Proposed Exemptions; Wells Fargo Bank, N.A., et al. [Notices] [12/03/1996]
Proposed Exemptions; Wells Fargo Bank, N.A., et al. [12/03/1996]
Volume 61, Number 233, Page
64150-64173=======================================================================
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10014, et al.]
Proposed Exemptions; Wells Fargo Bank, N.A., 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 restriction 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
request 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. 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, N.W., Washington, D.C.
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
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 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 (43 FR 47713, October 17, 1978) 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.
Wells Fargo Bank, N.A. (Wells Fargo) Located in San Francisco, CA;
Proposed Exemption
[Application No. D-10014]
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990).<SUP>1
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\1\ For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I. Covered 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, effective October 1, 1995, to the
[[Page 64151]]
purchase or redemption of shares by an employee benefit plan (the
Plan), in certain mutual funds that are either affiliated with Wells
Fargo (the Affiliated Funds) or are unaffiliated with Wells Fargo (the
Third Party Funds),<SUP>2 in connection with the participation by the
Plan in the Wells Fargo Portfolio Advisor Program (the Portfolio
Advisor Program).
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\2\ The Affiliated Funds and the Third Party Funds are
collectively referred to herein as the Funds.
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In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (E) and (F) of the Code, shall not
apply, effective October 1, 1995, to the provision, by Wells Fargo, of
asset allocation services to an independent fiduciary of a
participating Plan (the Independent Fiduciary) or to a participant (the
Directing Participant) of a Plan covered under the provisions of
section 404(c) of the Act (the Section 404(c) Plan) which may result in
the selection of portfolios by the Independent Fiduciary or the
Directing Participant in the Portfolio Advisor Program for the
investment of Plan assets.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II. General Conditions
(a) The participation by each Plan in the Portfolio Advisor Program
is approved by an Independent Fiduciary or Directing Participant, in
the case of a Section 404(c) Plan, and no Plan investing therein is
sponsored or maintained by Wells Fargo and/or its affiliates.
(b) As to each Plan, the total fees that are paid to Wells Fargo
and its affiliates constitute no more than reasonable compensation for
the services provided.
(c) With the exception of distribution-related fees pursuant to
Rule 12b-1 (the 12b-1 Fees) of the Investment Company Act of 1940 (the
'40 Act) which are offset, no Plan pays a fee or commission by reason
of the acquisition or redemption of shares in the Funds.
(d) The terms of each purchase or redemption of shares in the Funds
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) Wells Fargo provides written documentation to each Plan's
Independent Fiduciary or Directing Participant of its recommendations
or evaluations with respect to the Affiliated Funds or the Third Party
Funds based upon objective criteria.
(f) Any recommendation or evaluation made by Wells Fargo to an
Independent Fiduciary or Directing Participant is implemented only at
the express direction of such Independent Fiduciary or Directing
Participant.
(g) The quarterly fee that is paid by a Plan to Wells Fargo and its
affiliates for asset allocation and related services (the Outside Fee)
rendered to such Plan under the Portfolio Advisor Program is offset by
all gross investment management fees (the Advisory Fees) and
administrative fees (the Administrative Fees) received from the
Affiliated Funds by Wells Fargo, its affiliates, its former affiliates
and unrelated parties, including all 12b-1 Fees and Administrative Fees
that are paid by the Affiliated Funds to Stephens Inc. (Stephens) and
all 12b-1 Fees that Wells Fargo receives from the Third Party Funds,
such that the sum of the offset and the net Outside Fee (the Net
Outside Fee) will always equal the Outside Fee and the selection of
Affiliated or Third Party Funds will always be revenue neutral.
(h) With respect to its participation in the Portfolio Advisor
Program, prior to purchasing shares in the Affiliated Funds and the
Third Party Funds,
(1) Each Independent Fiduciary receives the following written or
oral disclosures from Wells Fargo:
(A) A brochure describing the Portfolio Advisor Program; a
Portfolio Advisor Program Account Agreement; a description of the
allocation models (the Allocation Models) as discussed in
Representation 1; and a reference guide/disclosure statement providing
details about the Portfolio Advisor Program, the fees charged
thereunder, the procedures for establishing, making additions to and
withdrawing from Portfolio Advisor Program Accounts (the Accounts); and
other related information.
(B) A risk tolerance and goal analysis questionnaire (the
Questionnaire) as described in Representation 11.
(C) Copies of applicable prospectuses (the Prospectuses) for the
Funds discussing the investment objectives of the Funds; the policies
employed to achieve these objectives; the corporate affiliation
existing between Wells Fargo and its affiliates; the compensation paid
to such entities; disclosures relating to rebalancing and reallocating
Allocation Models; and information explaining the risks attendant to
investing in the Affiliated Funds or the Third Party Funds.
(D) Upon written or oral request to Wells Fargo, a Statement of
Additional Information supplementing the applicable Prospectus, which
describes the types of securities and other instruments in which the
Funds may invest, the investment policies and strategies that the Funds
may utilize, including a description of the risks.
(E) A copy of the agreement between the Plan and Wells Fargo
relating to such Plan's participation in the Portfolio Advisor Program.
(F) A written recommendation of a specific Allocation Model
together with a copy of the Questionnaire and response.
(G) Upon written request to Wells Fargo, a copy of its investment
advisory agreement and sub-advisory agreement pertaining to the
Affiliated Funds as well as its distribution agreement pertaining to
the Third Party Funds.
(H) Copies of the proposed exemption and grant notice describing
the exemptive relief provided herein.
(I) Written disclosures of Wells Fargo's affiliation or
nonaffiliation with the parties who act as sponsors, distributors,
administrators, investment advisers and sub-advisers, custodians and
transfer agents of the Third Party Funds and the Affiliated Funds; and
(2) In the case of a Section 404(c) Plan,
(A) Wells Fargo provides each Directing Participant or Independent
Fiduciary (for dissemination to the Directing Participant) with copies
of the documents described above in paragraphs (h)(1)(A)-(I); and,
(B) In addition to the written disclosures, an explanation will be
provided to the Independent Fiduciary, upon request, by a Wells Fargo
Personal Financial Officer (the Personal Financial Officer) regarding
the services offered under the Portfolio Advisor Program, including the
operation and objectives of the Funds. Such information will be given
to either the Independent Fiduciary or the Directing Participant.
(3) If accepted as an investor in the Portfolio Advisor Program, an
Independent Fiduciary or Directing Participant is required to
acknowledge, in writing, to Wells Fargo, prior to purchasing shares of
the Funds that such Independent Fiduciary or Directing Participant has
received copies of the documents described in paragraph (h)(1) of this
Section II.
(4) With respect to a Title I Plan that does not permit
participant-directed investments as contemplated under section 404(c)
of the Act, written acknowledgement of the receipt of such documents is
provided by the Independent Fiduciary (i.e., the Plan administrator,
trustee, investment manager or named fiduciary, as the recordholder of
shares of the Funds.) Such Independent Fiduciary will be
[[Page 64152]]
required to represent in writing to Wells Fargo that such fiduciary
is--
(A) Independent of Wells Fargo and its affiliates;
(B) Capable of making independent decisions regarding the
investment of Plan assets;
(C) Knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto; and
(D) Able to make an informed decision concerning participation in
the Portfolio Advisor Program.
(5) With respect to a Section 404(c) Plan or a Plan that is covered
under Title II of the Act, the Directing Participant or the Independent
Fiduciary is required to acknowledge, in writing, receipt of such
documents and represent to Wells Fargo that such individual is--
(A) Independent of Wells Fargo and its affiliates;
(B) Knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto; and,
(C) Able to make an informed decision concerning participation in
the Portfolio Advisor Program.
(i) Subsequent to its participation in the Portfolio Advisor
Program, each Independent Fiduciary receives the following written or
oral disclosures from Wells Fargo with respect to ongoing participation
in the Portfolio Advisor Program:
(1) Written confirmations of each purchase or redemption
transaction involving shares of an Affiliated Fund or a Third Party
Fund (including transactions resulting from the realignment of assets
caused by a change in the Allocation Model's investment mix and from
periodic rebalancing of Account assets).
(2) Telephone quotations of such Independent Fiduciary's Plan
Account balance.
(3) A periodic, but not less frequently than quarterly, statement
of Account specifying the net asset value of the Plan's assets in such
Account, a summary of purchase, sale and exchange activity and
dividends received or reinvested and a summary of cumulative realized
gains and/or losses.
(4) Semiannual and annual reports that include financial statements
for the Affiliated Funds and the Third Party Funds as well as the fees
paid to Wells Fargo and its affiliates.
(5) A quarterly newsletter or other report pertaining to the
applicable Allocation Model which describes the Allocation Model's
performance during the preceding quarter, market conditions and
economic outlook and, if applicable, prospective changes in Affiliated
Fund and Third Party Fund allocations for the Allocation Model and the
reasons therefor.
(6) At least annually, a written or oral inquiry from Wells Fargo
to ascertain whether the information provided on the Questionnaire is
still accurate and to determine if such information should be updated.
(7) At least annually, a termination form (the Termination Form) as
described below in Section II(l) and (m).
(j) In the case of a Section 404(c) Plan, the Independent Fiduciary
will decide whether the information described in Section II(i) above is
to be distributed by Wells Fargo to the Directing Participants of such
Plan or whether the Independent Fiduciary will receive this information
and then provide it to the Directing Participants.
(k) If authorized in writing by the Independent Fiduciary or
Directing Participant, the Plan is automatically rebalanced on a
periodic basis by Wells Fargo to the Allocation Model previously
prescribed by the Independent Fiduciary or Directing Participant, if
one or more Fund allocations deviates from the Allocation Model
prescribed by the Independent Fiduciary or Directing Participant.
(l) In rebalancing a Plan,
(1) Wells Fargo is bound by the Allocation Model and is limited in
the degree of change that it can make to an Allocation Model's
investment mix.
(2) Wells Fargo is authorized to make changes in the mix of asset
classes in a Plan Account within a range of 0-15 percent (plus or
minus) for Stock and Bond Fund investments and within a range of 0-30
percent (plus or minus) for Money Market Fund investments without
obtaining the prior written approval of the Independent Fiduciary or
Directing Participant.
(3) Wells Fargo may not change the asset mix outside the authorized
limits unless it provides the Independent Fiduciary or Directing
Participant with 30 days' advance written notice of the proposed change
and gives the Independent Fiduciary or Directing Participant time to
elect not to have the change made.
(4) Wells Fargo may not divide a Fund sub-class unless it provides
30 days' advance written notice to the Independent Fiduciary or
Directing Participant of the proposed change and gives such individual
the opportunity to object to the change.
(5) Wells Fargo may not replace a Third Party Fund with an
Affiliated Fund.
(m) Although an Independent Fiduciary or Directing Participant may
withdraw from the Portfolio Advisor Program at any time, Wells Fargo
will provide such Independent Fiduciary or Directing Participant with
the Termination Form, at least annually during the first quarter of
each calendar year, but in all cases where Wells Fargo changes the
asset mix outside of the current Allocation Model, when a Fund sub-
class is to be divided, when Wells Fargo determines that it is in the
best interest of the Plan to use a Third Party Fund instead of an
Affiliated Fund and whenever the Outside Fee is increased. Wells Fargo
will provide such written notice to the Independent Fiduciary or
Directing Participant at least 30 days prior to the implementation of
the change.
(n) The instructions for the Termination Form must--
(1) State that the authorization is terminable at will by the
Independent Fiduciary or Directing Participant, without penalty to
such, upon receipt by Wells Fargo of written notice from the
Independent Fiduciary or Directing Participant; and
(2) Explain that any of the proposed changes noted above in
paragraph (m) of this Section, will go into effect if the Independent
Fiduciary or Directing Participant does not elect to withdraw by the
effective date.
(o) Wells Fargo maintains, for a period of six years, the records
necessary to enable the persons described in paragraph (p) of this
Section II to determine whether the conditions of this exemption have
been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Wells Fargo
and/or its affiliates, the records are lost or destroyed prior to the
end of the six year period; and
(2) No party in interest other than Wells Fargo 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 (p) of this Section II below.
(p)(1) Except as provided in section (p)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (o) of this
Section II are unconditionally available at their customary location
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service (the Service) or the
Securities and Exchange Commission (the SEC);
[[Page 64153]]
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(p)(2) None of the persons described above in paragraphs (p)(1)(B)-
(p)(1)(D) of this paragraph (p) are authorized to examine the trade
secrets of Wells Fargo or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Wells Fargo'' means Wells Fargo Bank, N.A. and any
affiliate of Wells Fargo, as defined in paragraph (b) of this Section
III.
(b) An ``affiliate'' of Wells Fargo includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Wells Fargo.
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Plan or Plans'' include Keogh plans, cash or
deferred compensation plans, profit sharing plans, pension and stock
bonus plans, individual retirement accounts (IRAs), salary reduction
simplified employee pension plans (SARSEPs), simplified employee
pension plans (SEP-IRAs) and, in the case of a Section 404(c) Plan, the
individual account of a Directing Participant.
(e) The term ``Independent Fiduciary'' means a Plan fiduciary which
is independent of Wells Fargo and its affiliates and is either--
(1) A Plan administrator, trustee, investment manager or named
fiduciary, as the recordholder of shares of the Funds of a Section
404(c) Plan;
(2) An individual covered by a Keogh Plan which invests in shares
of the Funds;
(3) An individual covered under a self-directed IRA, SEP-IRA or
SARSEP which invests in shares of the Funds;
(4) An employee, officer or director of Wells Fargo and/or its
affiliates covered by an IRA, a SEP-IRA or a SARSEP subject to Title I
of the Act; or
(5) A Plan administrator, trustee, investment manager or named
fiduciary responsible for investment decisions in the case of a Title I
Plan that does not permit individual direction as contemplated by
Section 404(c) of the Act.
(f) The term ``Directing Participant'' is a participant in a Plan,
such as a Section 404(c) Plan, who is permitted under the terms of the
Plan to direct, and who elects to so direct the investment of the
assets of his or her account in such Plan.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of October 1, 1995.
Summary of Facts and Representations
Description of the Parties
1. The parties to the transactions are described as follows:
(a) Wells Fargo, a wholly owned subsidiary of Wells Fargo &
Company, is one of the sixteenth largest commercial banks in the United
States. Wells Fargo provides a full range of banking services to
commercial, agribusiness, real estate and small business customers
mainly in California. Its Investment Management Group manages personal
trust accounts, corporate 401(k) and other qualified plans and mutual
funds. Its holding company, Wells Fargo and Company, is a full-line
banking firm serving institutions, government and individual investors
in the United States. Wells Fargo & Company stock is publicly-traded on
the New York Stock Exchange. Wells Fargo maintains its corporate
headquarters in San Francisco, California.
In addition to serving as a custodian or trustee to employee
benefit plans, IRAs and SEP-IRAs, Wells Fargo sponsors and serves as a
mass submitter and identical adopter for master and prototype pension
and profit sharing plans, including Keogh plans, cash or deferred
plans, and pension and stock bonus plans. Wells Fargo sponsors
prototype IRAs, SEP-IRAs and SARSEPs. With respect to the subject
transactions, Wells Fargo serves as the investment adviser/manager,
transfer agent, selling agent and dividend disbursing agent to certain
Affiliated Funds.
(b) Wells Fargo Securities, Inc. (WFSI), a wholly owned broker-
dealer of Wells Fargo, is a full service broker-dealer registered with
the SEC and a member of the National Association of Securities Dealers.
WFSI provides a full range of brokerage services to retail and private
customers and is principally located in San Francisco, California.
(c) Stephens of Little Rock, Arkansas, is a full service broker-
dealer and investment advisory firm that is unrelated to Wells Fargo
and/or its affiliates. It is the clearing broker for WFSI and the
sponsor and administrator for the Affiliated Funds. Stephens also
serves as the principal underwriter or distributor of each Affiliated
Fund's shares.
(d) Wells Fargo Nikko Investment Advisors (WFNIA) is a general
partnership that was formerly 50 percent owned by a subsidiary of Wells
Fargo and 50 percent owned by a subsidiary of The Nikko Securities Co.,
Ltd., an unaffiliated Japanese securities firm. WFNIA is a registered
investment adviser and serves as a sub-adviser to certain of the
Affiliated Funds. WFNIA maintains its principal place of business in
San Francisco, California.
(e) Wells Fargo Institutional Trust Company, N.A. (WFITC) is a
trust company that was 99.9 percent owned by WFNIA and 0.1 percent
owned by Wells Fargo & Company. WFITC serves as the custodian for
certain of the Affiliated Funds. WFITC maintains its principal place of
business in San Francisco, California.
Pursuant to an agreement dated June 21, 1995, Wells Fargo & Company
and Wells Fargo agreed to effect the sale of all of their right, title
and interest in the capital stock of WFITC and the partnership interest
in WFNIA, respectively, to Barclays Bank PLC, Barclays California
Corporation and Barclays Bank of Canada (collectively, Barclays), all
of which are unrelated to Wells Fargo & Company, Wells Fargo or any of
their affiliates. After consummation of the sale, which occurred on
December 29, 1995, WFITC and WFNIA became a part of BZW Global
Investors, an indirect wholly owned subsidiary of Barclays Bank PLC.
The new entity is located in San Francisco, California.
(f) The Plans are qualified plans, IRAs, SARSEPs and SEP-IRAs for
which Wells Fargo acts as master or prototype plan sponsor, mass
submitter sponsor and identical adopter, custodian, directed trustee or
recordkeeper. None of the Plans are sponsored by Wells Fargo or its
affiliates.
Description of the Affiliated Funds
2. The Affiliated Funds consist of the Stagecoach Funds, Inc. (the
Stagecoach Funds) and the Overland Express Funds, Inc. (the Overland
Funds), which are open-end investment companies registered under the
'40 Act. The Stagecoach Funds were organized as a Maryland corporation
in September 1991 and currently offer sixteen separate portfolios. The
Overland Funds
[[Page 64154]]
were organized as a Maryland corporation in April 1987 and currently
offer shares in twelve separate portfolios. Each Affiliated Fund is
registered under the Securities Act of 1933, as amended (the '33 Act),
and the '40 Act.
Each Affiliated Fund is designed to provide a means of investing in
separate portfolios that are professionally managed by Wells Fargo or
sub-advised by WFNIA. These portfolios may be sold through WFSI or
Wells Fargo as selling agent on behalf of the Affiliated Funds. Shares
in the Stagecoach Funds and the Overland Funds are currently being
offered by Wells Fargo to Plan customers, at no load.
Overall management and supervision of each Affiliated Fund rests
with such Fund's Board of Directors (the Directors). The Directors
approve all significant agreements involving the appropriate Affiliated
Fund and the persons and companies that furnish services. At least 40
percent of the Directors are unrelated to Wells Fargo and its
affiliates, including Stephens.
Currently, fifteen Affiliated Funds are being offered to investors
under the Portfolio Advisor Program. These Fund portfolios range from
the Stagecoach Corporate Stock Fund to the Overland U.S. Treasury Money
Market Fund. The Affiliated Funds are further divided into eight asset
sub-classes which range from Growth and Income to Cash. A number of the
portfolios are sub-advised by WFNIA whose sub-advisory fees are paid by
Wells Fargo from its Advisory Fees.
3. Wells Fargo serves as each Affiliated Fund's investment manager
pursuant to an advisory agreement entered into with such Fund. In
addition, Wells Fargo serves as the transfer agent, selling agent and
dividend disbursing agent of each Affiliated Fund, as custodian of
certain of the Affiliated Funds and as shareholder servicing agent of
the Stagecoach Funds.
For services rendered to the Affiliated Funds by Wells Fargo, its
affiliates or Stephens, the underlying contracts entered thereunder
must be approved by the Directors of each Affiliated Fund, including a
majority of disinterested Directors. The contracts must be approved for
an initial period of up to two years and then reapproved by the
Directors or the shareholders of the Affiliated Funds and by the
disinterested Directors, at least annually thereafter. Subject to the
supervision and direction of the Directors, Wells Fargo manages the
investment and reinvestment of each Affiliated Fund's assets and
provides investment guidance and policy direction in connection with
the objectives of the Affiliated Funds.
Each Affiliated Fund portfolio pays Wells Fargo Advisory Fees that
are computed daily and paid monthly at an annual rate based on a
percentage of the value of the portfolio's average daily net assets.
Currently, the annualized Advisory Fees range from 0.05 percent to 0.70
percent depending upon the portfolio.
In addition to the Advisory Fees, Wells Fargo and WFTIC may receive
custody, portfolio accounting, transfer agency and shareholder
servicing expenses from the Affiliated Funds (i.e., the Administrative
Fees) which may be waived from time to time. For some portfolios, the
Administrative Fees are included in that portion of Wells Fargo's
Advisory Fee that is paid to the sub-adviser. If not included in the
Advisory Fee, the current fee for (a) custodial services is 0.0167
percent annually, (b) $2,000 per month plus 0.07 percent on the first
$50 million, 0.045 percent on the next $50 million and 0.02 percent on
the excess over $100 million for portfolio accounting services, (c) a
minimum of $3,000 monthly, plus various transaction charges for
transfer agency services, and (d) 0.00 percent to 0.30 percent for
shareholder servicing.
4. Stephens serves as each Affiliated Fund's sponsor and
administrator and as distributor of portfolio shares. In general,
Stephens manages all aspects of the administration and operation of the
portfolios of the Affiliated Funds. For services provided to the
portfolio, Stephens receives a fee that is computed daily and paid
monthly at an annual rate based on a percentage of the value of the
portfolio's average net assets. As distributor, Stephens is the
principal underwriter of the shares of each Affiliated Fund. Stephens
enters into selling agreements with broker-dealers and other financial
institutions (i.e., selling agents) which make such shares available to
their customers. Stephens receives 12b-1 Fees from certain of the
Affiliated Fund portfolios. These fees range from 0.05 percent of net
assets annually from the Stagecoach Funds to 0.75 percent of net assets
annually from certain Overland Funds. In addition, Stephens receives
Administrative Fees from each Affiliated Fund portfolio ranging from
0.03 percent to 0.15 percent annually of such portfolios' net assets.
5. WFSI has entered into selling agreements with Stephens and acts
as a selling agent for certain Affiliated Fund portfolios. However,
with respect to Plans investing in the Affiliated Funds, WFSI will not
receive a sales load or commission (in the form of a 12b-1 Fee) from
Stephens.
6. WFNIA acts as the sub-adviser for certain portfolios. For
services rendered, WFNIA is paid a fee that is computed daily and paid
monthly at an annual rate based on a percentage of the portfolio's
average daily net assets. As stated above, these sub-advisory fees are
paid by Wells Fargo out of its Advisory Fees. Although WFNIA may
provide investment advice to such portfolios, Wells Fargo retains final
investment discretion with respect to the management of the assets of
each portfolio.
7. WFTIC currently acts as the custodian of the assets of certain
of the Affiliated Funds and it receives a custodian fee for such
services. The amount of this expense, to the extent not included in the
Advisory Fees is 0.0167 percent of the daily net assets of the
applicable Affiliated Fund.
Description of the Third Party Funds
8. The Third Party Funds are open-end, diversified management
investment companies registered under the '40 Act whose sponsors,
administrators, distributors, investment advisers and sub-advisers are
not affiliated with Wells Fargo or its affiliates. The Third Party
Funds may be made available from time to time to Plans investing in the
Portfolio Advisor Program.
Description of the Portfolio Advisor Program
9. The Portfolio Advisor Program is an asset allocation program
that has been offered by Wells Fargo to Independent Fiduciaries of
Plans since October 1, 1995. It is designed to provide small- and
medium-sized Plans with access to the type of investment advice that is
typically available to larger investors. The Portfolio Advisor Program
is intended to provide a format for investment with the following
features--a unified account statement covering all investments,
automatic allocation of assets and contributions, a single asset
allocation fee and no sales charges on purchases, redemptions,
reinvestments or transfers between investments.<SUP>3 The minimum
investment required to establish a Portfolio Advisor Program Account is
$10,000.<SUP>4
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\3\ Although shares in the Affiliated Funds can be marketed
outside of the Portfolio Advisor Program, such shares would
generally carry load fees.
\4\ If an investor has already opened a Portfolio Advisor
Program Account with Wells Fargo with a minimum investment of
$10,000, that same investor may open a second Portfolio Advisor
Program Account with Wells Fargo with a minimum investment of
$2,000. An investor having other accounts with Wells Fargo of
$10,000 or more that are not Portfolio Advisor Program Accounts will
not be eligible for this lower investment minimum.
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[[Page 64155]]
With respect to a Section 404(c) Plan, Wells Fargo will offer the
Portfolio Advisor Program to the Plan's Independent Fiduciary as an
investment option for the Plan or a portion of the Plan. Alternatively,
the Plan's Independent Fiduciary may decide to utilize the Portfolio
Advisor Program for all of the Plan's investment needs. In either
situation, Wells Fargo will afford the Independent Fiduciary the
opportunity to decide whether Wells Fargo will interact directly with
the Plan's Directing Participants or exclusively with the Independent
Fiduciary.
Wells Fargo will provide each Independent Fiduciary contemplating
investing in the Portfolio Advisor Program with a brochure describing
the Program; an Account agreement; a description of the Allocation
Models; and a reference guide/disclosure document providing detailed
information about the Portfolio Advisor Program, the fees charged
thereunder, the procedures for establishing, making additions to and
withdrawing from Accounts, and other related information. In the case
of a Section 404(c) Plan, this information may be provided to either
the Directing Participants by Wells Fargo or to the Independent
Fiduciary depending upon the arrangement such Independent Fiduciary has
negotiated with Wells Fargo.<SUP>5
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\5\ The Department wishes to point out that an Independent
Fiduciary has the responsibility to disseminate all information it
receives to each Directing Participant investing in the Portfolio
Advisor Program.
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10. Individual IRA, SEP-IRA and single participant Keogh plan
participants contemplating investing in the Portfolio Advisor Program
will open an Account with Wells Fargo. With respect to the Independent
Fiduciary of a Section 404(c) Plan, Wells Fargo will ask such fiduciary
to select the type of Account that is to be established. The
Independent Fiduciary of a Section 404(c) Plan may open a custody
Account for each individual Directing Participant or, in the
alternative, establish single custody Accounts in the name of the Plan
reflecting the grouping of Directing Participants by similar asset
Allocation Models.<SUP>6
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\6\ If Wells Fargo establishes a single custody account in the
name of a Section 404(c) Plan, it is represented that Wells Fargo
will not keep track of the individual interests of the Directing
Participants. Instead, the Independent Fiduciary will maintain such
records or have a third party recordkeeper perform this service.
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11. After opening an Account, the Independent Fiduciary will obtain
and complete an Account Agreement and risk tolerance and goal analysis
Questionnaire (which may be in paper or electronic form). Then, the
Independent Fiduciary will present the completed Account Agreement and
Questionnaire to a Personal Financial Officer or other representative
of Wells Fargo. The Questionnaire will be scored to determine which one
of several Allocation Models is most appropriate given the financial
goals, objectives and risk tolerances identified by the Independent
Fiduciary in the Questionnaire.<SUP>7
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\7\ Wells Fargo proposes to canvass each investor annually to
ascertain whether any of the answers to the Questionnaire have
changed from the previous year. If so, Wells Fargo will update the
Questionnaire. However, in the event an investor wishes to change
his or her Questionnaire during a quarter so that another Allocation
Model is called for, that new Allocation Model will be presented to
and approved by the investor and the change to the new Allocation
Model will be effected immediately.
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In the case of a Section 404(c) Plan, the Independent Fiduciary may
elect to have Wells Fargo meet with each Directing Participant. Then, a
Personal Financial Officer will provide information relating to the
Portfolio Advisor Program as noted above, have each Directing
Participant complete the Questionnaire, present the Directing
Participant with a recommended Allocation Model and provide the
Directing Participant with the relevant Prospectuses of the Funds in
the Allocation Model.
Alternatively, if the Independent Fiduciary chooses to have Wells
Fargo interact with it instead of the Directing Participants, the
Personal Financial Officer will meet with the Independent Fiduciary and
provide such fiduciary with a description of the Portfolio Advisor
Program for dissemination to the Directing Participants. The Personal
Financial Officer will also give the Independent Fiduciary
Questionnaires for completion by the Directing Participants. Based on
the results of the returned Questionnaires, Wells Fargo will then
recommend to the Independent Fiduciary, the appropriate Allocation
Models and provide such fiduciary with relevant Prospectuses of the
Funds in the recommended Allocation Models for distribution to the
Directing Participants.
12. The Allocation Models are designed to satisfy a variety of risk
tolerances and investment horizons. At the outset, there will be only
nine Allocation Models, some with growth-based investment objectives
and others with income-based investment objectives. In the future, more
Allocation Models may be added by Wells Fargo. Each Allocation Model
will have three asset classes and initially, nine asset sub-classes.
Table I shows the asset distribution for a sample Portfolio Advisor
Program Allocation Model.
Table I.--Portfolio Advisor Program Sample Allocation Model
[Moderate Medium-Term Model Allocation]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min Norm Max Min Norm Max
Class (percent) (percent) (percent) Fund type Asset sub-class (percent) (percent) (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Stock Funds......................... 45 60 75 Third party............ Growth................. 0 15 30
Third party............ Equity International... 0 5 20
Affiliated............. Growth & Income........ 0 15 30
Affiliated............. Equity Income.......... 0 15 30
Affiliated............. Asset Allocation....... 0 10 25
Bond Funds.......................... 25 40 55 Affiliated............. Total Return Bond...... 0 15 30
Affiliated............. Intermediate Bond...... 0 15 30
Affiliated............. Short-Term Bond........ 0 10 25
Money Market Funds.................. 0 0 30 Affiliated............. Cash................... 0 0 30
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: A Third Party Fund will never be replaced by an Affiliated Fund whereas an Affiliated Fund may be replaced by a Third
Party Fund. (See discussion
in Representation 15 regarding extraordinary changes that are outside the accepted percentage bands.)
[[Page 64156]]
13. The Allocation Models are developed and maintained by the Wells
Fargo Bank Asset Allocation Committee (the Allocation Committee) which
is comprised of senior investment officers of Wells Fargo's Investment
Management Group. The Allocation Committee is responsible for
determining the overall asset allocation of each Allocation Model among
the currently nine asset sub-class categories. The Allocation Committee
integrates both quantitative and fundamental analysis to determine
optimal Allocation Models that match risk and reward objectives. In
this regard, the Allocation Committee does not rely upon a software
program but rather examines current asset allocation strategies and
determines changes based on the present financial outlook, estimates of
expected returns, volatility in markets, asset class correlation,
economic trends and various securities valuation measures. These
criteria are provided by Wells Fargo to all Portfolio Advisor Program
investors in the disclosure materials.
14. The Allocation Models may be adjusted by the Allocation
Committee as changes in the economy and market conditions dictate
within the permissible ranges described below in Representation 15.
Such adjustments may include changing the investment mix of the
Allocation Models by altering the proportion of assets invested among
the asset sub-classes. However, such adjustments do not include the
Allocation Committee's adding to or deleting from Funds in an
Allocation Model without obtaining the written consent of the
Independent Fiduciary or the Directing Participant.
In addition, the Allocation Committee is subject to certain
limitations in changing the design of the Allocation Models. For
example, the Allocation Committee is required to design Allocation
Models that include the stock, bond and money market fund asset classes
and their respective sub-classes.
15. The Independent Fiduciary or Directing Participant will
authorize Wells Fargo to change the asset mix of a given Allocation
Model within a 15 percent range (i.e., 15 percent above or below the
normal position for the stock and bond asset sub-classes).<SUP>8
Movement within each sub-class of assets will also be authorized within
a range of no more than 15 percent above or below the normal position.
The Independent Fiduciary or Directing Participant will also authorize
Wells Fargo to change the cash position in a given Allocation Model in
a range of 0-30 percent above or below the normal position to
accommodate extremes in the other two asset sub-classes.<SUP>9 Wells
Fargo will make changes in the asset mix within these authorized limits
without seeking further approval from the Independent Fiduciary or the
Directing Participant. However, Wells Fargo will not change the asset
mix outside those limits unless it provides the Independent Fiduciary
or Directing Participant with 30 days' advance written notice of the
proposed change <SUP>10 and gives the Independent Fiduciary or
Directing Participant time to elect not to have the change made.<SUP>11
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\8\ Movement within each sub-class will apply to the total
assets held in an Independent Fiduciary's or a Directing
Participant's Account.
\9\ For any Allocation Model, it is represented that not more
than 30 percent of an investor's assets can be placed in the Money
Market Funds. If the range for cash is exceeded on a rebalancing
date due to market forces, then the assets will be rebalanced to
achieve the targeted percentages established in the relevant
Allocation Model. The rebalancing will require a redemption of
shares in the Money Market Funds so that the percentage in cash will
be aligned with the relevant Allocation Model percentage. In
addition, a corresponding purchase of funds in the asset sub-classes
that are below the targeted range will be made. (See Representation
18 for a discussion of the rebalancing of Accounts.)
\10\ Changes outside these limits may take the form of an
extraordinary shift (such as the movement of a large percentage of
assets into cash if the Allocation Committee determines that such a
move is warranted by economic conditions) or a change in the normal
position for the allocation mix of a particular Allocation Model
which the Allocation Committee considers necessary because of a more
permanent shift in market or economic conditions. In either case,
Wells Fargo will notify each Independent Fiduciary whose Plan is
invested in the relevant model or Directing Participant of the
change and give such Independent Fiduciary or Directing Participant
time to elect not to have the change made. The change will then be
made for all Independent Fiduciaries or Directing Participants who
do not elect otherwise. If a change is made to the normal position
for the allocation mix of a particular Allocation Model, Wells Fargo
will be authorized to change the allocation of assets within a 15
percent range (30 percent in the case of cash) above or below the
newly established normal position without notifying the Independent
Fiduciary in advance. If, on the other hand, after first notifying
the Independent Fiduciary or Directing Participant, Wells Fargo
makes an extraordinary change to the asset allocation which moves it
outside the authorized limit, Wells Fargo will be authorized to
return the asset mix back within the authorized limit without
further notice, but any other change which will result in the asset
mix remaining outside the authorized limit will only be made after
giving 30 days' advance written notice and allowing the Independent
Fiduciary or Directing Participant the opportunity to elect not to
have such change made.
\11\ Assuming an Independent Fiduciary of a Section 404(c) Plan
establishes a single custody Account with Wells Fargo in the name of
the Plan, it is represented that if a Directing Participant does not
wish to have his or her assets reallocated in accordance with Wells
Fargo's recommendation, such Directing Participant may choose
another Allocation Model or leave the Portfolio Advisor Program.
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16. Wells Fargo's Investment Review Committee (the Review
Committee), which is comprised of senior Wells Fargo officers, is
responsible for selecting Affiliated Funds and Third Party Funds that
satisfy the asset allocations specified by the Allocation Committee for
each Allocation Model. With the exception of the Growth and Equity
International asset sub-classes, the Review Committee will select
portfolios of the Affiliated Funds for investment. The Review Committee
will always select Third Party Funds for investment to the extent an
Allocation Model calls for an allocation of assets in the Equity
International and Growth sub-classes. If, however, the Review Committee
determines that investment in an Affiliated Fund is imprudent (e.g.,
the Affiliated Fund does not meet the requirements of a necessary asset
sub-class), it will select a Third Party Fund in lieu of an Affiliated
Fund for a particular sub-class of assets.<SUP>12 If a Third Party Fund
is substituted for an Affiliated Fund, the Review Committee must
thereafter use only a Third Party Fund (i.e., the same Third Party Fund
or another Third Party Fund). In the applicants' view, this precaution
will remove any conflicts of interest that may arise if the Review
Committee is faced with the prospect of selecting an Affiliated Fund
over a Third Party Fund.<SUP>13
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\12\ Changes in the Affiliated Funds or Third Party Funds used
to satisfy the need for investment in a particular asset sub-class
will only be made after Wells Fargo has notified all of the affected
Independent Fiduciaries or Directing Participants in writing and has
explained that the proposed changes will go into effect if the
Independent Fiduciaries or Directing Participants do not elect to
withdraw by the effective date of such change. (See Representation
27.)
\13\ If the Allocation Committee should later divide the asset
sub-classes for an Allocation Model into one or more new sub-
classes, the Review Committee will select Affiliated Fund Portfolios
to satisfy the call for investment in the new sub-class unless (a)
there is no Affiliated Fund Portfolio which invests in the new sub-
class of assets; (b) Wells Fargo's Affiliated Fund is not performing
as well as a similar Third Party Fund based upon such measurable
criteria as performance, expense ratio, standard deviation and, in
the case of the Bond Funds, the SEC yield; or (c) a Third Party Fund
has been utilized initially for the asset sub-class that is being
divided.
For example, Wells Fargo represents that ``total return'' is a
recognized sub-class of the Bond Fund asset class that is set forth
in Table I. Assuming the industry begins distinguishing between U.S.
bonds and foreign bonds, Wells Fargo explains that it may do this
for the benefit of its investors. In this regard, if an Affiliated
Fund has been used as the Fund for the total return sub-class, and
Wells Fargo has available two Bond Funds, each of which is
appropriate for the new sub-classes, Wells Fargo explains that it
will utilize these Affiliated Funds. If an Affiliated Fund is being
used for the U.S. bond sub-class, but Wells Fargo does not have an
appropriate Affiliated Fund for the foreign bond sub-class, it will
select a Third Party Fund. Thus, when the original sub-class is
serviced by an Affiliated Fund and that sub-class is divided, Wells
Fargo states that it may use an Affiliated Fund, a Third Party Fund
or a combination of the two. If, on the other hand, a Third Party
Fund is being used for the total return sub-class, Wells Fargo must
utilize Third Party Funds for both the new divided sub-classes. In
any event, Wells Fargo represents that it will give all investors 30
days' notice and the ability to object before any sub-class is
divided.
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[[Page 64157]]
17. The asset allocation services provided by the Personal
Financial Officer will not be binding on the Independent Fiduciary or
Directing Participant. No action will be taken on the recommendation
unless and until the Independent Fiduciary or Directing Participant
accepts and approves in writing the particular Allocation Model and the
corresponding investment mix (i.e., the investment allocation)
recommended by the Personal Financial Officer. The Independent
Fiduciary or Directing Participant can add or withdraw Plan assets to
or from the respective Account at any time (subject to a $100 minimum
redemption and purchase requirement) and can also choose a different
Allocation Model if the Independent Fiduciary's or Directing
Participant's investment needs and goals have changed. Moreover, Wells
Fargo intends to ask Independent Fiduciaries or Directing Participants
annually whether any information provided in the Questionnaire should
be changed or updated.
Rebalancing and Reallocation of Plan Accounts
18. Once an Independent Fiduciary or Directing Participant has
directed Wells Fargo to invest Plan assets that are held in an Account
in a particular Allocation Model, Wells Fargo will invest the Account
in the Affiliated Funds and/or Third Party Funds that the Allocation
Committee has previously chosen to satisfy the asset allocation called
for by the Allocation Model. It is anticipated that, over time,
disproportionate earnings as between asset types will cause the
Account's investment mix to drift out of balance with the Allocation
Model originally chosen by the Independent Fiduciary or Directing
Participant.
For example, the Allocation Model chosen by the Independent
Fiduciary or Directing Participant may require that 60 percent of
Account assets be invested in the Stock Funds and 40 percent of Account
assets be invested in the Bond Funds. If the Stock Funds perform better
than the Bond Funds during a particular period of time, more than 60
percent of the Account's assets will be invested in the Stock Funds by
the end of the period.
To correct this imbalance, Wells Fargo will move assets among
investments by buying and selling shares of the Affiliated Funds and/or
Third Party Funds on the second to the last business day of each
calendar quarter. For purposes of rebalancing, Wells Fargo will use the
net asset values of the affected Funds as of close of business for the
preceding trading day.<SUP>14 The applicants represent that the act of
rebalancing Accounts will not involve any exercise of investment
discretion on the part of Wells Fargo or its affiliates because the
rebalancing will be confined to bringing the Account into balance with
the Allocation Model chosen by the Independent Fiduciary or the
Directing Participant.
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\14\ It is represented that neither Wells Fargo nor its
affiliates will receive fees or commissions in connection with the
rebalancing. It is also represented that the current percentage
threshold for triggering rebalancing is a deviation of more than 5
percent above or below the targeted percentage for an asset sub-
class.
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Wells Fargo will also make periodic changes (or reallocations) to
the asset mix of the Allocation Models and to the mix and identity of
the Affiliated Funds and/or Third Party Funds that satisfy the
Allocation Models. Such changes will be made to take into account
changes in the economy and market conditions and will be made
independently of the selection of Funds. The changes will also be
confined to the percentage bands set forth above in Table I. When
changes are made to the Allocation Models, Wells Fargo will
automatically realign each Plan Account to make the Account's
investment mix match the new investment mix of the Allocation Model
selected by the Independent Fiduciary or Directing Participant.
Wells Fargo will realign the Accounts' assets by shifting assets
between Affiliated Funds and Third Party Funds according to changes in
the Allocation Model. This type of automatic realignment will take
place only within the percentage bands that have been authorized by the
Independent Fiduciary or Directing Participant. If an Allocation Model
changes such that assets would be allocated outside of the authorized
bands, Wells Fargo will notify the affected Independent Fiduciary or
Directing Participant of the proposed change and give each individual
an opportunity to elect not to permit such change.<SUP>15
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15 In the preceding example, if the Allocation Model were to be
changed such that the new investment allocation is 55 percent in the
Stock Funds and 45 percent in the Bond Funds (a 5 percent change
that is within 15 percent of the normal position for that Allocation
Model), Wells Fargo would then sell sufficient shares in the Stock
Funds to reduce the percentage of assets invested in such fund to 55
percent and invest the proceeds in the Bond Funds. If, however, a
change of more than 15 percent is proposed, Wells Fargo will first
notify each Independent Fiduciary or Directing Participant affected
and make changes to the Accounts of the Independent Fiduciaries or
Directing Participants who did not elect otherwise.
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Disclosures
19. Aside from the Questionnaire described above, in order for a
Plan to participate in the Portfolio Advisor Program, Wells Fargo will
provide an Independent Fiduciary or Directing Participant, with the
following materials and/or oral disclosures: (a) A copy of the
agreement between the Plan and Wells Fargo relating to the Plan's
participation in the Portfolio Advisor Program; (b) upon written
request to Wells Fargo, a copy of its investment advisory agreement and
sub-advisory agreement pertaining to the Affiliated Funds as well as
its distribution agreement pertaining to the Third Party Funds; (c) a
written recommendation of a specific Allocation Model together with a
copy of the Independent Fiduciary's Questionnaire and answers; (d) a
written or oral explanation of the Portfolio Advisor Program and the
operation and objectives of the Allocation Models; (e) sufficient and
understandable disclosure relating to rebalancing and reallocating the
Allocation Models; (f) a copy of the proposed and final exemptions
granting the relief requested herein; (g) written disclosures of Wells
Fargo's affiliation or nonaffiliation with the parties who act as
sponsors, distributors, administrators, investment advisers and sub-
advisers, custodians and transfer agents of the Third Party Funds and
the Affiliated Funds; and (h) in the case of a Section 404(c) Plan, to
the extent requested by the Independent Fiduciary, an explanation by a
Personal Financial Officer to Directing Participants in such Plan of
the services offered under the Portfolio Advisor Program, the operation
and objectives of the Funds and copies of the documents described in
(a)-(g).
Wells Fargo will make available for inspection by the Independent
Fiduciary or Directing Participant at the time of enrollment in the
Portfolio Advisor Program, copies of Prospectuses of each Affiliated
Fund and Third Party Fund in which a Plan's assets are invested. The
Prospectuses will also be mailed to the Independent Fiduciary, or if
applicable, to the Directing Participant, after the initial investment
of assets under the Portfolio Advisor Program. These documents discuss
the investment objectives of the Affiliated Funds and the Third Party
Funds, the policies employed to achieve these objectives, the corporate
affiliation existing between Wells Fargo and its
[[Page 64158]]
affiliates, the compensation paid to such entities and any information
explaining the risks attendant to investing in the Affiliated Funds or
Third Party Funds. In addition, upon written or oral request, an
Independent Fiduciary or Directing Participant will be given a
Statement of Additional Information supplementing the applicable
Prospectus which describes the securities and other instruments in
which the Funds may invest, the investment policies and strategies that
the Affiliated Funds or Third Party Funds may utilize, including a
description of the risks.
20. If accepted as an investor in the Portfolio Advisor Program,
the Independent Fiduciary or Directing Participant will be required to
acknowledge in writing, prior to investing through the Program, that
such Independent Fiduciary or Directing Participant has received copies
of the aforementioned documents. With respect to a Title I Plan that
does not permit participant- directed investments as contemplated under
section 404(c) of the Act, written acknowledgement of the receipt of
such documents is provided by the Independent Fiduciary (i.e., the Plan
administrator, trustee, investment manager or named fiduciary, as the
recordholder of shares of the Funds.) Such Independent Fiduciary will
be required to represent in writing to Wells Fargo that such fiduciary
is (a) independent of Wells Fargo and its affiliates; (b) capable of
making independent decisions regarding the investment of Plan assets;
(c) knowledgeable with respect to the Plan in administrative matters
and funding matters related thereto; and (d) able to make an informed
decision concerning participation in the Portfolio Advisor Program.
With respect to a Section 404(c) Plan or a Plan that is covered
under Title II of the Act, the Directing Participant or the Independent
Fiduciary is required to acknowledge, in writing, receipt of such
documents and represent to Wells Fargo that such individual is (a)
independent of Wells Fargo and its affiliates; (b) knowledgeable with
respect to the Plan in administrative matters and funding matters
related thereto; and, (c) able to make an informed decision concerning
participation in the Portfolio Advisor Program.
21. On an ongoing basis, Wells Fargo will provide the Independent
Fiduciary with (a) written confirmations of each purchase and
redemption of shares of an Affiliated Fund or Third Party Fund
(including transactions resulting from the realignment of assets caused
by a change in an Allocation Model's investment mix and from periodic
rebalancing of Account assets); (b) telephone quotations of such
Independent Fiduciary's Account balance; (c) a periodic (but not less
frequently than quarterly) statement of Account specifying the net
asset value of a Plan's assets that are invested in such Account, a
summary of purchase, sale and exchange activity and dividends received
or reinvested and a summary of cumulative realized gains/losses; (d)
semiannual and annual reports which will include financial statements
for the Funds and the fees paid by the Funds to Wells Fargo and its
affiliates; (e) a quarterly newspaper or other report pertaining to the
applicable Allocation Model describing such Allocation Model's
performance during the preceding quarter, market conditions and
economic outlook and, if applicable, prospective changes in Affiliated
Fund and Third Party Fund allocations for the Allocation Model and the
reasons therefor; (f) a written or oral inquiry at least once annually
to determine if the information provided in the Questionnaire is still
accurate and to determine if such information should be updated; and
(g) at least annually, a Termination Form that the Independent
Fiduciary may use to withdraw from the Portfolio Advisor Program
together with instructions for using such form.
With respect to a Section 404(c) Plan, the Independent Fiduciary
will determine whether the aforementioned information is provided
directly to the Directing Participants by Wells Fargo or whether such
fiduciary will receive this information and disseminate it to the
Directing Participants. If custody accounts are established in the
names of the Directing Participants, such participants will receive
individualized information.
Fee Structure
22. As to each investing Plan, the total fees that are paid to
Wells Fargo and its affiliates will constitute no more than reasonable
compensation for the services provided.<SUP>16 In this regard, for its
asset allocation and related services, Wells Fargo will charge each
participating Plan an annual Plan-level investment fee. The Outside Fee
will be based on total assets under management which are attributable
to such Plan's investment in both the Affiliated Funds and the Third
Party Funds. The annualized Outside Fee will be 1.95 percent (for
balances below $20,000), 1.85 percent (for balances of between $20,000
and $100,000, 1.65 percent (for balances between $100,000 and $250,000)
and 1.50 percent (for balances above $250,000).<SUP>17 From time to
time, Wells Fargo may reduce the Outside Fee for promotional purposes.
The duration and promotional nature of such reductions will be
disclosed to investors. The Outside Fee will be computed quarterly on
the average daily value of assets in the Plan's Account during the
quarter and will be deducted directly from the Account on a quarterly
basis.
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<SUP>16 The fact that certain transactions and fee arrangements
are the subject of an administrative exemption does not relieve the
fiduciaries of the Plans from the general fiduciary responsibility
provisions of section 404 of the Act. Thus, the Department cautions
Independent Fiduciaries of Plans investing in the Funds that they
have an ongoing duty under section 404 of the Act to monitor the
services provided to the Plans to assure that the services remain
appropriate and that the fees paid by the Plans for such services
are reasonable in relation to the value of the services provided. In
considering whether to enter into the arrangement for the provision
of asset allocation services, the Department emphasizes that it
expects the Independent Fiduciary to fully understand that the
selection or addition of Third Party Funds may result in a Plan
paying a larger overall aggregate fee for the package of services
than if the fiduciary had selected Affiliated Funds.
<SUP>17 In the case of a Section 404(c) Plan, the computation
of the Outside Fee will be based on the average daily value of all
of the assets in the Accounts of Directing Participants who invest
in the Portfolio Advisor Program. In other words, the Outside Fee is
based on the aggregate asset value of the Plan's asset and not on
the value of each Directing Participant's Account in the Portfolio
Advisor Program. The result is that all Directing Participants in a
Section 404(c) Plan will be subject to the same Outside Fee as well
as the breakpoints.
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23. Wells Fargo will receive Advisory Fees from the Affiliated
Funds ranging from 0.05 percent to 0.70 percent, annually, depending
upon the applicable portfolio. A sub- advisory fee is paid by Wells
Fargo out of its investment advisory fee to WFNIA. Wells Fargo may also
receive Administrative Fees from the Affiliated Funds. As stated in
Representation 3, if such fees are not included in the Advisory Fee for
a portfolio, the current fee for (a) custodial services is 0.0167
percent annually, (b) $2,000 per month plus 0.07 percent on the first
$50 million, 0.045 percent on the next $50 million and 0.02 percent on
the excess over $100 million for portfolio accounting services, (c) a
minimum of $3,000 monthly, plus various transaction charges for
transfer agency services, and (d) 0.00 percent to 0.30 percent for
shareholder servicing. Further, Wells Fargo may receive 12b-1 fees in
the form of ``trailing'' commissions of 0.05 percent to 0.50 percent of
assets invested with respect to Third Party Funds in the Portfolio
Advisor Program.
24. With respect to the Affiliated Funds, Wells Fargo proposes to
offset,
[[Page 64159]]
quarterly, against its Outside Fee, (a) all Advisory Fees and
Administrative Fees that are paid by the Affiliated Funds to Wells
Fargo, its affiliated sub-advisers, its former affiliates, WFNIA and
WFITC, and to other unrelated parties and (b) all 12b-1 Fees and
Administrative Fees that are paid to Stephens.<SUP>18 As stated in
Representation 3, the annualized Advisory Fees currently range from
0.05 percent to 0.70 percent of the portfolio's average daily net
assets. As stated in Representation 4, the annualized 12b-1 Fees that
are paid to Stephens range from 0.05 to 0.75 percent of the net assets
of the Affiliated Funds. In addition, the annualized Administrative
Fees that are paid to Stephens range from 0.03 percent to 0.15 percent
of the portfolio's net assets. With respect to the Third Party Funds,
Wells Fargo proposes to offset quarterly, against the Outside Fee, all
12b-1 Fees that it receives. As stated in Representation 23, these fees
currently range from 0.05 percent to 0.50 percent annually of net
assets invested.
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<SUP>18 The Department notes that if the Advisory Fee that is
offset includes a fee that is paid by Wells Fargo to an unrelated
sub- adviser, no additional offsetting will be required with respect
to that portion of the fee that is actually paid by Wells Fargo to
such sub-adviser.
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All such Fees described above will be offset in accordance with the
crediting mechanism that is described in Prohibited Transaction
Exemption (PTE) 77-4 (42 FR 18732, April 8, 1977). After the offset,
Wells Fargo will be paid a Net Outside Fee that may be deducted from
Plan Accounts. The Net Outside Fee, together with the Advisory Fees,
the Administrative Fees and 12b- 1 Fees will equal the Outside Fee
prior to any offset. Wells Fargo believes that the offset will
eliminate any potential conflicts of interest that may exist as a
result of the fact that the investment in certain Funds would generate
higher overall fees to Wells Fargo and its affiliates. In addition, by
insuring that the sum of the offset and the Net Outside Fee always
equals the Outside Fee, Wells Fargo believes that the selection of
Affiliated or Third Party Funds will be revenue-neutral.
Table II illustrates the revenue-neutral result of the offset
arrangement. As Table II shows, if a Plan with an Account balance of
$10,000 is invested in a Portfolio in which 50 percent or $5,000 is
invested, respectively, in an Affiliated Fund and a Third Party Fund,
the Plan will be subject to an Outside Fee of $195 or 1.95 percent of
assets invested.
TABLE II.--Example of Revenue-Neutral Fee Offset
----------------------------------------------------------------------------------------------------------------
Percentage Offset (advisory,
of assets Amount administrative, 12b-1
Fund type allocated invested in fees) Net outside Outside fee
to fund fund -------------------------- fee (1.95%)
(percent) Percent Amount
----------------------------------------------------------------------------------------------------------------
Third Party....................... 0.50 5,000 0.25 12.50 85.00 97.50
Affiliated........................ 0.50 5,000 0.80 40.00 57.50 97.50
-----------------------------------------------------------------------------
Total......................... 100.00 10,000 N/A 52.50 142.50 195.00
----------------------------------------------------------------------------------------------------------------
25. At the end of each quarter, Wells Fargo will calculate the
percentage of gross revenues that it has received during the quarter in
the form of Advisory Fees, Administrative Fees and 12b-1 Fees from the
applicable Affiliated Fund or Third Party Fund. Such percentage will
also include all 12b-1 Fees and Administrative Fees that are paid to
Stephens. These figures will be calculated as a percentage of the
average daily net asset value of assets in the appropriate Fund. The
weighted average of such revenues (the Offset Percentage) will then be
calculated for each Allocation Model. This will yield the amount of
Advisory Fees, Administrative Fees and 12b-1 Fees that are received.
This amount will be expressed as a percentage of the average daily net
value of Account assets. Wells Fargo proposes to reduce the Outside Fee
for the quarter for each Plan by subtracting from the Outside Fee the
Offset Percentage for the Allocation Model in which Plan assets were
invested during the quarter. Only after the Offset Percentage has been
subtracted will Wells Fargo deduct the Outside Fee from the Plan
Account in the Portfolio Advisor Program.
26. Table III shows the calculation of the Offset Percentage for a
sample Allocation Model. In this example, gross revenues for Wells
Fargo, its affiliates and where applicable, Stephens, as between the
Affiliated Funds and the Third Party Funds vary from 0.25 percent to
1.09 percent of the daily net asset value (annualized), depending on
which Affiliated Fund or Third Party Fund is selected. The weighted
average of these revenues for the entire Allocation Model is 0.83
percent (annualized), which is subtracted from the 1.95 percent Outside
Fee, thereby leaving a net Outside Fee of 1.12 percent (annualized) for
the quarter.
Table III.--Example of Fee Offset on Sample Allocation Model
----------------------------------------------------------------------------------------------------------------
Percentage
Total of assets Weighted
Fund type Sub-class revenues* allocated fee
(percent) to fund percentage
----------------------------------------------------------------------------------------------------------------
Third Party......................... Growth................. 0.50 x 15.00 = 7.50
Third Party......................... Equity Intn'tl......... 0.25 x 5.00 = 1.25
Affiliated.......................... Growth & Income........ 1.09 x 10.00 = 10.90
Affiliated.......................... Equity Income.......... 1.09 x 15.00 = 16.35
Affiliated.......................... Asset Allocation....... 0.80 x 10.00 = 8.00
Affiliated.......................... Total Return........... 1.03 x 15.00 = 15.45
Affiliated.......................... Intermediate........... 0.75 x 15.00 = 11.25
[[Page 64160]]
Affiliated.......................... Short-Term............. 0.80 x 10.00 = 8.00
Affiliated.......................... Cash................... 0.75 x 5.00 = 3.75
------------
Total........................... 100.00 82.45
------------
Outside Fee......................... 1.95
Weighted Average of Wells Fargo 0.83
Revenues (82.45 <divide> 100).
Net Account Fee (Annual)--Would be 1.12
Calculated Quarterly.
----------------------------------------------------------------------------------------------------------------
* For the Affiliated Funds, total revenues include all fees that are paid to Wells Fargo, its affiliated sub-
advisers, its former affiliates, Stephens and to other unrelated parties. For the Third Party Funds, total
revenues include 12b-1 Fees. Any other fees that Wells Fargo may receive from the Third Party Funds are paid
from the 12b-1 Fees.
Use of the Termination Form
27. Although an Independent Fiduciary or Directing Participant may
withdraw from the Portfolio Advisor Program at any time, Wells Fargo
will provide each such individual with a Termination Form, at least
annually, but in all cases where Wells Fargo changes the asset mix
outside of the current Allocation Model, when Wells Fargo proposes to
divide a Fund sub-class, when Wells Fargo determines that it is in the
best interest of the Plan to use a Third Party Fund instead of an
Affiliated Fund and whenever the Outside Fee is increased. Wells Fargo
will provide such written notice to the Independent Fiduciary or
Directing Participant at least 30 days prior to the implementation of
the change. The written notification will include the Termination Form
that the Independent Fiduciary or Directing Participant may use to
withdraw from the Portfolio Advisor Program. The Termination Form will
be accompanied by instructions on its use. The instructions will
expressly (a) provide that the authorization is terminable at will and
without penalty, upon receipt by Wells Fargo of written notice from the
Independent Fiduciary or Directing Participant; and (b) explain that
the proposed change will go into effect if the Independent Fiduciary or
Directing Participant does not elect to withdraw by the effective date.
28. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The investment of a Plan's assets in the Portfolio Advisor
Program has been or will be made by a Plan fiduciary or Directing
Participant who is independent of Wells Fargo and its affiliates such
that the Independent Fiduciary or Directing Participant will maintain
complete discretion with respect to participating in the Portfolio
Advisor Program.
(b) No Plan has paid or will pay a fee or commission by reason of
the acquisition, redemption, reinvestment or transfer of shares in the
Funds.
(c) As to each Plan, the total fees that are paid to Wells Fargo
and its affiliates have constituted or will constitute no more than
reasonable compensation for the services provided.
(d) Prior to investing in the Portfolio Advisor Program, each
Independent Fiduciary or Directing Participant have received or will
receive offering materials and disclosures from Wells Fargo which set
forth all material facts concerning the purpose, fees, structure,
operation, Account rebalancing, risks and participation in such
program.
(e) Wells Fargo has provided or will provide written documentation
to an Independent Fiduciary or Directing Participant of its
recommendations or evaluations based upon objective criteria.
(f) The quarterly Outside Fee that is paid by a Plan to Wells Fargo
for asset allocation and related services rendered to such Plan under
the Portfolio Advisor Program will be offset by (i) all Advisory Fees
(including sub-advisory fees) and Administrative Fees received from the
Affiliated Funds by Wells Fargo, its affiliates, its former affiliates,
and unrelated parties, (ii) all 12b-1 Fees and Administrative Fees that
are paid by the Affiliated Funds to Stephens and (iii) all 12b-1 Fees
Wells Fargo receives from the Third Party Funds, such that the sum of
the offset and the Net Outside Fee will always equal the Outside Fee
and the selection of Affiliated or Third Party Funds will always be
revenue neutral.
(g) Although Wells Fargo will have discretion to change the
investment mix of an Allocation Model, it has been and will be bound by
the financial goals and risk tolerances that the model represents and
it will be limited in the degree of change that it can make to an
Allocation Model's investment mix.
(h) Any authorizations made by an Independent Fiduciary or
Directing Participant with respect to increases in the Outside Fee,
changes in the asset mix outside an Allocation Model, the division of a
Fund sub-class, or the substitution of a Third Party Fund for an
Affiliated Fund, have been and will be terminable at will and without
penalty to the Plan, upon receipt by Wells Fargo of written notice of
termination from the Independent Fiduciary or the Directing
Participant.
(i) Each Independent Fiduciary or Directing Participant has
received and will receive ongoing disclosures from Wells Fargo
regarding the continued participation in the Portfolio Advisor Program.
(j) All dealings between the Plans, the Funds and Wells Fargo have
been and will remain on a basis which is at least as favorable to the
Plans as such dealings are with other shareholders of the Funds.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Cassemco, Inc. Retirement Plan and Trust Agreement Located in
Cookeville, Tennessee; Proposed Exemption
[Application No. D-10350]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act
[[Page 64161]]
and section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406(a) and 406 (b)(1) and (b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (A) through (E) of the Code, shall not
apply to the proposed cash sale (the Sale) by the Plan of certain
securities (the Securities) to Cassemco, Inc. the sponsoring employer
(the Employer) and party in interest with respect to the Plan; provided
(1) the Sale is a one-time transaction for cash, (2) the Plan pays no
commissions nor incurs any expenses in connection with the proposed
Sale, and (3) the Plan receives as consideration for the Sale no less
than the fair market value of the Securities as of the date of the
Sale.
Summary or Facts and Representations
1. The Employer, a Tennessee corporation organized October 19,
1978, is in the business of manufacturing protective sporting goods
equipment for sporting-goods dealers and supplying packaging materials
for ammunition to military prime contractors.
Mrs. Barbara Nipper Tetreault is the sole owner of the Employer,
succeeding her late husband in 1991, when also she became the trustee
and fiduciary of the Plan.
The Plan is a defined benefit pension plan with approximately
$137,921.50 in total assets and 31 participants, as of September 3,
1996. The Employer, because of financial problems, discontinued funding
the Plan in 1991. On July 3, 1996, the Plan submitted a formal notice
of termination to the Pension Benefit Guaranty Corporation, and now the
Plan is prepared to distribute the accrued vested benefits of the Plan
to its participants and beneficiaries.
2. The Securities, which the Plan proposes to sell to the Employer,
consist of 956 shares of common stock, and 956 warrants that are
exercisable at $10.50 and expire December 31, 1997. The Securities were
issued to the Plan, effective December 31, 1995, by AquaPro
Corporation, a Tennessee corporation, in an exchange for the limited
partnership holdings of the Plan in a catfish farm, Circle Creek
AquaCulture, L.P., a Tennessee limited partnership. The Plan acquired
its limited partnership holdings in the Circle Creek AquaCulture, L.P.
on May 1, 1989, from an unrelated party for investment purposes.
In a letter dated September 4, 1996, Mr. George S. Hastings, Jr.,
President of AquaPro Corporation determined that the current fair
market value of the Securities held by the Plan was $7.50 for each of
the 956 shares and $2.25 for each of the 956 warrants, or a total fair
market value of $9,321 for all the Securities held by the Plan.
Mr. Hastings represents, that although the Securities are not
currently registered or listed on a national securities exchange,
several million dollars have been invested in the shares of common
stock of AquaPro Corporation and acquired by outside investors, paying
$7.50 per share; also, Mr. Hastings determined that the automatic
conversion feature of the warrants, effective on the expiration date,
December 31, 1997,\19\ gave the warrants a fair market value of $2.25
per warrant.
---------------------------------------------------------------------------
\19\ The automatic conversion feature of the warrants provides
that upon their expiration each warrant converts to 3/10 share of
the common stock issued by AquaPro Corporation.
---------------------------------------------------------------------------
In addition, in a letter dated November 6, 1995, Bishop Crown
Investment Research, Inc. (Bishop), located in San Diego, California
determined the Securities value was $7.50 per share for the common
stock and the value of the warrants was $2.25 per warrant. The
determination by Bishop was made for determining the exchange values
when AquaPro Corporation acquired the limited partnership holdings of
the Plan, effective December 31, 1995, in Circle Creek AquaCulture,
L.P.
The applicant and Mr. Hastings represent that both Mr. Hastings and
Bishop are unrelated and independent of the Plan and the trustee or
sponsor of the Plan.
3. The applicant requests an administrative exemption from the
prohibited transaction provisions of the Act to enable the Plan to sell
for cash the Securities at their fair market value to the Employer.
Following the proposed Sale the applicant intends to complete the
termination of the Plan by distributing the accrued vested benefits to
the Plan participants and beneficiaries. The applicant represents that
an additional funding contribution will be made to the Plan so that on
the date of distribution the Plan will pay the participants and
beneficiaries all their accrued benefits due under the terms of the
Plan. The applicant also represents that because of the limited trading
activity of the Securities since they are not registered or listed on a
national securities exchange, the Plan has not been able to sell the
Securities to a non-party in interest with respect to the Plan.
The Sale is represented by the applicant to be in the best
interests of the Plan and its participants and beneficiaries because
the Plan will be able to distribute the accrued vested benefits and be
able to terminate and avoid additional costs and expenses.
Also, the applicant represents that the rights of the participants
and beneficiaries are protected by the independent determination of the
fair market value of the Securities by Mr. Hastings and Bishop.
4. In summary, the applicant represents that the proposed
transaction will satisfy the criteria of section 408(a) of the Act
because (a) the Sale of the Securities involves a one-time transaction
for cash; (b) the Plan will not incur any commission payments nor any
other expenses from the Sale; (c) the Plan will be able to distribute
the accrued vested benefits to Plan participants and beneficiaries and
terminate; (d) the Securities have been independently appraised by the
president of the issuing corporation; and (e) the Plan will receive as
consideration from the Sale an amount no less than the fair market
value of the Securities as of the date of the Sale.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
PanAgora Asset Management, Inc. (PanAgora) Located in Boston,
Massachusetts; Proposed Exemption
[Application No. D-10351]
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, PanAgora shall not be precluded from functioning as a
``qualified professional asset manager'' pursuant to Prohibited
Transaction Exemption 84-14 (PTE 84-14, 49 FR 9494, March 13, 1984)
solely because of a failure to satisfy Section I(g) of PTE 84-14, as a
result of affiliation with E.F. Hutton & Company, Inc. (Hutton) and
Shearson Lehman Brothers, Inc. (Shearson), formerly Shearson Lehman
Hutton, Inc. (SLH).
Effective Date: This exemption, if granted, will be effective as of
September 22, 1989, the date on which PanAgora was formed.
Summary of Facts and Representations
1. PanAgora is a Delaware corporation that was formed on September
22, 1989.
[[Page 64162]]
PanAgora originally was a wholly-owned subsidiary of The Boston
Company, Inc. (TBC), which was in turn a subsidiary of SLH. On April
27, 1990, Nippon Life Insurance Company (NLI) obtained a 50% interest
in PanAgora; the remaining 50% interest was owned 25% by SLH and 25% by
TBC. On May 20, 1993, the ownership was changed so that NLI owned 50%
and SLH owned 50%. On July 31, 1993, as part of the reorganization
accompanying the sale of the Shearson retail brokerage business, the
ownership changed to 50% NLI and 50% Lehman Brothers, Inc.<SUP>20
---------------------------------------------------------------------------
20 On March 13, 1993, Shearson entered into an asset purchase
agreement with Primerica Corporation and its wholly-owned
subsidiary, Smith Barney, providing for the sale to Smith Barney and
its designated affiliates of substantially all of the assets of the
Shearson Lehman Brothers Division of Shearson and the SLB Asset
Management Division of Shearson. The remaining business was renamed
Lehman Brothers, Inc.
---------------------------------------------------------------------------
PanAgora has a Board of Directors of 10 persons. Four are
designated by NLI, three are designated by Lehman and three are
PanAgora employees. PanAgora is a registered investment adviser under
the Investment Advisers Act of 1940 (the Advisers Act). As of December
31, 1995, PanAgora managed investments of $13,486,300,000 for 98
clients, including 73 clients which are plans subject to the Act, 5
foundations, 10 governmental plans, 7 mutual funds and 3 offshore
funds.
2. Shearson is a wholly-owned subsidiary of Shearson Lehman
Brothers Holdings Inc. (Shearson Holdings), 100 percent of the issued
and outstanding common stock of which is owned by American Express
Company (AMEX). AMEX is a publicly-owned company whose stock is traded
on the New York Stock Exchange. AMEX and its subsidiaries form a
diversified financial and travel services company.
On January 13, 1988, over 90 percent of the stock of E.F. Hutton
Group Inc. (Hutton Group), the parent company of Hutton, was tendered
to SLBP Acquisition Corporation (SLBP), a wholly-owned subsidiary of
Shearson Holdings, pursuant to an Agreement and Plan of Merger (Merger
Agreement) dated December 2, 1987, as amended on December 28, 1987,
entered into among Shearson Holdings, SLBP, and the Hutton Group. On
January 21, 1988, as permitted by the terms of the Merger Agreement,
SLBP assigned its right to purchase those shares so accepted to
Shearson and Shearson purchased the shares. As a result of the
acquisition of the Hutton Group stock, Shearson controls the Hutton
Group and indirectly controls Hutton.
3. On May 2, 1985, Hutton entered a plea of guilty (the Guilty
Plea) to an Information filed in the United States District Court for
the Middle District of Pennsylvania. The Information charged that
Hutton had violated the federal mail and wire fraud statutes in
connection with its handling of certain checking accounts it maintained
for the deposit of its own funds during the period from July 1, 1980 to
February 16, 1982. The applicant represents that as a result of the
Guilty Plea, Hutton agreed to pay, and has paid, a criminal fine of
$2,000,000 plus $750,000 to defray the costs of the government
investigation. Hutton further agreed to establish, and has established,
a restitution program for the benefit of commercial banks that may have
been damaged by its actions. None of the acts alleged in the
Information, however, involved funds or securities owned by any
investment advisory or brokerage clients of Hutton or any employee
benefit plan for which Hutton or any affiliate is a party in interest.
4. On May 16, 1988, Hutton entered a plea of guilty (the Providence
Plea) in the United States District Court for the District of Rhode
Island on two counts of violating the Bank Secrecy Act and one count of
conspiracy to violate that Act. The applicant represents that Hutton
agreed to pay, and has paid, an aggregate fine of $1,010,000 as a
result of the Providence Plea. The Information filed by the government
in connection with the Providence Plea alleges that the conduct of the
two brokers, formerly employed at Hutton-Providence, was in violation
of the Bank Secrecy Act. The Bank Secrecy Act requires the filing of a
Currency Transaction Report, under certain circumstances, if more than
$10,000 in cash is deposited with a financial institution. The
applicant represents that the brokers' unlawful conduct occurred
primarily in the period from 1982 to 1983, and no such conduct
transpired later than October 1984--more than three years before
Shearson acquired its majority interest in Hutton.
5. On March 3, 1989, George Inserra, a broker employed by Shearson,
pled guilty to charges of securities fraud, soliciting commissions in
connection with an employee benefit plan, and filing a false income tax
return. On the same date, John Inserra, also employed by Shearson as a
broker, pled guilty to securities fraud conspiracy. Further, on May 1,
1989, the Department filed a complaint in the U.S. District Court for
the Northern District of New York alleging that Shearson, among others,
and its agents, misused assets of three New York Teamsters Funds (the
Funds) to benefit themselves and others through a stock parking scheme
and indirect fee arrangements with banks, and that Shearson mishandled
the Funds' cash balances and manipulated stock purchases. On September
19, 1990, Shearson and the Department executed a settlement agreement
(the Settlement) regarding the Department's complaint. Without
admitting or denying the Department's allegations, Shearson agreed
pursuant to the Settlement to make a payment to the affected Funds.
6. The applicant states that the Inserras had left the employment
of Shearson in October 1985, long before the guilty pleas were entered
in March 1989. The applicant further represents that although the
Securities and Exchange Commission (SEC) instituted proceedings against
Shearson as a result of the Inserras' activities, Shearson was not
charged with any criminal offenses. Shearson settled the SEC
proceedings by accepting a censure by the SEC for failure to exercise
reasonable supervision of the Inserras. As part of the settlement with
the SEC, Shearson agreed to institute revised policies and procedures
recommended by an independent consultant to prevent the kinds of
defalcations engaged in by the Inserras. The applicant represents that
the independent consultant thoroughly analyzed Shearson's operations
and recommended systemic changes designed to preclude the types of
unsupervised actions committed by the Inserras.
7. AMEX has represented that although none of the unlawful conduct
involved Hutton's investment management activities or any plans covered
by the Act, the criminal activities described above could preclude each
component of AMEX, as an affiliate of Hutton, from serving as a
``qualified professional asset manager'' (QPAM) pursuant to sections
I(g) and V(d) of PTE 84-14. Similarly, AMEX has represented that the
guilty pleas of the Inserras could preclude each component of AMEX, as
an affiliate of Shearson, from serving as a QPAM, pursuant to sections
I(g) and V(d) of PTE 84-14. Section I(g) of PTE 84-14 precludes a
person who otherwise qualifies as a QPAM from serving as a QPAM if such
person or an affiliate <SUP>21 thereof has
[[Page 64163]]
within the 10 years immediately preceding the transaction been either
convicted or released from imprisonment as a result of certain criminal
activity. PanAgora requests an exemption to enable it to function as a
QPAM despite its failure to satisfy section I(g) of PTE 84-14 due to
affiliation with Hutton and Shearson and the pleas entered by Hutton
and the Inserras.<SUP>22
---------------------------------------------------------------------------
\21\ For purposes of section I(g) of PTE 84-14, an ``affiliate''
of a person is defined, in relevant part, as ``any person directly
or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with the person * * *'' (PTE
84-14 section V(d)). As such, under this definition, American
Express and all its subsidiaries (collectively, AMEX) would be
considered affiliates of Shearson and Hutton.
\22\ In Prohibited Transaction Exemption 94-34 (PTE 94-34, 59 FR
19247, April 22, 1994), AMEX obtained the relief proposed herein for
itself and its wholly owned subsidiaries, including Lehman Brothers,
Inc., the successor to SLH. Although PanAgora was then a subsidiary
of AMEX, PTE 94-34 provided no relief for PanAgora because it was
not a wholly owned subsidiary.
---------------------------------------------------------------------------
8. The transactions covered by this proposed exemption would
include the full range of transactions that can be executed by
investment managers who qualify as QPAMs pursuant to PTE 84-14. The
applicant represents that the requested exemption is not relevant to
most transactions involving the purchase/sale of securities, securities
lending, investment in short-term instruments (such as repurchase
agreements and bankers' acceptances) and certain residential mortgage
pools, since each such transaction is covered by other class
exemptions. However, the applicant represents that the requested
exemption, to enable access to the exemptive relief afforded by PTE 84-
14, is needed for PanAgora to engage in various transactions involving
investments in real estate, mortgages, and commodities, between plans
over which PanAgora has investment discretion and parties in interest
with respect to such plans.
9. AMEX has represented that various measures have been taken by
Hutton and Shearson, since the Hutton pleas and the Inserra pleas, to
ensure that conduct such as that involved in such pleas will not recur.
Among the steps taken to prevent such conduct in the future are the
following:
(A) Hutton has acted to recompense its depository banks for any
harm which may have been caused by the illegal acts involved in the
Guilty Plea and the Providence Plea.
(B) Hutton initiated changes in its organizational structure and
management practices: Realignment and centralization of financial
operations, computerized enhancement of Hutton's headquarters to
monitor activity at the branch and regional levels, and instruction of
all employees on the procedural revisions.
(C) Hutton adopted recommendations made by former Judge Griffin
Bell, U.S. Court of Appeals for the Fifth Circuit,<SUP>23 who was
retained to conduct an independent inquiry into the cash management
practices to which Hutton pled guilty. The changes made pursuant to
Judge Bell's recommendation include restructuring of the financing,
financial control, operations and general counsel functions,
establishment of an independent audit committee with full access to
Hutton's chief executive officer and board of directors, and
development of a corporate code of ethics, supplemented by educational
and monitoring programs, in conjunction with the Ethics Resource Center
in Washington, D.C.
---------------------------------------------------------------------------
\23\ Judge Bell has also served as Attorney General of the
United States.
---------------------------------------------------------------------------
(D) In late December 1987, following the announcement of Shearson's
merger with Hutton Group, Shearson retained outside counsel to
investigate and advise with respect to Hutton's compliance with the
Bank Secrecy Act. The investigation revealed certain unreported
currency transactions at Hutton branch offices prior to Shearson's
acquisition of Hutton. AMEX has represented that the United States
Attorney for the Southern District of New York completed its inquiry
into possible legal violations at Hutton branch offices and indicated
it will take no further action.
(E) In connection with Shearson's application to the SEC for an
exemption from the provisions of section 9(a) of the Investment Company
Act of 1940, Shearson agreed to retain independent auditors: (i) To
confirm that the Shearson currency reporting procedures are in place in
each former Hutton branch office; (ii) to review the currency reporting
procedures to determine whether they are reasonably designed to ensure
compliance with the Bank Secrecy Act and whether changes are needed to
ensure ongoing compliance; and (iii) to report the results of the
review to Shearson. AMEX has represented that upon completion of the
auditor's review, Shearson submitted the report and recommendations to
the SEC, together with a report by Shearson setting forth the action
proposed for implementation of the recommendations. AMEX stated that
such proposed action has been taken.
(F) As of February 8, 1988, as part of the consolidation of the
Hutton branch offices into the Shearson branch office system, each
Hutton branch adopted the same internal procedures for processing
currency transactions as those followed by Shearson. AMEX has
represented that such procedures prevent the kind of irregularities
involved in the Providence Plea. AMEX stated that as additional
safeguards, the Shearson procedures forbid all Shearson employees from
taking possession of currency for a customer, escorting a customer to a
financial institution to convert currency, and/or advising a customer
as to how to ``structure'' a transaction with a financial institution
in order to avoid reporting requirements under the Currency Transaction
Reporting Act.
(G) Although the SEC instituted proceedings against Shearson as a
result of the Inserras' activities, Shearson was not charged with any
criminal offense, and Shearson expeditiously settled the SEC
proceedings by accepting a censure by the SEC for failure to reasonably
supervise the Inserras and the branch manager overseeing the Inserras.
As part of the settlement, Shearson committed to institute revised
policies and procedures recommended by an independent consultant and
designed to prevent the kinds of defalcations engaged in by the
Inserras.
10. The applicant asserts that failure to grant the requested
exemption will prohibit employee benefit plans for which PanAgora acts
as investment manager from engaging in transactions with parties in
interest that would otherwise be permitted under PTE 84-14, and will
cause the plans to forego attractive investment opportunities. The
applicant notes that it would be deprived of its abilities to offer and
render the full panoply of specialized investment advisory services
demanded by employee benefit plans covered by the Act. The applicant
represents that neither of the Hutton pleas involved PanAgora in any
way, and thus do not impair the abilities of PanAgora to serve as
independent investment manager.
With respect to the conduct and pleas of the Inserras, AMEX has
pointed out that the Inserras were not employees of Shearson at the
time they pled guilty to the charges against them, and Shearson was
never charged with any criminal offense in connection with their
activities. The applicant represents that the ability of PanAgora or
any other AMEX affiliate to act as a QPAM has not been affected by the
activities of the Inserras, which were neither authorized nor condoned
by Shearson or any other AMEX affiliate.
11. In summary the applicant represents that the proposed exemption
satisfies the criteria of section 408(a) of the Act for the following
reasons: (A) Hutton's criminal activity occurred prior to acquisition
by Shearson, and the activities of the Inserras did not involve any
criminal charges against Shearson; (B) Both Hutton and Shearson have
undertaken substantial reforms
[[Page 64164]]
and put in place procedures designed to prevent any recurrence of the
criminal activity; (C) PanAgora will be able to engage in a broader
variety of investment services on behalf of employee benefit plans
which demand such services; (D) The ability of PanAgora to act as QPAM
has not been impaired by criminal acts that were neither authorized nor
condoned by Shearson or any other AMEX affiliate; and (E) The other
conditions of PTE 84-14, combined with the procedures adopted by Hutton
and Shearson, afford ample protection of the interests of participants
and beneficiaries of employee benefit plans.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
SouthTrust Securities, Inc. (ST) Located in Birmingham, Alabama;
Proposed Exemption
[Application No. D-10376]
I. Transactions
A. Effective October 25, 1996, the restrictions of sections 406(a)
and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b)
of the Code by reason of section 4975(c)(1) (A) through (D) of the Code
shall not apply to the following transactions involving trusts and
certificates evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A. (1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded Plan.\24\
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\24\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective October 25, 1996, the restrictions of sections
406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section
4975 (a) and (b) of the Code by reason of section 4975(c)(1)(E) of the
Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.\25\ For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
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\25\ For purposes of this exemption, each plan participating in
a commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B. (1) or (2).
C. Effective October 25, 1996, the restrictions of sections 406(a),
406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a)
and (b) of the Code by reason of section 4975(c) of the Code, shall not
apply to transactions in connection with the servicing, management and
operation of a trust, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.\26\
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\26\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. Effective October 25, 1996, the restrictions of sections 406(a)
and 407(a) of the Act, and the taxes imposed by sections 4975 (a) and
(b) of the Code by reason of sections 4975(c)(1) (A) through (D) of the
Code, shall not apply to any transactions to which those restrictions
or taxes would otherwise apply merely because a person is deemed to be
a party in interest or disqualified person (including a fiduciary) with
respect to a plan by virtue of providing services to the plan (or by
virtue of having a relationship to such service provider described in
section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2)
(F), (G), (H) or (I) of the Code), solely because of the plan's
ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated
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to the rights and interests evidenced by other certificates of the same
trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Ratings
Servicer (S&P's), Moody's Investors Service, Inc. (Moody's), Duff &
Phelps Inc. (D & P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) a certificate--
(a) that represents a beneficial ownership interest in the assets
of a trust; and
(b) that entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) a certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) that is issued by and is an obligation of a trust;
with respect to certificates defined in (1) and (2) above for which ST
or any of its affiliates is either (i) the sole underwriter or the
manager or co-manager of the underwriting syndicate, or (ii) a selling
or placement agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) either
(a) secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property);
(d) obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) ``guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1); \27\
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\27\ It is the Department's view that the definition of
``trust'' contained in III.B. includes a two-tier structure under
which certificates issued by the first trust, which contains a pool
of receivables described above, are transferred to a second trust
which issues securities that are sold to plans. However, the
Department is of the further view that, since the exemption provides
relief for the direct or indirect acquisition or disposition of
certificates that are not subordinated, no relief would be available
if the certificates held by the second trust were subordinated to
the rights and interests evidenced by other certificates issued by
the first trust.
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(2) property which had secured any of the obligations described in
subsection B.(1);
(3) undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and
(4) rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include any
investment pool unless: (i) the investment pool consists only of assets
of th |
