.
    Section I(e) provides that an Independent Fiduciary must receive 
advance written notice of the transaction, as well as the following 
written information concerning the Funds: (a) a current prospectus for 
each Fund in which a Client Plan is considering investing; (b) full and 
detailed written disclosure of the investment advisory and other fees 
charged to, or paid by, the Client Plan (and by such Fund) to the Bank 
or any unrelated third party, including the nature and extent of any 
differential between the rates of the fees; (c) the reasons why the 
Bank may consider an exchange of the Client Plan's CIF assets for 
investments in the Fund to be appropriate for the Client Plan; and (d) 
a statement describing whether there are any limitations applicable to 
the Bank with respect to which assets of the Client Plan may be 
invested in the Fund, and, if so, the nature of such limitations.
    Moreover, under section I(f), the Independent Fiduciary gives prior 
approval in writing of each in-kind transfer of the Client Plan's CIF 
assets to a Fund in exchange for shares of the Fund, on the basis of 
the information disclosed to the Independent Fiduciary. In addition, 
section I(g) requires that the Independent Fiduciary receive written 
confirmation of the transaction no later than 105 days after the 
transaction. This written confirmation must disclose the number of CIF 
units held by the Client Plan immediately before the transaction and 
the number of Fund shares held by the Client Plan immediately following 
the transaction, the related per unit and per share values, and the 
dollar amounts of the CIF units and the Fund shares involved in the 
transaction.
    Section I(h) requires that, for each Client Plan, the combined 
total of all fees received by the Bank for the provision of services to 
the Client Plan, and in connection with the provision of services to a 
Fund in which a Client Plan invests, must not exceed ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act. 
Finally, section I(i) provides that all dealings between a Client Plan 
and a Fund are on a basis no less favorable to the Client Plan than 
such dealings are with other shareholders of the Fund.
    On a prospective basis, Section II requires that the transactions 
meet certain conditions in addition to those described in Section I of 
the proposal. These additional conditions are described below.
    Section II(c) provides an exception to the general requirement that 
the assets transferred to a Fund consist of the Client Plan's pro rata 
portion of each of the assets of the CIF. This exception applies to 
certain investments in fixed-income securities. The fixed-income 
securities which are allocated between the CIF and the Fund must have 
the same coupon rates, maturities and credit ratings at the time of the 
transaction and cannot exceed one (1) percent of the aggregate assets 
held by the CIF as of each transfer. In this regard, section IV(j) 
defines the term ``fixed-income security'' as any interest-bearing or 
discounted government or corporate security with a face amount of 
$1,000 or more that obligates the issuer to pay the holder a specified 
sum of money, usually at specific intervals, and to repay the principal 
amount of the loan at maturity.
    Under section II(f) of the proposal, the Independent Fiduciary must 
give prior approval in writing of each in-kind transfer of the Client 
Plan's CIF assets to a Fund in exchange for shares of the Fund. The 
advance notice required by section II(e) will include the identity of 
securities that will be valued in accordance with Rule 17a-7(b)(4) of 
the '40 Act and allocated under section II(c), and the identity of any 
fixed-income securities allocated under section II(c).<SUP>9
---------------------------------------------------------------------------

    \9\ Rule 17a-7(b)(4) describes the method for determining the 
current market price of securities that are not reported securities 
under Rule 11Aa3-1 (17 CFR 240.11Aa3-1), are not traded principally 
on an exchange and are not quoted in the NASDAQ system. 17 CFR 
270.17a-7(b)(4). Because the proper valuation of such securities may 
require more extensive inquiry than in the valuation of securities 
described in Rule 17a-7(b)(1)-(b)(3), the Department believes that 
the Independent Fiduciary should receive advance notice that the 
transfer will entail such valuations.
---------------------------------------------------------------------------

    Section II(g)(1) requires a Bank to send the Independent Fiduciary 
of a Client Plan an additional written confirmation, not later than 30 
days after the completion of the transaction, for securities that were 
valued in accordance with Rule 17a-7(b)(4). The additional confirmation 
must contain the following information: (a) the identity of each such 
security; (b) the current market price as of the date of the 
transaction of each such security involved in the transaction; and (c) 
the identity of each pricing service or market-maker consulted in 
determining the value of such securities.
    In addition, section II(h) requires the Bank to provide certain 
ongoing disclosures to the Independent Fiduciary of a Client Plan. Such 
written disclosures must include: (a) a copy of an updated prospectus 
for each Fund in which such plan has invested, which is to be provided 
at least on an annual basis; and (b) upon the request of the 
Independent Fiduciary, a report or statement (which may take the form 
of the most recent financial report, the current Statement of 
Additional Information, or some other written statement) containing a 
description of

[[Page 58229]]

all fees paid by the Fund to the Bank. The purpose of this additional 
disclosure is to ensure that the Independent Fiduciary will continue to 
have the information necessary to effectively monitor the Fund 
investments made by the Client Plan.
    The Department wishes to note that the requirement under sections I 
and II of the proposal that all valuations of all plan assets 
transferred from a CIF to a Fund be determined in accordance with Rule 
17a-7 under the '40 Act is designed to provide flexibility for future 
transactions. Thus, for example, if Rule 17a-7 is subsequently amended 
by the SEC to accommodate new pricing systems, Banks could take 
advantage of the amended Rule without having to request an amendment to 
the class exemption. However, the Department cautions that the 
exemption would not be available for transactions involving assets that 
are not valued by reference to sources independent of the Bank.
    Unlike the individual exemptions cited above, this proposed class 
exemption does not grant relief for fees that the Bank may receive from 
the Fund as a result of the Client Plans' purchase of Fund shares. 
However, section III of this proposal provides that a purchase of Fund 
shares that complies with sections I and II will be deemed a purchase 
of shares of an open-end investment company for purposes of PTE 77-4, 
and in compliance with paragraphs (a), (d) and (e) of section II of 
that exemption. Compliance with all of the conditions of PTE 77-4 would 
permit the Bank to receive investment advisory and similar fees from 
the Fund with respect to shares acquired by a Client Plan in accordance 
with the proposal.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act which require, among other things, that a fiduciary 
discharge his duties with respect to the plan solely in the interests 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interests of the 
plans and their participants and beneficiaries and protective of the 
rights of participants and beneficiaries of such plans;
    (3) If granted, the proposed exemption will be applicable to a 
transaction only if the conditions specified in the class exemption are 
met; and
    (4) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Code and the Act, 
including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed exemption to the address 
and within the time period set forth above. All comments will be made a 
part of the record. Comments and requests for a hearing should state 
the reasons for the writer's interest in the proposed exemption. 
Comments received will be available for public inspection with the 
referenced application at the above address.

Proposed Exemption

    The Department has under consideration the grant of the following 
class 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.)

Section I. Retroactive Exemption for the Purchase of Fund Shares With 
Assets Transferred In-Kind From A CIF

    For the period from October 1, 1988, to [date of publication of 
final class exemption], the restrictions of sections 406(a) and 
406(b)(1) and (b)(2) of the Act and the taxes imposed by section 4975 
of the Code, by reason of section 4975(c)(1)(A) through (E), shall not 
apply to the purchase by an employee benefit plan (the Client Plan) of 
shares of one or more diversified open-end management investment 
companies (the Fund or Funds) registered under the Investment Company 
Act of 1940, the investment adviser for which is a bank (the Bank) that 
is also a fiduciary of the Client Plan, in exchange for assets of the 
Client Plan transferred in-kind to the Fund from a collective 
investment fund (the CIF) maintained by the Bank, if the following 
conditions are met:
    (a) No sales commissions or other fees are paid by the Client Plan 
in connection with the purchase of Fund shares.
    (b) All transferred assets are securities for which market 
quotations are readily available.
    (c) The transferred assets constitute the Client Plan's pro rata 
portion of such assets that were held by the CIF immediately prior to 
the transfer.
    (d) The Client Plan receives Fund shares that have a total net 
asset value equal to the value of the Client Plan's pro rata share of 
transferred assets on the date of the transfer, as determined in a 
single valuation for each asset, with all valuations performed in the 
same manner, at the close of the same business day, in accordance with 
Securities and Exchange Commission Rule 17a-7 (using sources 
independent of the Bank and the Fund) and the procedures established by 
the Funds pursuant to Rule 17a-7.
    (e) With respect to each Client Plan owning assets held by the CIF, 
an Independent Fiduciary with respect to such plan receives advance 
written notice of the in-kind transfer and purchase and full written 
disclosure of information concerning the Funds which includes the 
following:
    (1) A current prospectus for each Fund to which the CIF assets may 
be transferred;
    (2) A statement describing the fees to be charged to, or paid by, a 
Client Plan and the Funds to the Bank or any unrelated third party, 
including the nature and extent of any differential between the rates 
of the fees;
    (3) A statement of the reasons why the Bank may consider the 
transfer and purchase to be appropriate for the Client Plan; and
    (4) A statement of whether there are any limitations on the Bank 
with respect to which plan assets may be invested in shares of the 
Funds, and, if so, the nature of such limitations.
    (f) On the basis of the foregoing information, the Independent 
Fiduciary gives approval, in writing, for each purchase of Fund shares 
in exchange for the Client Plan's transferred CIF assets, consistent 
with the responsibilities, obligations and duties imposed on 
fiduciaries by Part 4 of Title I of the Act.
    (g) The Bank sends by regular mail to the Independent Fiduciary of 
each

[[Page 58230]]

Client Plan that purchases shares in connection with the in-kind 
transfer, no later than 105 days after completion of each purchase, a 
written confirmation of the transaction containing--
    (1) The number of CIF units held by the Client Plan immediately 
before the transfer, the related per unit value and the total dollar 
amount of such CIF units; and
    (2) The number of shares in the Funds that are held by the Client 
Plan immediately following the transfer, the related per share net 
asset value and the total dollar amount of such shares.
    (h) As to each Client Plan, the combined total of all fees received 
by the Bank for the provision of services to the Client Plan, and in 
connection with the provision of services to a Fund in which a Client 
Plan holds shares purchased in connection with the in-kind transfer is 
not in excess of ``reasonable compensation'' within the meaning of 
section 408(b)(2) of the Act.
    (i) All dealings in connection with the in-kind transfer and 
purchase between the Client Plan and a Fund are on a basis no less 
favorable to the Client Plan than dealings between the Fund and other 
shareholders.

Section II. Prospective Exemption for the Purchase of Fund Shares With 
Assets Transferred In-Kind From A CIF

    Effective [date of publication of final class exemption], the 
restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act 
and the taxes imposed by section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (E) of the Code, shall not apply to the purchase 
by an employee benefit plan (the Client Plan) of shares of one or more 
diversified open-end management investment companies (the Fund) 
registered under the Investment Company Act of 1940, the investment 
adviser for which is a bank (the Bank) that is also a fiduciary of the 
Client Plan, in exchange for assets of the Client Plan transferred in-
kind to the Fund from a collective investment fund (the CIF) maintained 
by the Bank if the following conditions are met:
    (a) No sales commissions or other fees are paid by the Client Plans 
in connection with the purchase of Fund shares through the transfer of 
assets from the CIF.
    (b) All transferred assets are securities for which market 
quotations are readily available.
    (c) The transferred assets constitute the Client Plan's pro rata 
portion of such assets that were held by the CIF immediately prior to 
the transfer. Notwithstanding the foregoing, the allocation of fixed-
income securities held by a CIF among Client Plans on the basis of each 
Client Plan's pro rata share of the aggregate value of such securities 
will not fail to meet the requirements of section II(b) if:
    (1) The aggregate value of such securities does not exceed one (1) 
percent of the total value of the assets held by the CIF immediately 
prior to the transfer; and
    (2) Such securities have the same coupon rate and maturity, and at 
the time of the transfer, the same credit ratings from nationally 
recognized statistical rating agencies.
    (d) The Client Plan receives Fund shares that have a total net 
asset value equal to the value of the Client Plan's pro rata share of 
transferred assets on the date of the transfer, as determined in a 
single valuation for each asset, with all valuations performed in the 
same manner, at the close of the same business day, in accordance with 
Securities and Exchange Commission Rule 17a-7 (using sources 
independent of the Bank and the Fund) and the procedures established by 
the Funds pursuant to Rule 17a-7.
    (e) With respect to each Client Plan owning assets held in the CIF, 
an Independent Fiduciary for such Client Plan receives advance written 
notice of the in-kind transfer and purchase of assets and full written 
disclosure of information concerning the Funds which includes the 
following:
    (1) A current prospectus for each Fund to which the CIF assets may 
be transferred;
    (2) A statement describing the fees to be charged to or paid by the 
Client Plan and the Funds to the Bank or any unrelated third party, 
including the nature and extent of any differential between the rates 
of such fees;
    (3) A statement of the reasons why the Bank may consider the 
transfer and purchase to be appropriate for the Client Plan;
    (4) A statement of whether there are any limitations on the Bank 
with respect to which plan assets may be invested in shares of the 
Funds, and, if so, the nature of such limitations;
    (5) The identity of securities that will be valued in accordance 
with Rule 17a-7(b)(4) and allocated under section II(c); and
    (6) The identity of any fixed-income securities allocated pursuant 
to section II(c).
    (f) On the basis of the foregoing information, the Independent 
Fiduciary gives prior approval, in writing, for each purchase of Fund 
shares in exchange for the Client Plan's assets transferred from the 
CIF, consistent with the responsibilities, obligations and duties 
imposed on fiduciaries by Part 4 of Title I of the Act.
    (g) The Bank sends by regular mail to the Independent Fiduciary of 
each Client Plan that purchases Fund shares in connection with the in-
kind transfer, the following information:
    (1) Not later than 30 days after the completion of the purchase, a 
written confirmation which contains--
    (i) The identity of each security that was valued for purposes of 
the purchase of Fund shares in accordance with Rule 17a-7(b)(4);
    (ii) The current market price, as of the date of the in-kind 
transfer, of each such security involved in the purchase of Fund 
shares; and
    (iii) The identity of each pricing service or market-maker 
consulted in determining the current market price of such securities.
    (2) Within 105 days after the completion of each purchase, a 
written confirmation which contains--
    (i) The number of CIF units held by the Client Plan immediately 
before the in-kind transfer, the related per unit value, and the total 
dollar amount of such CIF units; and
    (ii) The number of shares in the Funds that are held by the Client 
Plan immediately following the purchase, the related per share net 
asset value and the total dollar amount of such shares.
    (h) With respect to each of the Funds in which a Client Plan 
continues to hold shares acquired in connection with the in-kind 
transfer, the Bank provides the Independent Fiduciary of the Client 
Plan with--
    (1) A copy of an updated prospectus of such Fund, at least 
annually; and
    (2) Upon request of the Independent Fiduciary, a report or 
statement (which may take the form of the most recent financial report, 
the current Statement of Additional Information, or some other written 
statement) containing a description of all fees paid by the Fund to the 
Bank.
    (i) As to each Client Plan, the combined total of all fees received 
by the Bank for the provision of services to the Client Plan, and in 
connection with the provision of services to a Fund in which a Client 
Plan holds shares acquired in connection with the in-kind transfer, is 
not in excess of ``reasonable compensation'' within the meaning of 
section 408(b)(2) of the Act.
    (j) All dealings in connection with the in-kind transfer and 
purchase between the Client Plan and a Fund are on a basis no less 
favorable to the Client Plan than dealings between the Fund and other 
shareholders.

[[Page 58231]]

Section III. Availability of Prohibited Transaction Exemption (PTE) 77-
4

    Any purchase of Fund shares that complies with the conditions of 
either Section I or Section II of this class exemption shall be treated 
as a ``purchase or sale'' of shares of an open-end investment company 
for purposes of PTE 77-4 and shall be deemed to have satisfied 
paragraphs (a), (d) and (e) of section II of that exemption. 42 FR 
18732 (April 8, 1977).

Section IV. Definitions

    For purposes of this proposed exemption:
    (a) The term ``Bank'' means a bank or trust company, and any 
affiliate thereof [as defined below in paragraph (b)(1)], which is 
supervised by a state or federal agency.
    (b) An ``affiliate'' of a person includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person.
    (2) Any officer, director, employee or relative of such person, or 
partner in any such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``collective investment fund'' or ``CIF'' means a 
common or collective trust fund or pooled investment fund maintained by 
a ``Bank'' as defined in paragraph (a) of this Section IV.
    (e) The term ``Fund'' or ``Funds'' means any diversified open-end 
management investment company or companies registered under the '40 Act 
for which the Bank serves as an investment adviser, and may also serve 
as a custodian, shareholder servicing agent, transfer agent or provide 
some other secondary service (as defined below in paragraph (i) of this 
section).
    (f) The term ``net asset value'' means the amount calculated by 
dividing the value of all securities, determined by a method as set 
forth in a Fund's prospectus and statement of additional information, 
and other assets belonging to each of the portfolios in such Fund, less 
the liabilities chargeable to each portfolio, by the number of 
outstanding shares.
    (g) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (h) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is independent of and unrelated to the Bank. For 
purposes of this exemption, the Independent Fiduciary will not be 
deemed to be independent of and unrelated to the Bank if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Bank or any affiliate thereof;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of such fiduciary, is an officer, director, partner, employee 
of the Bank (or is a relative of such persons) or any affiliate 
thereof;
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this proposed exemption.
    If an officer, director, partner, employee of the Bank (or relative 
of such persons) or any affiliate thereof, is a director of such 
Independent Fiduciary, and if he or she abstains from participation in 
(i) the choice of the Client Plan's investment adviser, and (ii) the 
approval of any purchase or sale between the Client Plan and the Funds, 
as well as any transaction described in Sections I and II above, then 
paragraph (h)(2) of this Section IV shall not apply.
    (i) The term ``secondary service'' means a service provided by a 
Bank to a Fund other than investment management, investment advisory or 
similar services.
    (j) The term ``fixed-income security'' means any interest-bearing 
or discounted government or corporate security with a face amount of 
$1,000 or more that obligates the issuer to pay the holder a specified 
sum of money, at specific intervals, and to repay the principal amount 
of the loan at maturity.
    (k) The term ``Client Plan'' means a pension plan described in 29 
CFR 2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, and 
a plan described in section 4975(e)(1) of the Code, but does not 
include an employee benefit plan established or maintained by the Bank 
or by an affiliate thereof, for its own employees.
    (l) The term ``security'' shall have the same meaning as defined in 
section 2(36) of the '40 Act, as amended, 15 U.S.C. 80a-2(36) (1996).

    Signed at Washington, D.C., this 5th day of November, 1996.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor.
[FR Doc. 96-29036 Filed 11-12-96; 8:45 am]
BILLING CODE 4510-29-P