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Secretary of Labor Thomas E. Perez
Grant of Individual Exemptions; TCW Group, Inc., Trust Company of the West, TCW Funds Management, Inc., TCW Galileo Funds, (Collectively; TCW) [Notices] [11/04/1997]

EBSA (Formerly PWBA) Federal Register Notice

Grant of Individual Exemptions; TCW Group, Inc., Trust Company of the West, TCW Funds Management, Inc., TCW Galileo Funds, (Collectively; TCW) [11/04/1997]

[PDF Version]

Volume 62, Number 213, Page 59744-59749

[DOCID:fr04no97-93]


[[Page 59744]]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 97-60; Exemption Application No. D-
10319]

 
Grant of Individual Exemptions; TCW Group, Inc., Trust Company of 
the West, TCW Funds Management, Inc., TCW Galileo Funds, (Collectively; 
TCW)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) from certain of the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, D.C. The notices also 
invited interested persons to submit comments on the requested 
exemptions to the Department. In addition the notices stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicants have represented that they 
have complied with the requirements of the notification to interested 
persons. No public comments and no requests for a hearing, unless 
otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, 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 proposed to the Secretary 
of Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:
    (a) The exemptions are administratively feasible;
    (b) They are in the interests of the plans and their participants 
and beneficiaries; and
    (c) They are protective of the rights of the participants and 
beneficiaries of the plans.

TCW Group, Inc., Trust Company of the West, TCW Funds Management, Inc., 
TCW Galileo Funds, Inc. (Collectively; TCW), Located in Los Angeles, 
California

[Prohibited Transaction Exemption 97-60; Exemption Application No. D-
10319]

Exemption

Section I. Covered Transactions

    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)(l)(A) through (D) of the Code, shall not apply to 
the acquisition or redemption of units (the Units) in the TCW Life 
Cycle Trusts (the Trusts, as defined in Section III) by individual 
account plans described in section 3(34) of the Act (the Plans), 
including Plans sponsored by TCW, in connection with such Plans' 
participation in the TCW Portfolio Solutions Program (the Program), and 
the acquisition or redemption of shares (the Shares) in the TCW Galileo 
Funds (the Funds, as defined in Section III) by the Trusts.
    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 
to the receipt of fees by TCW as a result of the provision of advice in 
connection with the investment by the Plans in the Trusts, a Money 
Market Fund, a Guaranteed Investment Contract (GIC) or similar 
investment vehicle, under the Program.
    This exemption is subject to the following conditions set forth 
below in Section II.

Section II. General Conditions

    A. The terms of each purchase or redemption of the Units in the 
Trusts are at least as favorable to an investing Plan as those 
obtainable in an arm's length transaction with an unrelated party.
    B. The participation of a Plan in the Program will be expressly 
authorized in writing by a fiduciary of the Plan who is independent of 
TCW.<SUP>1</SUP> With respect to the Plans sponsored by TCW, this 
condition will be deemed satisfied for purposes of the purchase or 
redemption of Units in the Trusts, if the purchase and redemption of 
Shares in the Funds by the Trusts meets the conditions of Prohibited 
Transaction Exemption (PTE) 77-3 (42 FR 18743, April 8, 1977).
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    \1\ In the case of a Plan sponsored by TCW, such fiduciary need 
not be independent of TCW.
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    C. Participation in the Program will be limited to Plans which have 
a minimum of $5,000,000 in plan assets as of the end of the most recent 
plan year.
    D. No Plan will pay a fee or commission by reason of the 
acquisition or redemption of Units in the Trusts or Shares in the 
Funds.
    E. The price paid or received by the Plans for the Units in the 
Trusts is the ``net asset value'' per Unit, at the time of the 
transaction. The Trusts will buy and sell shares in the Funds on the 
same basis as other shareholders.
    F. The total fees paid to TCW and its affiliates by each Plan for 
the provision of services in connection with its investment in the 
Units of the Trusts under the Program does not exceed ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act. In 
this regard, the total amount paid by a Trust to TCW or unaffiliated 
third persons for services necessary to operate the Trusts, and for TCW 
to provide what may be considered investment advice, will not exceed 1% 
per annum of the average daily ``net asset value'' of the shares of the 
Funds and cash held by such Trust.
    G. TCW will not receive any fees from the Plans whose participants 
(the Participants) receive recommendations concerning investment in a 
Trust, nor from the Trusts in which the Plans invest. Notwithstanding 
the foregoing, TCW will not be precluded from receiving: (i) fees from 
the Funds which are paid by other investors in the Funds, and which are 
permissible under the Investment Company Act of 1940, as amended (the 
1940 Act); (ii) reimbursement for ``direct expenses'' within the 
meaning of 29 CFR 2550.408c-2 in connection with the operation of the 
Program; or (iii) reimbursement for direct expenses which TCW pays to 
unaffiliated third persons for goods and services provided to the 
Trusts and/or Plans under the Program.
    H. Any investment advice given to the Participants by TCW under the 
Program will be based on the responses provided by the Participants to 
worksheet questions which are developed and designed by an independent 
financial expert (the Financial Expert, as defined in Section III (F)) 
and the independent behavioral expert (the Behavioral Expert as defined 
in Section III (G), collectively; the Experts).

[[Page 59745]]

    I. Any investment advice given to the Participant will be 
implemented only at the express direction of the Participant.
    J. Under the Program, TCW will give investment advice to the 
Participants that is limited to the Trusts, a Money Market Fund, a GIC 
or a similar investment vehicle that may or may not be affiliated with 
TCW.<SUP>2</SUP>
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    \2\ TCW will not receive any fees or other compensation with 
respect to recommendations regarding investments in an unrelated 
Money Market Fund, GIC or similar investment vehicle.
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    K. The compensation of neither Expert is affected by the decisions 
made by the participants and beneficiaries regarding investment of the 
assets of their accounts among the Trusts.
    L. To the extent any assistance is provided by TCW, or unaffiliated 
third persons, to the Participants in completing the worksheets and 
questions designed by the Experts, such assistance is provided by 
individuals whose compensation is not affected by the investment by the 
participants and beneficiaries of the assets of their accounts among 
the Trusts.
    M. With respect to its participation in the Program, an independent 
Plan fiduciary must receive, prior to the Plan's investment in any of 
the Trusts, complete and detailed written information regarding the 
Trusts and the Funds which will include, but may not be limited to:
    (1) A description of the Program;
    (2) The allocation of the Funds in each Trust specified by the 
Financial Expert, and the basis upon which the Funds in each Trust will 
be rebalanced so that the Funds' proportionate value in each Trust 
equals that specified by the Financial Expert;
    (3) Upon request by the Plan fiduciary, the current basis upon 
which the asset allocation of the Trusts was derived;
    (4) Full disclosure of all the expenses charged to the Trusts, and 
how such expenses are allocated;
    (5) Full disclosure of all the fees charged by the Funds, which may 
be accomplished by providing the current prospectus for each of the 
Funds comprising a Trust; and
    (6) A copy of the proposed exemption and the final exemption, as 
published in the Federal Register.
    N. (1) Prior to investing in a Trust, each Participant will receive 
full disclosures which will include, but may not be limited to:
    (a) Disclosure regarding composition of the Trusts, and a 
description of the underlying Funds;
    (b) Upon request, a Participant will also receive a copy of the 
Funds' prospectus <SUP>3</SUP>; and
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    \3\ TCW anticipates that most Plans which participate in the 
Program will comply with section 404(c) of the Act. Section 404(c) 
of the Act requires, in part, that specific disclosures be provided 
by the Plans to the participants and beneficiaries. See 29 C.F.R. 
2550.404c-1(b)(2)(i)(A) and (b)(2)(i)(B)(2)(iv) and (v).
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    (c) The Participant can meet with a facilitator familiar with the 
Program, or contact such a facilitator using a toll-free number.
    (2) Subsequent to his participation in the Program, each 
Participant will receive the following disclosures which will include, 
but may not be limited to:
    (a) Written confirmations of purchase and redemption transactions 
for each Participant within 10 days of each such transaction;
    (b) Telephone access to the quotations of the Participant's account 
balance; and
    (c) A periodic newsletter describing the Trusts' performance during 
the preceding period, market conditions and economic outlook and, if 
applicable, prospective changes in the asset allocation model and the 
reasons for the change.
    O. Each Plan fiduciary will receive the following written 
disclosures with respect to its ongoing participation in the Program 
which will include, but may not be limited to:
    (1) A quantitative annual report which will include--
    (a) Performance Summary for each Fund;
    (b) Schedule of Investments for each Fund;
    (c) Statements of Assets and Liabilities for each Fund;
    (d) Statements of Operations for each Fund;
    (e) Statements of Changes in Net Assets for each Fund;
    (f) Notes to Financial Statements, which include but are not 
limited to, primary investment objective of each Fund;
    (g) The performance and rate of return achieved for each Trust and 
the Funds in which the Trust is invested; and
    (h) A breakdown of all expenses and fees at the Fund and Trust 
levels.
    P. (1) Except as provided in Section II (P)(2) below, the 
independent Plan fiduciary will receive, at least 30 days advance 
notice of any material change in the information described in Section 
II (M)(2) or (3) regarding the composition of the Trusts or the basis 
on which the Trusts' assets are rebalanced, and will receive at least 
30 days advance notice of any material increase in expenses at the 
Trust level described in Section II (M)(4);
    (2) The Financial Expert will have the sole responsibility for 
determining the materiality of any changes in the information in 
Section II (M)(2) or (3). TCW will determine the materiality of any 
changes described in Section II (M)(4) regarding the expenses charged 
to the Trusts. For any changes in the information in Section II (M)(2) 
or (3) which are not material, the independent Plan fiduciaries will be 
notified within 10 days of such change. For any changes in the 
information in Section II (M)(4) which are not material the independent 
Plan fiduciary will be notified at least quarterly. Independent Plan 
fiduciaries will be afforded, at all times, a reasonable opportunity to 
terminate their Plans' participation in the Program as described in 
Section II (Q)(2) below; and
    (3) Under extraordinary circumstances outside the control of TCW, 
the independent Plan fiduciary may not be provided advance notice by 
TCW of material changes in the information listed in Section II (M)(2) 
or (3) regarding the composition of the Trusts or the basis on which 
the Trusts' assets are rebalanced. Under such circumstances, the Plan 
fiduciaries will be notified within 10 days of any such change. The 
Financial Expert will determine whether the circumstance is 
extraordinary and if the change in the composition of the Trusts or in 
the basis for rebalancing is material.
    Q. (1) The Units in the Trusts will be redeemed by TCW, at no 
charge. Redemption requests received in proper form prior to the close 
of trading on the New York Stock Exchange (NYSE) will be affected at 
the net asset value per Unit determined on that day. Redemption 
requests received after the close of regular trading on the NYSE will 
be effected at the net asset value at the close of business of the next 
business day; and
    (2) The Plans can redeem their Units in the Trusts on five business 
days (or less) notice.
    R. The Trusts permit participants and beneficiaries to purchase or 
redeem an interest in the Trust on any day that the shares of the Funds 
contained within the Trust can be purchased or redeemed. This paragraph 
(R) does not preclude any Plan from restricting such purchases and 
redemptions to a less frequent basis.
    S. All transactions involving securities owned by the Funds will be 
executed through brokers in which TCW has no interest and who are 
unrelated to TCW. TCW will not receive any consideration from such 
brokers in connection with their selection, or for effecting or 
executing such transactions

[[Page 59746]]

other than research which will benefit the shareholders of the Funds, 
including the Trusts. TCW brokerage practices will reasonably comply 
with the requirements of section 28(e) of the Securities Exchange Act 
of 1934.
    T. (1) The independent fiduciaries of Plans participating in the 
Program will receive full written disclosure, in a statement separate 
from a Fund prospectus, of any proposed increases in the rates of 
advisory or other fees charged by TCW to the Funds for services (or of 
any material increase in expenses charged by TCW to the Funds or fees 
charged by TCW for internal accounting services for the Funds) at least 
30 days prior to the effective date of such increase, accompanied by a 
termination form (the Termination Form, as described in (2) below) and 
shall receive full written disclosure in a Fund prospectus, or 
otherwise, of any such increases in the rate of fees charged by TCW to 
the Funds; and
    (2) The Termination Form shall provide an election to terminate 
participation in the Program and shall contain instructions on the use 
of the form that includes the following information: (a) the 
authorization to participate in the Program is terminable at will by 
the Plan, without penalty to the Plan, upon receipt by TCW of written 
notice from the Plan; and (b) failure to return the Termination Form 
will result in the continued authorization of the Plan's participation 
in the Program, including investment in the Trusts.
    U. TCW maintains, for a period of six years, the records necessary 
to enable the persons described in paragraph (V) of this Section II to 
determine whether the conditions of this exemption have been met, 
including a record of each recommendation made to the participants and 
beneficiaries, and their subsequent investment choices, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to the circumstances beyond the control of TCW 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 TCW, 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 not available for examination as required 
by paragraph (V)(1) of this Section II below.
    V. (1) Except as provided in subparagraph (2) of this paragraph (V) 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (U) of 
this Section II are unconditionally available at their customary 
location for examination during normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the Securities and 
Exchange Commission,
    (b) Any 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 or representative of such employer, and
    (d) Any participant or beneficiary of any participating Plan, or 
any duly authorized representative of such participant or beneficiary.
    (2) None of the persons described in paragraphs (1)(b)-(d) of this 
paragraph (V) shall be authorized to examine trade secrets of TCW, or 
commercial or financial information which is privileged or 
confidential.

Section III. Definitions

    A. The term ``Trust'' or ``Trusts'' means a commingled trust or 
trusts which satisfy the requirements of IRS Revenue Ruling 81-100, 
1981-1 C.B. 326 which invest exclusively in one or more of the 
portfolios of TCW Galileo Funds, Inc., cash or cash equivalents.
    B. The term ``Fund'' or ``Funds'' means one or more of the 
portfolios of TCW Galileo Funds, Inc., an open-end investment company 
registered under the 1940 Act.
    C. The term ``TCW'' means the TCW Group, Inc., and any affiliates 
thereof as defined below in paragraph (D) of this Section III.
    D. The term ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    E. The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    F. The term ``Financial Expert'' means Professor Jeffrey F. Jaffe, 
Ph.D., or a successor Financial Expert. Less than 5 percent (5%) of 
Professor Jaffe's gross income, for federal income tax purposes, in his 
prior tax year, will be paid by TCW in the immediately subsequent tax 
year. If the Financial Expert has any income which is not included in 
the gross income (e.g., interest income which is exempt from federal 
income taxes), such income may be added to his gross income for his 
purpose. In the event TCW determines to replace Professor Jaffee or any 
of his successors, TCW will send a letter to the Department 60 days 
prior to such replacement. The letter will specify that the successor 
Financial Expert has responsibilities, experience and independence 
similar to those of Professor Jaffee. If the Department does not object 
to the successor, the new appointment will become effective on the 60th 
day after the Department receives such letter.
    G. The term ``Behavioral Expert'' means Professor Shlomo Benartzi, 
or a successor Behavioral Expert. In the event TCW determines to 
replace Professor Benartzi or any of his successors, TCW will send a 
letter to the Department 60 days prior to such replacement. The letter 
will specify that the successor has responsibilities, experience and 
independence similar to that of Professor Benartzi. If the Department 
does not object to the successor, the new appointment will become 
effective on the 60th day after the Department receives such letter.
    H. The term ``net asset value'' of a Trust is defined to mean the 
fair market value of shares in the Funds and cash and cash equivalents, 
minus the accrued expenses of a Trust.
EFFECTIVE DATE: This exemption is effective as of August 1, 1997, the 
date the notice of proposed exemption was published in the Federal 
Register.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the notice of proposed exemption (the Notice) published on August 1, 
1997 at 62 FR 41433.

Written Comments

    The Department received two written comments with respect to the 
Notice and no requests for a public hearing. The first comment was 
filed by TCW and generally requests clarifications and modifications to 
the Notice. Set forth below in paragraph 1 are the relevant points of 
the TCW comment.
    The second comment was filed by a representative of the 401(k) 
Association. This comment generally raises issues about certain aspects 
of the Notice, and was subsequently sent by the Department to TCW for 
their response. Set forth below in paragraph 2 is a list of the issues 
raised by the commenter (the Commenter) together with the responses to 
those points by TCW.

[[Page 59747]]

1. Discussion of TCW's Comment

    Section I of the Notice exempts, in relevant part, the provision of 
advice, and the receipt of fees as a result thereof, in connection with 
the investment by the Plans in the Trusts under the Program.
    TCW states that the Notice makes clear in Condition J of Section II 
of the General Conditions and in the Summary of Facts and 
Representations (Summary) that, in addition to the Trusts, the Program 
will also make available non-Trust investment vehicles, i.e., ``a Money 
Market Fund, a Guaranteed Investment Contract (GIC) or a similar 
investment vehicle that may or may not be affiliated with TCW.'' While 
it is anticipated that the Program will normally produce a 
recommendation for a single Trust, there could be instances in which a 
non-Trust investment vehicle is recommended. TCW suggests that the last 
part of the second paragraph of Section I of the Notice be modified to 
take into account the potential investment by the Plans in the Trusts, 
a Money Market Fund, a Guaranteed Investment Contract (GIC) or a 
similar investment vehicle under the Program.
    In addition, the Department has determined to modify the above-
referenced language in Section I in order to clarify that relief from 
the prohibited transaction restrictions of section 406(b) of the Act is 
provided only for the receipt of fees by TCW as a result of the 
provision of advice by TCW to participants of plans who participate in 
the Program. Nothing contained in this exemption provides relief from 
the general standards of fiduciary conduct described in section 404 of 
the Act for the investment advice provided to participants. Thus, TCW 
remains fully responsible under the Act for its fiduciary actions. We 
also note that the plan fiduciary (usually the employer/ sponsor) is 
responsible under the Act for the decision to retain TCW, as well as 
for periodically monitoring TCW's performance.
    Therefore, the Department has modified the above language of 
Section I of the final exemption to read as follows:
    ``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 to the receipt of fees by TCW as a result of the provision of 
advice in connection with the investment by the Plans in the Trusts, a 
Money Market Fund, a Guaranteed Investment Contract (GIC) or similar 
investment vehicle, under the Program.''
    TCW also suggests that a new sentence should be added at the end of 
section 13 (Section) of the Summary. The new sentence should read:
    ``References to Trust or Trusts in this paragraph also encompass 
the other investment options available under the Program.'' The 
Department concurs with this comment.
    2. TCW suggests that Condition C of Section II and Section 16(f) of 
the Summary be modified to provide that the amount of plan assets 
referred to in those provisions be measured, ``* * * as of the end of 
the most recent plan year.''
    The Department concurs with this comment and has modified Condition 
C of Section II of the final exemption.
    3. TCW requests clarification regarding Condition L of Section II. 
Although Condition L of Section II is intended to preclude individuals 
who provide assistance to Participants from receiving compensation 
which is affected by the specific investments made by such Participants 
among the Trusts, such individuals may receive enhanced compensation 
based on the amount invested in the entire Program by all Participants, 
or by the Participants which they or their teams assist.
    4. TCW notes that Condition Q (1) of Section II should indicate 
more clearly when the net asset value is measured for the purpose of 
effecting redemption requests received after the close of regular 
trading on the NYSE when NYSE is closed the next day. TCW suggests that 
the last phrase in the third sentence in Condition Q(1) ``* * * except 
on weekends or holidays when the NYSE is closed'' be deleted and that 
the word ``business'' be inserted between the words ``next'' and 
``day'' such that the phrase reads, in relevant part, ``* * * the close 
of business of the next business day.''
    The Department concurs with this comment and has modified Condition 
Q (1) of Section II of the final exemption.
    5. TCW also suggests that in the definition of ``net asset value'' 
contained in Paragraph H of Section III, the words ``and cash 
equivalents'' should be added in the third line after the word 
``cash'', such that the definition reads as follows:
    ``The term `net asset value' of a Trust is defined to mean the fair 
market value of shares in the Funds and cash and cash equivalents, 
minus the accrued expenses of a Trust.''
    The same change should be made in the next-to-last sentence in 
Section 4 of the Summary such that the sentence reads as follows:

    ``The Trusts trade at the net asset value of the amalgam of the 
Funds in which they are invested, plus any cash and cash equivalents 
they hold.''

    The Department concurs with this comment and has modified Paragraph 
H of Section III of the final exemption.
    6. TCW represents that Continental Asset Management Corp. 
referenced in Section 1 of the Summary is now named TCW Advisors Inc. 
and still remains an SEC registered advisor.
    7. TCW suggests that to be consistent with footnote 6 of the 
Notice, the third sentence in Paragraph 2 of the Summary should begin 
with ``It is anticipated that * * *'' such that the sentence should 
read:
    ``It is anticipated that virtually all of the Plans participating 
in the Program will be designed to comply with the provisions of 
section 404(c) of the Act.'' The Department concurs with this comment.
    Additionally, TCW comments that to more accurately reflect the 
Worksheet process, the sixth and following sentences in Paragraph 2 of 
the Summary should read as follows:
    ``The Worksheets consist of a series of questions designed to 
assess the Participants' retirement needs and levels of risk tolerance, 
including his or her current Plan and non-Plan investments, anticipated 
future savings and retirement goals. Upon completion of the Worksheets, 
a Participant's response will be analyzed and each Participant will 
receive a written recommendation from TCW of an appropriate Trust (or 
other investment vehicle under the Program) for investment. Matching 
the Worksheet responses to projections of the risk and return 
characteristics of portfolios available under the Program will allow 
the selection of a portfolio consistent with that Participant's 
retirement needs and risk tolerance.''
    The Department concurs with this comment.
    8. TCW suggests that to describe more accurately the quantitative 
annual report to be provided by TCW to the Plan Fiduciaries, the second 
sentence of the second paragraph in Paragraph 10 of the Summary should 
read as follows:
    ``The annual report will enable the Plan Fiduciaries to determine 
whether the Program has increased or maintained Plan participation, has 
increased or maintained the level of Participants' investment or 
deferrals under the Plan, or has achieved more appropriate asset 
allocation for the investment of the Plan Participants' accounts.''
    The Department concurs with this comment.

[[Page 59748]]

    9. TCW also states that to make clear that approval by the 
Financial Expert is necessary for the creation of any Separate Trust, 
the word ``only'' should be inserted between the words ``utilized'' and 
``if'' in the second sentence of subsection (b) of Paragraph 16 of the 
Summary such that the modified sentence reads as follows:
    ``A Separate Trust may be utilized only if the Financial Expert 
approves such modification.''
    The Department concurs with this comment.

2. Discussion of the Second Comment

A. Independence of the Financial Expert
    In this regard, the Commenter is concerned that TCW will have 
little or no control over the results of investment recommendations 
under the Program. Further, the Commenter suggests that Professor 
Jaffe, the Financial Expert, will be insufficiently involved in the 
Program due to the 5% overall limit on the amount of income derived 
from TCW. In addition, the Commenter questions whether the Financial 
expert will be assuming any personal responsibility for the provision 
of advice. In response, TCW maintains that TCW will not control the 
results of investment recommendation under the Program; rather, as 
stated throughout the Notice and as a specific condition in Section II 
of the Notice and this exemption, those recommendations will be based 
on responses to the worksheet questions developed and designed by the 
independent Experts.
    As to Professor Jaffe, TCW responds that the 5% limit on his 
compensation is designed to ensure that he does not depend too heavily 
on TCW for compensation, but remains independent of TCW.
    The Commenter further suggests that Professor Jaffe should not be 
permitted to be contractually indemnified by TCW. TCW responds by 
stating that if Professor Jaffe is so indemnified, it will not make him 
any less independent of TCW. To the contrary, a contractual indemnity 
would give him rights in dealing with TCW that he might otherwise lack. 
Also, the amount of indemnification offered to Professor Jaffe by TCW 
will not be dependent on the nature of the advice provided the 
Participant. Further, as TCW points out, the Department recognizes that 
even indemnities relating to breaches of statutory fiduciary duties are 
permissible under the Act, provided that they are not paid from plan 
assets, or do not attempt to induce a breach of fiduciary duty. (See 29 
CFR section 2509.75-4). TCW also maintains that it has every incentive 
to respect the professional independence of Professor Jaffe because he 
is central to the operation of the Program, and intends to structure 
any agreement with Professor Jaffe so as to ensure his independence.
    The Commenter also raises similar questions regarding the 
independence of persons who will do computer programming in connection 
with the Program in as much as such programmers are hired by TCW. TCW 
notes that the Commenter has misunderstood the role of the programmers. 
The programmers will perform a ministerial function, i.e., to handle 
the technical aspects of programming. The substantive aspects of the 
computer programs will be controlled by the Financial Expert and the 
Behavioral Expert. Therefore, TCW maintains that concerns about 
compensation or indemnification of the programmers is misplaced. In any 
event, TCW believes that preclusion of any indemnity of the programmers 
would be inappropriate for the same reasons expressed as to Professor 
Jaffe.
b. The Fee Arrangements
    A second concern of the Commenter appears to be fee arrangements 
associated with the Program. The Commenter appears to question the 
reasonableness of the fee arrangements and what the Commenter refers to 
as the 1% fee on a participant's account balance. TCW notes that there 
is no such fee; rather, the 1% figure refers to a cap that limits the 
amount of direct expenses payable from the Trusts for the services 
necessary to operate the Program. The only fees that TCW will receive 
are the normal fees charged for advisory services to the underlying 
Funds. These fees are paid from the Funds and would affect Participants 
investing in the Funds through the Program in exactly the same manner 
as any other investor in the Funds.
    There will be no fees paid to TCW by the Trusts or by any Plan for 
advisory services or for any other services necessary for the operation 
of the Program. The Commenter apparently misinterpreted a reference in 
the Notice to a cap of 1% of a Trust's net asset value per annum on 
amounts payable by a Trust for services necessary to operate the 
Program. This cap is discussed in more detail in Section 19 of the 
Summary in the Notice. As Section 19 states, these expenses will 
include reimbursement to TCW for direct expense payments to third 
parties unaffiliated with TCW. As stated in the last paragraph of 
Section 18 of the Summary, to the extent that TCW itself receives 
reimbursement of any expenses, it will be limited to reimbursement of 
``direct expenses'' within the meaning of 29 CFR section 2550.408c-2.
    In short, TCW will receive no fees in connection with the Program 
other than normal advisory fees in connection with the mutual funds. 
The 1% cap on direct expenses paid by the Trusts is a safeguard to 
ensure that the Trusts do not pay excessive expenses; it is not 
intended to, and would not, authorize any payment of fees to TCW from a 
Trust. TCW expressly states that the Plan Participants' accounts will 
not be charged fees by TCW in connection with the Program. Furthermore, 
Plan Participants will have complete discretion whether to invest in 
any Trusts and will be free to accept or reject any investment 
recommendations made in connection with the Program.
c. Recommendations
    To address his concerns, the Commenter recommends that the 
following six specific recommendations be adopted in any final grant of 
the exemption by the Department:
    1. Require those individuals/entities that are providing the 
advisory-related services to assume the liability exposure for the 
services they are providing. Prohibit TCW or any other entity from 
indemnifying them.
    2. Limit the compensation that is paid for this service to a 
maximum amount per participant, such as $250.00.
    3. Require each participant to decide whether he/she wants this 
additional service. The participant also should be able to discontinue 
the service at any time.
    4. Require an independent audit by one of the major auditing firms 
at least annually of the process and the entities involved to certify 
that there is in fact independence.
    5. Require the submission to DOL of a signed disclosure form for 
each employer that buys this service.
    6. Require TCW to submit to DOL annually a confirmation that the 
disclosure conditions have been satisfied. This notice should include a 
list of all employers in the program, and it should be signed by the 
CEO of the TCW Group.
    In response to these recommendations, TCW maintains the following.
    The first recommendation regarding indemnity has been addressed 
above. TCW maintains that this recommendation is unnecessary and 
unreasonable.
    The second and third recommendations appear to be based on the 
misunderstanding relating to the 1%

[[Page 59749]]

fee discussed above. TCW maintains that because there is no such fee, 
there is no reason to change its form or limit it. A Participant is, as 
noted above, already completely free to decide whether to begin or to 
discontinue investments under the Program.
    The last three recommendations do not appear to be otherwise 
discussed in the comment letter. TCW's general response to these 
recommendations is that they will likely add unnecessary expense to the 
Program without any corresponding benefit. To the extent that these 
recommendations arise from the Commenter's misunderstanding of the fee 
arrangement and other aspects of the Program, they should be rejected 
by the Department on that basis.
    Specifically, it is not clear to TCW exactly how an auditing firm 
would perform an audit to verify independence; as a practical matter, 
because the independence of the Experts is central to the Program and 
this exemption, TCW would have every incentive to ensure that 
independence is maintained. Similarly, if the Department wishes to 
audit the Program, or to monitor compliance with the conditions of the 
exemption, it will exercise its statutory powers under section 504 of 
the Act. Alternatively, the Department can access the relevant records 
pursuant to Condition V of Section II of the Notice and of this 
exemption. Imposing an additional requirement that the names of the 
plan sponsors who have selected the Program be submitted to the 
Department along with the signed disclosure forms may act as a 
deterrent to the plan sponsors' selection of the Program. Furthermore, 
TCW is fully committed to complying with the substantive disclosures 
requirement contained in the Notice and in this exemption because such 
a requirement will provide meaningful information to the Plan 
Participants and fiduciaries. TCW states that imposing additional 
requirements would be detrimental to the Program while offering no 
additional protection to the Participants.
    The Department has considered the comments and the responses set 
forth by TCW and has determined that no modification of this exemption 
is necessary regarding the points raised by the Commenter. With respect 
to the recommendations of the Commenter, the Department notes that each 
exemption is subject to the explicit condition that the material facts 
and representations submitted in support of an application are true and 
accurate. The exemption application contains the representations of the 
applicant. Many such representations are reflected in the terms and 
conditions of the exemption. These terms and conditions provide for the 
independence of the Experts and the disclosures to be provided by TCW. 
Thus, to the extent that TCW does not comply with the terms and 
conditions of the exemption, the exemption would be void.
    After giving full consideration to the entire record, including the 
written comments, the Department has decided to grant the exemption 
subject to the modifications or clarifications described above. The two 
comment letters have been included as part of the public record of the 
exemption application. The complete exemption file is available for 
public inspection in the Public Disclosure Room of the Pension and 
Benefits Administration, Room N-5638, U.S. Department of Labor, 200 
Constitution Avenue, NW., Washington DC 20210.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department 
of Labor, telephone (202) 219-8883. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions to which the exemptions does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional rules. Furthermore, the 
fact that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (3) The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in each 
application are true and complete and accurately describe all material 
terms of the transaction which is the subject of the exemption. In the 
case of continuing exemption transactions, if any of the material facts 
or representations described in the application change after the 
exemption is granted, the exemption will cease to apply as of the date 
of such change. In the event of any such change, application for a new 
exemption may be made to the Department.

    Signed at Washington, D.C., this 30th day of October, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 97-29175 Filed 11-3-97; 8:45 am]
BILLING CODE 4510-29-P