Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6679

1This proposed exemption applies to IRAs

described in section 408(a) of the Code. Pursuant

to 29 CFR 2510.3–2(d), the IRAs are not ‘‘employee

benefit plans’’ covered under Title I of the Act.

However, the IRAs are subject to jurisdiction

pursuant to section 4975 of the Code.

2The Affiliated Funds and the Third Party Funds

are collectively referred to herein as the Funds.

Persons wishing to make statements

or presentations at the Town Hall

Meetings should limit oral statements to

5 minutes, but extended written

statements may be submitted for the

record. Written statements may also be

submitted without presenting oral

statements. Individuals may submit

written comments to the Employment

and Training Administration, Division

of Older Worker Programs, 200

Constitution Avenue, NW., Room

N4644, Washington. DC 20210,

Attention: Mr. Erich W. (‘‘Ric’’) Larisch.

Minutes of all Town Hall Meetings

and summaries of other documents will

be available to the public on the SCSEP

website http://www.wdsc.org/owprog.

Any written comments on the minutes

should be directed to Mr. Erich W.

(‘‘Ric’’) Larisch, as shown above.

Individuals with disabilities who are

planning to attend the Atlanta Town

Hall Meeting should contact Ms.

Theresa Lambert of the National

Association of State Units on Aging at

(202) 898–2578, (this is not a toll-free

number) if special accommodations are

needed.

Signed at Washington DC, this 17 day of

January, 2001.

Raymond L. Bramucci,

Assistant Secretary of Labor.

[FR Doc. 01–1801 Filed 1–19–01; 8:45 am]

BILLING CODE 4510–30–U

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application No. D–10571, et al.]

Proposed Exemptions; Keystone

Brokerage, Inc. (Keystone)

AGENCY: Pension and Welfare Benefits

Administration, Labor

ACTION: Notice of proposed exemptions.

SUMMARY: This document contains

notices of pendency before the

Department of Labor (the Department) of

proposed exemptions from certain of the

prohibited transaction restrictions of the

Employee Retirement Income Security

Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing

Requests

All interested persons are invited to

submit written comments or request for

a hearing on the pending exemptions,

unless otherwise stated in the Notice of

Proposed Exemption, within 45 days

from the date of publication of this

Federal Register Notice. Comments and

requests for a hearing should state: (1)

The name, address, and telephone

number of the person making the

comment or request, and (2) the nature

of the person’s interest in the exemption

and the manner in which the person

would be adversely affected by the

exemption. A request for a hearing must

also state the issues to be addressed and

include a general description of the

evidence to be presented at the hearing.

ADDRESSES: All written comments and

request for a hearing (at least three

copies) should be sent to the Pension

and Welfare Benefits Administration,

Office of Exemption Determinations,

Room N–5649, U.S. Department of

Labor, 200 Constitution Avenue, NW.,

Washington, DC 20210. Attention:

Application No. lll, stated in each

Notice of Proposed Exemption. The

applications for exemption and the

comments received will be available for

public inspection in the Public

Documents Room of the Pension and

Welfare Benefits Administration, U.S.

Department of Labor, Room N–5638,

200 Constitution Avenue, NW.,

Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions

will be provided to all interested

persons in the manner agreed upon by

the applicant and the Department

within 15 days of the date of publication

in the Federal Register. Such notice

shall include a copy of the notice of

proposed exemption as published in the

Federal Register and shall inform

interested persons of their right to

comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The

proposed exemptions were requested in

applications filed pursuant to section

408(a) of the Act and/or section

4975(c)(2) of the Code, and in

accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR

32836, 32847, August 10, 1990).

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978, 5 U.S.C. App. 1 (1996), transferred

the authority of the Secretary of the

Treasury to issue exemptions of the type

requested to the Secretary of Labor.

Therefore, these notices of proposed

exemption are issued solely by the

Department.

The applications contain

representations with regard to the

proposed exemptions which are

summarized below. Interested persons

are referred to the applications on file

with the Department for a complete

statement of the facts and

representations.

Keystone Brokerage, Inc. (Keystone), et

al. Located in Williamsport, PA

[Application No. D–10571]

Proposed Exemption

Based on the facts and representations

set forth in the application, the

Department is considering granting an

exemption under the authority of

section 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).1

Section I. Covered Transactions

If the exemption is granted, the

sanctions resulting from the application

of section 4975 of the Code, by reason

of 4975(c)(1)(A) through (D) of the Code

shall not apply, effective October 3,

1997 through June 30, 2000, to the

purchase or redemption of shares, by a

self-directed individual retirement

account (the IRA), of investment

portfolios (the Portfolios) of certain

mutual funds that were affiliated with

Keystone (the Affiliated Funds) or in

other mutual funds that were

unaffiliated with Keystone (the Third

Party Funds),2 in connection with the

IRA’s participation in the KeyPremier

Nautilus Series Program, or its

successor, the Nautilus Series Program,

(together, the Investment Advisory

Program).

In addition, 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 3, 1997

through June 30, 2000, to (1) the

provision, by Keystone, of asset

allocation and related services to an

independent fiduciary of an IRA (the

Independent Fiduciary), which resulted

in the selection of Portfolios in the

Investment Advisory Program by the

Independent Fiduciary for the

investment of IRA assets; and (2) the

receipt of fees by Martindale Andres &

Co., Inc. (Martindale) and Governor

Group Advisors, Inc. (GGA), affiliates of

Keystone, in connection with provision

of investment advisory or sub-advisory

services to the Fund Portfolios.

This proposed exemption is subject to

the conditions set forth below in Section

II.

6680 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

Section II. General Conditions

(a) The participation by an IRA in the

Investment Advisory Program was

approved by an Independent Fiduciary.

(b) As to each IRA, the total fees that

were paid to Keystone and its affiliates

constituted no more than reasonable

compensation for the services provided.

(c) With the exception of distributionrelated fees paid to Keystone pursuant

to Rule 12b–1 (the Rule 12b–1 fees) of

the Investment Company Act of 1940

(the Investment Company Act) which

were offset, no IRA paid a fee or

commission by reason of the acquisition

or redemption of the shares of the

Funds.

(d) The terms of each purchase or

redemption of shares in the Funds

remained at least as favorable to an

investing IRA as those obtainable in an

arm’s length transaction with an

unrelated party.

(e) Keystone provided written

documentation to each IRA’s

Independent Fiduciary of its

recommendations or evaluations

regarding the Fund Portfolios as well as

the design and parameters with respect

to an asset allocation model (the Asset

Allocation Model), based upon objective

criteria that were uniformly applied.

(f) Any recommendation or evaluation

made by Keystone to an Independent

Fiduciary was implemented only at the

express direction of such Independent

Fiduciary.

(g) The quarterly fee paid by an IRA

to Keystone and its affiliates for asset

allocation and related services rendered

to such IRA under the Investment

Advisory Program (the Outside Fee) was

offset by—

(1) All gross investment management

fees (the Advisory Fees) that were paid

by the Affiliated Funds to Keystone,

including any sub-advisory fees that

were paid by the Affiliated Funds to

third party sub-advisers;

(2) All administrative fees (the

Administrative Fees) that were paid to

GGA and BISYS Fund Services Limited

Partnership (BISYS), an unrelated party;

and

(3) All Rule 12b–1 Fees that were paid

by the Third Party Funds to Keystone or

its current and former affiliates with

respect to an Investment Advisory

Account (the Account), such that the

sum of the offset and the net Outside

Fee always equaled the aggregate

Outside Fee, thereby making the

selection of Affiliated Funds or Third

Party Funds revenue-neutral.

(h) With respect to its participation in

the Investment Advisory Program, prior

to purchasing shares in the Portfolios of

the Affiliated Funds and the Third Party

Funds—

(1) Each Independent Fiduciary

received the following written or oral

disclosures from Keystone:

(A) A brochure describing the

Investment Advisory Program; an

Investment Advisory Program Account

Agreement (the Account Agreement); a

description of the Asset Allocation

Models; and a reference guide/

disclosure statement providing details

about the Investment Advisory Program,

the fees charged thereunder, the

procedures for establishing, making

additions to and withdrawing from the

Accounts, and other related

information;

(B) A risk tolerance and goal analysis

questionnaire (the Questionnaire) or a

written report of responses given by the

Independent Fiduciary in a personal

interview (the Interview) with a

Keystone representative (the Interview

Report);

(C) Copies of applicable prospectuses

(the Prospectuses) for the Fund

Portfolios discussing the investment

objectives of the Portfolios; the policies

employed to achieve the objectives of

the Portfolios; the corporate affiliation

existing between Keystone and its

affiliates; the compensation paid to such

entities; disclosures relating to

rebalancing and reallocating Asset

Allocation Models; and information

explaining the risks attendant to

investing in Portfolios for the Affiliated

Funds and the Third Party Funds;

(D) Upon written or oral request to

Keystone, a Statement of Additional

Information supplementing the

applicable Prospectus, which described

the types of securities and other

instruments in which the Portfolios

could invest and the investment policies

and strategies that the Portfolios could

utilize, including a description of the

risks;

(E) A copy of the Account Agreement

between the IRA and Keystone relating

to the IRA’s participation in the

Investment Advisory Program;

(F) A written recommendation of a

specific Asset Allocation Model,

together with a copy of the

Questionnaire and response or the

Interview Report;

(G) Upon written request to Keystone,

a copy of any investment advisory

agreement or sub-advisory agreement

between Keystone and the Affiliated

Funds; and

(H) Written disclosures of Keystone’s

affiliation or non-affiliation with the

parties who act as sponsors,

distributors, administrators, investment

advisers and sub-advisers, custodians

and transfer agents of the Portfolios.

(2) If accepted as an investor in the

Investment Advisory Program, the

Independent Fiduciary was required to

acknowledge in writing to Keystone

prior to purchasing shares of the Fund,

that such Independent Fiduciary had

received copies of the documents

described in paragraph (h)(1) of this

Section II and represent to Keystone that

such individual was—

(A) Independent of Keystone and its

affiliates;

(B) Knowledgeable with respect to the

IRA in administrative matters and

funding matters related thereto; and

(C) Able to make an informed

decision concerning participation in the

Investment Advisory Program.

(i) Subsequent to its participation in

the Investment Advisory Program, each

Independent Fiduciary received the

following written or oral disclosures

from Keystone with respect to ongoing

participation:

(1) Written confirmations of each

purchase or redemption transaction

involving shares of an Affiliated Fund

or a Third Party Fund Portfolio

(including transactions resulting from

the realignment of assets caused by a

change in the Asset Allocation Model’s

investment mix and from periodic

rebalancing of Account assets);

(2) Telephone quotations of such

Independent Fiduciary’s IRA Account

balance;

(3) A periodic, but not less frequently

than quarterly, Statement of Account

specifying the net asset value of the

IRA’s assets in such Account, a

summary of purchase, sale and

exchange activity and dividends

received or reinvested, a summary of

cumulative realized gains and/or losses,

and a statement of fees paid to Keystone

and its affiliates;

(4) Semiannual and annual reports

that included financial statements for

the Portfolios;

(5) A quarterly report pertaining to the

applicable Asset Allocation Model

describing the Asset Allocation Model’s

performance during the preceding

quarter; market conditions and

economic outlook; and, if applicable,

prospective changes in Portfolio

allocations for the Asset Allocation

Model and the reasons therefor;

(6) At least annually, a written or oral

inquiry from Keystone to ascertain

whether the information provided on

the Questionnaire or in the Interview

Report was still accurate or required

updating; and

(7) At least annually during the first

calendar quarter of each year after

March 24, 1999, or at other times

specified in Section II(l), a termination

form (the Termination Form), meeting

the requirements of Section II(k) and (l)

below.

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6681

(j) If authorized in writing by the

Independent Fiduciary, the IRA was

automatically rebalanced on a quarterly

basis by Keystone (using the net asset

values of the affected Funds as of the

close of business on a pre-established

date) to the Asset Allocation Model

previously prescribed by the

Independent Fiduciary, if one or more

Fund allocations deviated from the

Asset Allocation Model prescribed by

the Independent Fiduciary because—

(1) At least one transaction required to

rebalance the IRA among the Funds

involved a purchase or redemption of

securities valued at $250 or more; and

(2) The net asset value of the Fund

affected was more than 5 percent of the

IRA’s investment in such Fund.

(k) Keystone was authorized to

provide written notice to the

Independent Fiduciary, at least 30 days

prior to the implementation of any of

the following changes:

(1) A change in the asset mix outside

the current Asset Allocation Model;

(2) The division of a class of assets

(the Asset Class);

(3) The replacement of a Third Party

Fund with an Affiliated Fund, or an

Affiliated Fund with a Third Party

Fund; and

(4) An increase in the Outside Fee.

(l) The written notice described above

in Section II(k) was required to—

(1) State that the Independent

Fiduciary could terminate the IRA’s

participation in the Investment

Advisory Program at will and without

penalty, upon receipt by Keystone of

written notice from the Independent

Fiduciary; and

(2) Explain that any of the proposed

changes noted in paragraphs (k)(1)–(4)

of Section II would go into effect if the

Independent Fiduciary did not elect to

withdraw by the effective date.

(3) For changes occurring after March

24, 1999, the notice was to be

accompanied by a Termination Form

containing instructions identical to

those set forth above in paragraphs

(l)(1)–(2) of this Section II.

(m) Keystone was not authorized to

replace an Affiliated Fund with a Third

Party Fund Portfolio or vice versa, nor

was Keystone authorized to make an

additional Third Party Fund Portfolio

available for investment under the

Investment Advisory Program.

(n) Keystone will maintain, for a

period of six years, the records

necessary to enable the persons

described in paragraph (o) 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

Keystone 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

Keystone, shall be subject to the taxes

imposed by section 4975(a) and 4975(b)

of the Code if the records are not

maintained or are not available for

examination as required by paragraph

(o) of this Section II below.

(o)(1) Except as provided in section

(o)(2) of this paragraph, 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 or the

Securities and Exchange Commission;

(B) Any Independent Fiduciary of a

participating IRA or any duly

authorized representative of such

Independent Fiduciary; and

(C) Any participant or beneficiary of

any participating IRA or any duly

authorized representative of such

participant or beneficiary.

(2) None of the persons described

above in paragraphs (o)(1)(B) and

(o)(1)(C) of this paragraph (o) are

authorized to examine the trade secrets

of Keystone or commercial or financial

information which is privileged or

confidential.

Section III. Definitions

For purposes of this proposed

exemption:

(a) The term ‘‘Keystone’’ means

Keystone Brokerage, Inc. and any

affiliate of Keystone, as defined in

paragraph (b) of this Section III.

(b) An ‘‘affiliate’’ of Keystone

includes—

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with Keystone; (For

purposes of this subparagraph, the term

‘‘control’’ means the power to exercise

a controlling influence over the

management or policies of a person

other than an individual.)

(2) Any individual who is an officer,

director or partner in Keystone or a

person described in subparagraph (b)(1);

and

(3) Any corporation or partnership of

which Keystone or an affiliate or a

person described in subparagraphs

(b)(1) or (b)(2) of this Section III, is a 10

percent or more partner or owner.

(c) The term ‘‘officer’’ means a

president, any vice president in charge

of a principal business unit, division or

function (such as sales, administration

or finance), or any other officer

performing a policy-making function for

the entity.

(d) The term ‘‘IRA’’ includes a selfdirected individual retirement account

which is described in section 408(a) of

the Code and which is not an

‘‘employee benefit plan’’ covered under

Title I of the Act. The term ‘‘IRA’’ does

not include any IRAs that were

sponsored or maintained by Keystone or

its affiliates for their own employees nor

does it include any IRAs that were held

by employees of Keystone or its

affiliates in their individual capacities.

(e) The term ‘‘Independent Fiduciary’’

means an individual who was covered

under a self-directed IRA which

invested in shares of the Funds.

(f) The term ‘‘Asset Class’’ means an

asset class under a classification system

used by Morningstar, Inc. (Morningstar)

or Lipper, Inc. (Lipper). For purposes of

this exemption, two Funds were not in

the same Asset Class if they were

classified differently under either the

Morningstar or Lipper classification

systems. Thus, for example, if two

Funds were treated in separate Asset

Classes under the Morningstar system,

they would be treated as being in

separate Asset Classes even if the Funds

were in the same Asset Class (or were

not classified at all) under the Lipper

system.

(g) The term ‘‘Affiliated Fund’’ means

a portfolio of an investment company

registered under the Investment

Company Act for which Keystone or an

affiliate acted as the investment adviser

and may have also acted as the subadviser, co-administrator or custodian.

(h) The term ‘‘Third Party Fund’’

means a portfolio of an investment

company that is registered under the

Investment Company Act for which

neither Keystone nor any affiliate acted

as an investment adviser, sub-adviser,

co-administrator or custodian.

(i) The ‘‘Advisory Fees’’ refer to the

investment advisory fees that were paid

by the Affiliated Funds to Keystone and

its affiliates.

(j) The ‘‘Administrative Fees’’ refer to

the co-administration fees that were

paid by the Affiliated Funds to GGA and

BISYS.

(k) The ‘‘Rule 12b–1 Fees’’ were paid

to Keystone and its affiliates by the

Third Party Funds in connection with

certain distribution-related services

(e.g., advertising) that were made

pursuant to a written plan of

distribution.

EFFECTIVE DATE:

If granted, this proposed exemption

will be effective from October 3, 1997

until June 30, 2000.

6682 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

3As discussed herein, Funds shares were sold to

the IRAs at no load. Thus, the participating IRAs

did not compensate Corelink, or for that matter,

BISYS. Keystone represents that it does not know

whether BISYS compensated Corelink for services

rendered nor is it certain why BISYS executed

trades through Corelink rather than performing this

service directly.

Summary of Facts and Representations

Description of the Parties

1. The parties to the transactions are

described as follows:

(a) Keystone Financial, Inc. (KFI) is a

bank and financial services holding

company headquartered in Harrisburg,

Pennsylvania. KFI provides a full range

of banking and non-banking services to

persons and entities in Pennsylvania,

Maryland, West Virginia, Virginia, New

York, Ohio and Delaware.

(b) Keystone is a second-tier

subsidiary of KFI. Keystone provided

services to the IRAs under the

Investment Advisory Program described

herein and served as a broker-dealer for

trades under such Program.

(c) Key Trust Company (KeyTrust) of

Horsham, Pennsylvania, is a subsidiary

of KFI. KeyTrust served as custodian for

those IRAs utilizing the Investment

Advisory Program.

(d) Martindale of West Conshocken,

Pennsylvania, is a subsidiary of KFI.

Martindale served as the sub-adviser to

the Affiliated Funds and prior to

February 1, 1999, it served as the

investment adviser to such Funds.

(e) BISYS of Columbus, Ohio, is a

registered broker-dealer. As noted

above, BISYS is not affiliated with

Keystone, KFI, KeyTrust or Martindale.

BISYS, through its affiliated clearing

broker, Corelink Financial, Inc.

(Corelink), acted as the clearing broker

with respect to purchases and sales of

Fund shares by the IRAs participating in

the Investment Advisory Program. In

addition, BISYS performed various

administrative, accounting, and

recordkeeping functions on behalf of

Keystone. In this capacity, BISYS,

through Corelink, held Fund shares on

behalf of IRAs participating in the

Investment Advisory Program and

served as sub-custodian for IRAs

utilizing the Program under a custodial

services agreement with KeyTrust.

Further, BISYS served as distributor,

Fund accountant, transfer agent, and

administrator or co-administrator for the

Affiliated Funds.3

(f) GGA, a wholly-owned subsidiary

of KFI, served as the investment adviser

to the Affiliated Funds. In addition,

GGA and BISYS served as coadministrators for the Affiliated Funds.

(g) The IRAs participating in the

Investment Advisory Program included

self-directed IRAs which are described

in section 408(a) of the Code and which

are not ‘‘employee benefit plans’’

covered under Title I of the Act. All IRA

holders were outside clients of Keystone

and its affiliates rather than employees

of these entities. The IRAs did not

include any IRAs sponsored by

Keystone and/or its affiliates nor did

they include IRAs held by employees of

Keystone and/or its affiliates in their

individual capacities.

Description of the Funds

2. The Affiliated Funds participating

in the Investment Advisory Program

consisted of a group of Fund Portfolios

referred to as ‘‘Governor Funds.’’

Originally, the Affiliated Funds

included the following Fund Portfolios

of ‘‘The Sessions Group’’: the

KeyPremier Prime Money Market Fund,

the KeyPremier Intermediate Term

Income Fund, the KeyPremier

Established Growth Fund and the

KeyPremier Aggressive Growth Fund.

The Sessions Group was an open-end

management investment company

registered under the Investment

Company Act of 1940 (the Investment

Company Act), for which Martindale

served as the investment adviser. The

Sessions Group was also an Ohio

business trust that offered shares in 19

separate series. Each series of shares

constituted a different Portfolio, only 4

of which were offered to investors under

the Investment Advisory Program. The

Sessions Group was designed to provide

a convenient means of investing in

separate Portfolios that were

professionally managed by Martindale.

Shares in The Sessions Group were

offered to trust customers of KeyTrust,

other banking subsidiaries of Keystone,

and the general public. Although some

Portfolios required investors to pay load

charges, all Fund Portfolios were offered

to IRA investors at no load.

3. Pursuant to an advisory agreement,

Martindale served as the investment

adviser to the Affiliated Funds

comprising The Sessions Group from

October 3, 1997 until February 1, 1999.

Martindale’s investment advisory

agreement had been approved by the

Board of Trustees (the Trustees) for an

initial period of up to two years and was

required to be re-approved thereafter by

the Trustees or the Portfolios’

shareholders, at least annually.

Subject to the supervision and

direction of the Trustees, Martindale

managed the investment and

reinvestment of the assets of each

Portfolio of The Sessions Group and

provided investment guidance and

policy direction in connection with the

objectives and policies of each such

Portfolio. Although each Affiliated Fund

Portfolio paid Martindale an Advisory

Fee for services rendered, Martindale

agreed to waive a portion of such fee.

The waiver continued throughout

Martindale’s tenure as investment

adviser.

The Advisory Fees were computed

daily and paid monthly at an annual

rate based on a percentage of the value

of the Portfolio’s average daily net

assets. Depending upon the Affiliated

Fund Portfolio managed, the annualized

Advisory Fees that were payable to

Martindale are shown in the following

table. The left-hand column of the table

reflects the Advisory Fees that would

have been paid to Martindale had the

waiver been lifted while the right-hand

column of the table shows the Advisory

Fees that were actually paid to

Martindale during the waiver.

Portfolio

Before

waiver

(percent)

After

waiver

(percent)

KeyPremier Prime

Money Market

Fund .................. 0.40 0.20

KeyPremier Intermediate Term Income Fund ........ 0.60 0.30

KeyPremier Established Growth

Fund .................. 0.75 0.40

KeyPremier Aggressive Growth

Fund .................. 1.00 0.50

4. Effective February 1, 1999, The

Sessions Group was reorganized into

‘‘Governor Funds,’’ a Delaware business

trust which then comprised the

Affiliated Funds. Like The Sessions

Group, Governor Funds constituted an

open-end management investment

company registered under the

Investment Company Act where shares

were offered to IRA investors, at no

load. These Affiliated Funds were

advised by GGA and consisted of the

following 12 Portfolios: the Prime

Money Market Fund, the U.S. Treasury

Obligations Money Market Fund, the

Established Growth Fund, the

Aggressive Growth Fund, the Emerging

Growth Fund, the International Equity

Fund, the Intermediate Term Income

Fund, the Limited Duration Government

Securities Fund, the Pennsylvania

Municipal Bond Fund, the Lifestyle

Conservative Growth Fund, the Lifestyle

Moderate Growth Fund, and the

Lifestyle Growth Fund.

Under the Investment Company Act,

Governor Funds, as the successor

Affiliated Funds, continued the

business of The Sessions Group. In this

regard, amounts formerly invested in

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6683

The Sessions Group were reinvested in

the corresponding Affiliated Fund

Portfolios of Governor Funds.

5. As investment adviser to the

Affiliated Funds, GGA also waived a

portion of its Advisory Fees. The waiver

remained in effect for the duration of

the Investment Advisory Program. The

following table shows the Advisory Fees

that were payable to GGA. Such fees are

expressed as a percentage of each

Portfolio’s net assets. The left-hand

column of the table shows the Advisory

Fees that would have been paid to GGA

had the waiver been lifted while the

right-hand column of the table shows

the Advisory Fees that were actually

paid to GGA during the waiver.

Portfolio

Before

waiver

(percent)

After

waiver

(percent)

Prime Money Market Fund ............ 0.40 0.20

U.S. Treasury Obligations Money

Market Fund ...... 0.40 0.20

Established Growth

Fund .................. 0.75 0.60

Aggressive Growth

Fund .................. 1.00 0.70

Emerging Growth

Fund .................. 1.25 0.50

International Equity

Fund .................. 1.25 0.40

Intermediate Term

Income Fund ..... 0.60 0.30

Limited Duration

Government Securities Fund ..... 0.60 0.30

Pennsylvania Municipal Bond

Fund .................. 0.60 0.30

Lifestyle Conservative Growth

Fund .................. 0.25 0.15

Lifestyle Moderate

Growth Fund ..... 0.25 0.15

Lifestyle Growth

Fund .................. 0.25 0.15

Martindale served as sub-adviser to

each of the Affiliated Funds, except the

International Equity Fund. For subadvisory services rendered, Martindale

was paid an annualized sub-advisory fee

by the Affiliated Funds, as a percentage

of each Portfolio’s net assets.

Martindale’s sub-advisory fees, which

were paid out of GGA’s Advisory Fees,

are presented as follows:

Portfolio

Subadvisory

fee (percent)

Prime Money Market Fund ... 0.10

U.S. Treasury Obligations

Money Market Fund .......... 0.20

Established Growth Fund ..... 0.40

Aggressive Growth Fund ...... 0.50

Emerging Growth Fund ........ 0.50

Portfolio

Subadvisory

fee (percent)

Intermediate Term Income

Fund .................................. 0.30

Limited Duration Government

Securities Fund ................. 0.30

Pennsylvania Municipal Bond

Fund .................................. 0.30

Lifestyle Conservative

Growth Fund ..................... 0.05

Lifestyle Moderate Growth

Fund .................................. 0.05

Lifestyle Growth Fund .......... 0.05

In addition, GGA and BISYS served as

co-administrators for the Affiliated

Funds. The maximum annualized fee

payable to each entity under their

Management and Co-Administration

Agreement was 0.15 percent of the

average daily net assets of the Prime

Money Market Fund, the Pennsylvania

Municipal Bond Fund, the Established

Growth Fund, the Intermediate Term

Income Fund, the Aggressive Growth

Fund, the U.S. Treasury Obligations

Money Market Fund, the Limited

Duration Government Securities Fund,

the Emerging Growth Fund and the

International Equity Fund. Because

GGA and BISYS waived a portion of

their Administrative Fees, the aggregate

annualized fee paid to each coadministrator was reduced to 0.115

percent.

6. Overall responsibility for

management and supervision of the

Affiliated Funds was vested in five

Trustees, three of whom were unrelated

to Keystone and its affiliates. The

Trustees approved all significant

agreements involving the Affiliated

Funds and the persons and companies

that furnished services to such Funds. A

Trustee could be removed by either (a)

a two-thirds vote of the Trustees or (b)

by a vote of shareholders owning at least

two-thirds of the outstanding shares of

all series of the Affiliated Funds. If a

Trustee was an officer or a director of

Keystone, a sub-adviser, Martindale,

GGA, or BISYS, it was precluded from

receiving compensation from The

Affiliated Funds.

Each Affiliated Fund Portfolio was

required to bear its own expenses. These

expenses included all fees and other

costs not specifically waived and/or

borne by the Affiliated Funds’ service

providers.

7. The Third Party Funds were openend, diversified investment companies

registered under the Investment

Company Act whose sponsors,

administrators, distributors, investment

advisers, and sub-advisers were not

affiliated with Keystone or its affiliates.

The Third Party Funds were made

available by Keystone to the IRAs, at no

load, in the event the Affiliated Funds

failed to offer a Portfolio in a particular

Asset Class.

IRA investors participating in the

Investment Advisory Program were

offered two Third Party Funds. These

Funds were The Putnam Fund for

Growth and Income and The T. Rowe

Price International Stock Fund.

For distribution-related services that

were rendered to the Third Party Funds,

Keystone and its affiliates received Rule

12b–1 Fees that were paid by the

respective Third Party Funds to their

distributors. The Rule 12b–1 Fees were

in the form of trailing commissions and

did not exceed 0.25 percent of the assets

invested in each Third Party Fund

Portfolio.

Description of the Investment Advisory

Program/Request for Exemptive Relief

8. The Investment Advisory Program

was an asset allocation program that

was offered by Keystone to IRA

participants between October 3, 1997

and June 30, 2000. Formerly known as

the ‘‘KeyPremier Nautilus Series

Program’’ but later referred to as the

‘‘Nautilus Program,’’ the Investment

Advisory Program was designed to

provide small- and medium-sized

investors with access to the type of

investment advice typically available

only to larger investors. The Investment

Advisory Program offered IRA investors

the following features: (a) A unified

Account statement covering all

investments; (b) automatic allocation of

assets and contributions; (c) a single

asset allocation fee; and (d) no sales

charges on purchases, redemptions, or

transfers between investments. The

minimum investment required for an

Independent Fiduciary to establish an

Account under the Investment Advisory

Program was $25,000.

Effective June 30, 2000, Keystone

discontinued the Investment Advisory

Program. Currently, it is providing asset

allocation services under a separate

program which does not involve

investment in any Affiliated Funds or

Third Party Funds from which it will

receive fees. However, for the interim

period between October 3, 1997 and

June 30, 2000, Keystone and the other

parties to the transactions have

requested an administrative exemption

from the Department in order to provide

retroactive relief for any prohibited

transactions that may have arisen during

the operation of the Investment

Advisory Program.

If granted, the proposed exemption

would be effective from October 3, 1997

until June 30, 2000. The proposed

exemption would permit the purchase

6684 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

or redemption, by an IRA, of shares of

certain Affiliated Fund and the Third

Party Fund Portfolios, in connection

with the IRA’s participation in the

Investment Advisory Program. In

addition, the proposed exemption

would permit Keystone’s provision of

asset allocation and related services to

an IRA’s Independent Fiduciary, which

resulted in such Independent

Fiduciary’s selection of Portfolios in the

Investment Advisory Program for the

investment of IRA assets, and the

receipt of fees by Keystone and/or its

affiliates.

Keystone believes that because it and

Key Trust would be considered

disqualified persons with respect to the

IRAs participating in the Investment

Advisory Program, the decision by an

Independent Fiduciary to participate in

such Program would be statutorily

exempt under section 4975(d)(2) of the

Code. However, Keystone notes that

there is uncertainty regarding the

availability of section 4975(d)(2) of the

Code where the asset allocation

recommendations provided to an

Independent Fiduciary of an IRA under

the Investment Advisory Program may

cause such entities to be considered

fiduciaries with respect to the IRAs.

Therefore, Keystone has requested

retroactive exemptive relief from the

Department for the transactions

described above.

Operation of the Investment Advisory

Program

9. Before opening an Account in the

Investment Advisory Program, Keystone

provided each Independent Fiduciary

with the following information: (a) A

brochure describing the Investment

Advisory Program; (b) an Account

Agreement; (c) a description of the

available Asset Allocation Models; and

(d) a reference guide/disclosure

document providing detailed

information outlining the mechanics of

the Investment Advisory Program, the

fees charged under such Program, the

procedures for establishing Accounts

and making withdrawals and additions,

and other related information. If an

Independent Fiduciary wished to open

an Account with Keystone, such

Independent Fiduciary would complete

an Account Agreement and answer a

series of questions regarding investment

objectives and risk tolerance. Answers

to these questions were communicated

to an investment adviser representative

for Keystone (the Keystone

Representative) either through a

personal Interview, or by obtaining and

completing a Questionnaire (which was

in paper or electronic form).

Once completed, the Questionnaire

was presented to the Keystone

Representative. If answers were given

through an Interview, the Keystone

Representative would prepare a written

report of the answers (i.e., the Interview

Report). Then, a copy of the Interview

Report would be given to the

Independent Fiduciary. The responses

provided by the Independent Fiduciary

during the Interview or on the

Questionnaire were scored by the

Keystone Representative to determine

which of several Asset Allocation

Models were the most appropriate,

given the financial goals, objectives and

risk tolerances previously identified by

the Independent Fiduciary in the

Interview or Questionnaire.

10. The Asset Allocation Models were

designed to satisfy a variety of risk

tolerances, investment horizons, and tax

planning concerns. There were six Asset

Allocation Models available to the IRAs

under the Investment Advisory

Program. Each Asset Allocation Model

consisted of an asset distribution among

the Asset Classes.

The Asset Allocation Models were

developed and maintained by an

investment committee (the Allocation

Committee) consisting of investment

professionals of the Asset Management

Division of KFI.

In constructing the Asset Allocation

Models, the Allocation Committee

utilized Encorr Software which had

been developed by Ibbotson Associates,

an unrelated party, to determine the

optimal allocations for various risk/

return tolerances among five general

Asset Classes based on historical risk

and return. The Allocation Committee

then divided one of these Asset Classes

(e.g., Large Cap) into two asset subclasses (e.g., Large Cap and Large Cap

Growth) on the basis of historical risk

and return data as shown below in

Table I.

TABLE I.—SAMPLE ASSET ALLOCATION MODEL

Asset class Fund type Portfolio Percentage

Money Market ........................... Affiliated ................................... Prime Money Market Fund ........................................................ 6

Fixed Income ............................ Affiliated ................................... Intermediate Term Income Fund ............................................... 76

Large Cap Growth .................... Affiliated ................................... Established Growth Fund .......................................................... 8

Large Cap Value ....................... Third Party ............................... Putnam Fund for Growth and Income ....................................... 10

Total ................................... .................................................. .................................................................................................... 100

11. The Allocation Committee could

make adjustments to the Asset

Allocation Models to take into

consideration the investment goals and

risk tolerances represented by such

Models, and to account for changes in

the economy and market conditions.

These adjustments could include

changing the investment mix of the

Asset Allocation Models by modifying

the proportion of assets invested in each

Asset Class. In no event could Keystone

change the asset mix of an Asset

Allocation Model without first notifying

the Independent Fiduciary in writing of

the proposed change and giving such

Independent Fiduciary at least 30 days

within which to elect not to have the

change made. However, if the

Independent Fiduciary did not elect

otherwise, Keystone was authorized to

make the change.

12. The Retail Investment Product

Committee of KFI (the Review

Committee) was responsible for

selecting the Portfolios used to satisfy

the asset allocations specified by the

Allocation Committee for each Asset

Allocation Model. The Review

Committee was composed of KFI

officers with substantial portfolio

management, investment and regulatory

compliance experience. These officers

also served on the Allocation

Committee.

The Review Committee selected

Portfolios of the Affiliated Funds for

investment to the extent that the

Affiliated Funds offered a Portfolio in a

particular Asset Class. If no Affiliated

Fund offered the requisite Portfolio, the

Review Committee selected Portfolios of

the Third Party Funds for investment.

Any changes in the Portfolios on the

part of Keystone in order to satisfy

investment in a particular Asset Class

were only made after Keystone had

provided written notice to all affected

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6685

4The Independent Fiduciary could specifically

instruct Keystone not to invest in a specific

Portfolio, in which case any IRA assets invested in

that Portfolio would be reinvested within five

business days in another Portfolio selected by

Keystone and specifically approved by the

Independent Fiduciary. A fee was charged for each

such special instruction.

5Neither Keystone nor any of its affiliates

received a commission from such purchases and

sales.

6 In other words, an Account would be rebalanced

if the transactions requiring rebalancing had a

‘‘material effect’’ on the allocation. To have a

material effect on an allocation of an Account, at

least one transaction required to rebalance the

Account had to be greater than $250 and at least

one transaction had to change the value of the Fund

Portfolio by more than 5 percent (i.e., the

percentage of an IRA’s assets invested in a Portfolio

compared to the percentage called for in the Asset

Allocation Model selected for the IRA). However,

Keystone reserved the right to rebalance an Account

even if the required minimums were not satisfied.

For example, if under the Asset Allocation

Model, 35 percent of an IRA’s assets were invested

in the Established Growth Fund, then rebalancing

would occur if the percentage actually invested in

the Established Growth Fund increased above 40

percent or decreased below 30 percent (but only if

the dollar amount of the rebalancing transaction

would exceed $250).

7For reallocations occurring after March 24, 2000,

Keystone would have been required to include a

Termination Form with the notice. See

Representation 21. However, as stated above,

Keystone never implemented the reallocation

mechanism even though this change was

communicated to IRA investors in the Termination

Form.

Independent Fiduciaries. In addition,

these changes would only be

implemented if the Independent

Fiduciaries did not elect otherwise

within 30 days of such notification.

13. Based on the results generated

from the Interview or Questionnaire, a

Keystone Representative recommended

to the Independent Fiduciary an Asset

Allocation Model, together with the

corresponding initial investment mix of

Portfolios that comprise the Asset

Allocation Model. The asset allocation

services provided by the Keystone

Representative were of an advisory

nature and were not binding upon the

Independent Fiduciary. No action was

taken on the initial recommendation

unless and until the Independent

Fiduciary accepted and approved, in

writing, the Asset Allocation Model and

corresponding investment mix

recommended by the Keystone

Representative. The Independent

Fiduciary could add or withdraw IRA

assets to or from the Account at any

time (subject to any applicable

minimum redemption and purchase

requirement). Further, the Independent

Fiduciary could also choose a different

Asset Allocation Model by submitting a

new Questionnaire or by means of a

new Interview if the investment needs

and goals of the Independent Fiduciary

had changed.

Rebalancing of IRA Accounts

14. Keystone invested the Account in

the Affiliated Funds and/or Third Party

Funds that the Allocation Committee

had previously chosen to satisfy the

allocation called for by the Asset

Allocation Model.4 However, it was

anticipated that over time,

disproportionate earnings as between

asset types would cause an Account’s

investment mix to drift out of balance

with the Asset Allocation Model

originally chosen by the Independent

Fiduciary. For example, if the chosen

Asset Allocation Model called for 50

percent of an Account’s assets to be

invested in the Fixed Income Class

through the Intermediate Term Income

Fund, and 50 percent in cash through

the Prime Money Market Fund, and if

the Intermediate Term Income Fund

performed better than the Money Market

Fund during a particular period of time,

more than 50 percent of the Account’s

assets would be invested in the Fixed

Income Class by the end of the period.

To correct this imbalance, Keystone

would periodically move assets among

the chosen investments by buying and

selling shares of selected Portfolios from

appropriate distributors on the second

to the last business day of each calendar

quarter. For purposes of rebalancing,

Keystone used the net asset values of

the affected Funds as of the close of

business for the preceding trading day.5

Keystone had no discretion as to the

timing or amount of the rebalancing.

In the case of the foregoing example,

Keystone would sell shares of the

Intermediate Term Income Fund and

invest the proceeds in the Prime Money

Market Fund so that the Account would

again be 50 percent invested in Fixed

Income Securities and 50 percent in

cash. Rebalancing would be conducted

on a quarterly basis and confined to

bringing the Account into balance with

the Asset Allocation Model chosen by

the Independent Fiduciary. Moreover,

rebalancing would only occur if the

percentage of assets invested in a

particular Portfolio varied from the

Asset Allocation Model by more than a

predetermined threshold set forth in the

Account Agreement.6 As stated above,

Keystone used the net asset values of

the Affiliated Funds as of the close of

business on the preceding trading day.

Reallocation of IRA Accounts

15. Keystone represents that from

time to time, it was authorized to make

changes to the asset mix of the Asset

Allocation Models, as well as to the mix

and identity of Affiliated Fund and/or

Third Party Fund Portfolios that

satisfied the Asset Allocation Models.

However, Keystone states that it never

utilized the reallocation method during

the time period the Investment Advisory

Program was in effect. Had Keystone

decided to implement the reallocation

mechanism, it would have been

required to inform each affected

Independent Fiduciary in advance and

in writing of the proposed change. In

addition, Keystone would have been

required to provide each Independent

Fiduciary with the opportunity to elect

not to permit such change.7 If the

Independent Fiduciary took no action,

Keystone would have been authorized

to realign each Account on a quarterly

basis to make the Account’s investment

mix match the new investment mix of

the Asset Allocation Model selected by

the Independent Fiduciary.

Disclosures

16. Aside from the Questionnaire and

Interview Report described above, in

order for an IRA to participate in the

Investment Advisory Program, Keystone

provided an Independent Fiduciary

with the following materials and oral

disclosures:

• A brochure describing the Investment

Advisory Program; an Account Agreement; a

description of the Asset Allocation Models;

and a reference guide/disclosure statement

providing details about the Investment

Advisory Program, the fees charged

thereunder, the procedures for establishing,

making additions to and withdrawing from

Accounts, and other related information.

• Copies of applicable Prospectuses for the

Portfolios discussing the investment

objectives of the Portfolios, the policies

employed to achieve these objectives, and the

corporate affiliation existing between

Keystone and its affiliates, the compensation

paid to such entities, disclosures relating to

rebalancing and reallocating Asset Allocation

Models (even though the reallocation service

was never implemented), and information

explaining the risks attendant to investing in

the Portfolios.

• Upon written or oral request to Keystone,

a Statement of Additional Information

supplementing the Prospectuses, which

described the type of securities and other

instruments in which the Portfolios may

invest and the investment policies and

strategies that the Portfolios may utilize,

including a description of the risks.

• A copy of the Account Agreement

between the IRA and Keystone relating to the

IRA’s participation in the Investment

Advisory Program.

• A written recommendation of a specific

Asset Allocation Model, together with a copy

of the Questionnaire and response, or the

Interview Report.

If accepted as an investor in the

Investment Advisory Program, the

Independent Fiduciary was required to

6686 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

acknowledge in writing to Keystone,

prior to investing through such Program,

that such Independent Fiduciary had

received copies of the aforementioned

documents. In addition, the

Independent Fiduciary was required to

represent to Keystone that such

individual was (a) independent of

Keystone and its affiliates; (b)

knowledgeable with respect to the IRA

in administrative matters and funding

matters related thereto; and (c) able to

make an informed decision concerning

participation in the Investment

Advisory Program.

17. In addition, on an ongoing basis,

Keystone was required to provide each

Independent Fiduciary with the

following oral or written disclosures:

• Written confirmations of each purchase

and redemption of shares of a Portfolio

(including transactions resulting from the

realignment of assets caused by a change in

the Asset Allocation Model’s investment mix

and from periodic rebalancing of Account

assets).

• Telephone quotations of Account

balances.

• A periodic, but not less frequently than

quarterly, Statement of Account specifying

the net asset value of the IRA’s assets

invested in such Account, a summary of

purchase, sale and exchange activity and

dividends received or reinvested, a summary

of cumulative realized gains or losses, and a

statement of the fees paid to Keystone and its

affiliates.

• Semiannual and annual reports that

included financial statements for the

Portfolios.

• A quarterly report pertaining to the

applicable Asset Allocation Model describing

such Asset Allocation Model’s performance

during the preceding quarter, market

conditions and economic outlook and, if

applicable, prospective changes in Portfolio

allocations for the Asset Allocation Model,

and the reasons therefor.

• At least annually, a written or oral

inquiry from Keystone to ascertain whether

the information provided in the

Questionnaire or Interview Report was still

accurate, and to determine whether such

information should be updated.

• At least annually, a Termination Form.

Fee Structure

18. As to each investing IRA, the total

fees paid to Keystone and its affiliates

constituted not more than reasonable

compensation for the services provided

within the meaning of section

4975(d)(2) of the Code. Keystone

charged each participating IRA an

annual investment fee (the Outside Fee)

at rates set forth in the Account

Agreement. For example, if the average

daily value of the Account—

• Exceeded $149,999, the Outside Fee

charged was 1.30 percent; or

• Was less than $150,000, the Outside Fee

charged was 1.55 percent.

The Outside Fee was computed

quarterly on the average daily value of

the assets in an IRA’s Account during

the quarter and was deducted directly

from the Account (or paid directly by

the Independent Fiduciary), also on a

quarterly basis.

Although Keystone was authorized to

increase the Outside Fee periodically, it

never implemented this change.

Assuming the Outside Fee had been

increased, Keystone would have been

required to notify the Independent

Fiduciaries of all IRAs participating in

the Investment Advisory Program, in

writing, at least 30 days prior to the

effective date of a such fee increase. The

Independent Fiduciary would have been

permitted to withdraw from the

Investment Advisory Program at will

and without penalty, and the fee

increase would only have gone into

effect if the Independent Fiduciary did

not elect to withdraw by the effective

date.

As stated above, each investing IRA

did not pay any sales loads on the

purchase of Portfolio shares through the

Investment Advisory Program. The

Accounts were invested only in

Portfolios which charged no front- end

or back-end sales charges or for which

the sales charges had been waived.

As discussed in Representation 3,

Martindale received Advisory Fees from

the Affiliated Funds. These annualized

fees were paid at the Fund Portfoliolevel and were based on a percentage of

the assets held by such Portfolio, of

between 0.20 percent and 0.50 percent.

Similarly, GGA received annualized

Advisory Fees of between 0.15 percent

and 0.70 percent and Martindale

received sub-advisory fees ranging from

0.05 percent to 0.50 percent.

In addition to the Advisory Fees, GGA

and BISYS received Administrative Fees

from the Affiliated Funds of 0.115

percent.

Further, Keystone and its affiliates

received Rule 12b–1 Fees from certain

Third Party Fund distributors with

respect to IRA assets invested in the

Third Party Funds through the

Investment Advisory Program. The Rule

12b–1 Fees were in the form of trailing

commissions of up to 0.25 percent per

annum of the net asset value of each

Third Party Fund.

Besides the aforementioned fees, each

Portfolio incurred certain expenses.

These expenses included charges for

legal and accounting services, printing

costs, registration fees, regulatory

compliance costs, costs associated with

maintaining the Fund’s legal existence,

and shareholder communication costs.

19. Keystone represents that with

respect to each Account, it offset,

quarterly, against the Outside Fee it

received, (a) all Advisory Fees

(including sub-advisory fees that were

paid to third party sub-advisers), (b) all

Administrative Fees GGA and BISYS

received from the Affiliated Funds, and

(c) all Rule 12b–1 Fees that were paid

to Keystone and its affiliates by the

respective Third Party Funds. Thus, the

sum of the offset and the net Outside

Fee would always equal the aggregate

Outside Fee and the selection of

Affiliated Funds or Third Party Funds

would always be revenue-neutral.

Moreover, Keystone believed this

method of offsetting of all Fund-level

fees would eliminate any conflicts of

interest resulting from the investment of

an Account’s assets in certain Fund

Portfolios that generated higher overall

fees for Keystone and its affiliates.

At the end of each quarter, Keystone

calculated the percentage of gross

revenues that it and its affiliates earned

during the quarter in the form of

Advisory Fees (from the Affiliated

Funds) or Rule 12b–1 Fees (from the

Third Party Funds). These figures were

calculated as a percentage of the average

daily net value of assets in each

Portfolio. The weighted average of such

revenues (the Offset Percentage) were

then calculated for each Asset

Allocation Model as shown below in

TABLE II. This yielded the amount of

the Advisory Fees and Rule 12b–1 Fees

that were earned by Keystone and its

affiliates. Such fees were expressed as a

percentage of the average daily net value

of Account assets. Because the Outside

Fee was also calculated as a percentage

of the average daily net value of

Account assets, Keystone reduced the

Outside Fee for the quarter for each IRA

by subtracting from the Outside Fee, the

Offset Percentage for the Asset

Allocation Model in which the IRA’s

assets had been invested during the

quarter. Only after the Offset Percentage

had been subtracted would Keystone

deduct the Outside Fee from the IRA’s

Account.

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6687

TABLE II.—EXAMPLE OF OUTSIDE FEE OFFSET BASED ON AN ACCOUNT WITH AN AVERAGE DAILY VALUE OF $150,000 OR

MORE

[All percentages annualized]

Fund type Asset class Total revenues

(percentage)

Percentage

of assets

allocated

to fund

Weighted

fee

percentage

Affiliated Fund ......................................... Fixed Income ......................................... 0.60 × 35.00 .... 21.00

Affiliated Fund ......................................... Money Market ........................................ 0.40 × 30.00 .... 12.00

Third Party Fund ..................................... International Equity ................................ 0.20 × 35.00 .... 7.00

Total ................................................. ................................................................ ........................ .... 100 .... 40.00

Outside Fee: ............................................ ................................................................ ........................ .... 1.30 .... ........................

Weighted Average of Keystone Revenues (40 ÷ 100):................................................................ ........................ .... 0.40 .... ........................

Net Account Fee (Annual) Would be

Calculated Quarterly.

................................................................ ........................ .... 0.90 .... ........................

20. Like the Affiliated Funds, the

Third Party Funds also incurred

expenses for shareholder services,

custody, the costs of regulatory

compliance, legal fees, and shareholder

communication costs, as well as the

management and service fees imposed

by investment advisers and service

providers unaffiliated with Keystone or

its affiliates. As for both the Affiliated

and the Third Party Funds, these Fundlevel expenses were not offset against

Keystone’s Outside Fee.

Termination Form

21. An Independent Fiduciary had the

ability to withdraw from the Investment

Advisory Program at any time, provided

such fiduciary gave proper notice to

Keystone. In addition, Keystone was

authorized to provide 30 days’ advance

written notice to the Independent

Fiduciary if it wished to change the

asset mix of an Account outside of an

Asset Allocation Model, divide an Asset

Class, replace a Third Party Fund with

an Affiliated Fund or vice versa, or

increase its Outside Fee. The written

notice was required to (a) state that the

Independent Fiduciary could terminate

the IRA’s participation in the

Investment Advisory Program at will

and without penalty, upon receipt by

Keystone of written notice from the

Independent Fiduciary; and (b) explain

that any of the changes noted above

would go into effect if the Independent

Fiduciary did not elect to withdraw by

the effective date.

However, under either circumstance,

there was no formalized structure in

place whereby Keystone could inform

an Independent Fiduciary of his or her

right to withdraw from the Investment

Advisory Program on a more frequent

basis or to document the Independent

Fiduciary’s withdrawal decision.

Therefore, on March 24, 1999, Keystone

began distributing the Termination

Form to each Independent Fiduciary

participating in the Investment

Advisory Program. Although

distribution of such form would be

required thereafter, at least annually

(i.e., during the first calendar quarter of

each year), it was considered mandatory

in all cases where Keystone wished to

make the changes noted above.

The Termination Form was to be

accompanied by instructions on its use.

The instructions, which contained

information similar to the contents of

Keystone’s formerly-disseminated

notice, provided that (a) the

authorization was terminable at any

time and without penalty, either by

completing and returning the

Termination Form or by sending other

written notice to Keystone; and (b) no

purchases and sales under the Account

Agreement would be executed after the

next business day following Keystone’s

receipt of the Termination Form or other

written withdrawal notice. Assuming

Keystone proposed to modify an asset

mix or raise its Outside Fee, the

Termination Form would also have

stated that the change would only go

into effect if the Independent Fiduciary

did not elect to withdraw by the

effective date.

Keystone represents that it never

replaced an Affiliated Fund with a

Third Party Fund Portfolio or vice versa,

nor did it otherwise make an additional

Third Party Fund Portfolio available for

investment under the Investment

Advisory Program, change an asset mix

outside of an Asset Allocation Model or

increase its Outside Fee. Therefore,

there were no special circumstances to

warrant an earlier distribution of such

form. Moreover, because of the

contemplated termination of the

Investment Advisory Program on June

30, 2000, Keystone made no further

annual distribution of the Termination

Form to Independent Fiduciaries.

22. It is represented that the

transactions satisfied the statutory

criteria for an exemption under section

4975(c)(2) of the Code because:

(a) The investment of an IRA’s assets

under the Investment Advisory Program

was made by a fiduciary that was

independent of Keystone and its

affiliates and such Independent

Fiduciary maintained complete

discretion with respect to the IRA’s

continued participation in the

Investment Advisory Program.

(b) No IRA paid a fee or commission

by reason of the acquisition or

redemption of shares of Fund Portfolios.

(c) As to each IRA, the total fees that

were paid to Keystone and its affiliates

constituted no more than reasonable

compensation for the services provided.

(d) Prior to investing under the

Investment Advisory Program, each

Independent Fiduciary received offering

materials and disclosures from Keystone

which set forth all material facts

concerning the purpose, fee structure,

rebate arrangement, operation,

rebalancing, risks and participation in

such Program.

(e) Keystone provided written

documentation to an Independent

Fiduciary of its recommendations based

upon objective criteria that were

uniformly applied.

(f) The quarterly Outside Fee that was

paid by an IRA to Keystone for asset

allocation and related services rendered

to such IRA under the Investment

Advisory Program was offset by—(1) all

gross Advisory Fees received by

Keystone and/or its affiliates from the

Affiliated Funds, including subadvisory fees that are paid to third party

sub-advisers; (2) all Administrative Fees

received by GGA and BISYS from the

Affiliated Funds; and (3) all Rule 12b1 Fees that were paid by the Third Party

Funds to Keystone and/or its affiliates,

such that the sum of the Outside Fee

6688 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

8The Plan sold approximately 10 acres of the

Land in 1987 to Brian Skeuse, a party in interest,

pursuant to the terms and conditions of Prohibited

Transaction Exemption (PTE) 87–17, 52 FR 2630

(January 23, 1987). The Department is providing no

opinion herein as to whether the conditions of PTE

87–17 were met.

9The Department is not providing any opinion in

this proposed exemption as to whether the

acquisition and holding of the Land, including the

Property, by the Plan violated any of the provisions

of Part 4 of Title I of the Act.

However, the Department notes that an

investigation regarding the subject investments

made by the Plan and related transactions has been

conducted by the Department’s Regional Office in

New York. In this regard, the proposed exemption,

if granted, will enable the Plan to be made ‘‘whole’’

with regard to the total costs to the Plan for the

Property and will allow the Plan to reinvest the

proceeds of the proposed sale in other assets which

may yield greater returns.

and the Offset Fees equaled the total

Outside Fee, and the selection of

Affiliated or Third Party Fund Portfolios

was revenue-neutral.

(g) Although Keystone had discretion

to make unilateral Model Adjustments

to an IRA’s Asset Allocation Model, it

was bound by the financial goals and

risk tolerances that the Model

represented and it was limited in the

degree of change that it could make to

an Asset Allocation Model’s investment

mix.

(h) In rebalancing an IRA investor’s

Account, neither Keystone nor its

affiliates exercised discretionary

management or control over the IRA.

(i) Although the Independent

Fiduciary could withdraw from the

Investment Advisory Program at any

time, any authorizations made by such

IRA investors with respect to increases

in the Outside Fee, Model Adjustments

that were outside of an Asset Allocation

Model, the addition or substitution of a

Fund, would be terminable at will and

without penalty to the IRA, upon receipt

by Keystone of a Termination Form

from such IRA investor which would

advise the Independent Fiduciary (1) of

his or her right to withdraw from the

Investment Advisory Program and (2)

that absent affirmative approval, the

change would be effective as of a given

date.

(j) Each Independent Fiduciary

received disclosures from Keystone

regarding the participation of the IRA in

the Investment Advisory Program.

(k) All dealings between an IRA, the

Funds and Keystone remained on a

basis which was at least as favorable to

the IRA as such dealings are with other

shareholders of the Funds holding the

same classes of shares as the IRA.

Notice to Interested Persons

Keystone will provide notice of the

proposed exemption to Independent

Fiduciaries of IRAs formerly investing

in the Investment Advisory Program

within 30 days of the publication of the

notice of pendency in the Federal

Register. Such notice will be provided

by first-class mail and will include a

copy of the notice of proposed

exemption, as published in the Federal

Register, as well as a supplemental

statement, as required pursuant to 29

CFR 2570.43(b)(2). The supplemental

statement will inform interested persons

of their right to comment on and/or to

request a hearing with respect to the

pending exemption. Therefore,

comments and requests for a hearing

must be received by the Department no

later than 60 days from the date of the

publication of this notice of proposed

exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms.

Jan D. Broady of the Department,

telephone (202) 219–8881. (This is not

a toll-free number.)

Reagent Chemical & Research, Inc.

Employees Profit Sharing Plan and

Trust (the Plan) Located in Middlesex,

New Jersey

[Application No. D–10793]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

and section 4975(c)(2) of the Code and

in accordance with the procedures set

forth in 29 CFR Part 2570, Subpart B (55

FR 32836, 32847, August 10, 1990). If

the exemption is granted, the

restrictions of sections 406(a), 406(b)(1)

and (b)(2) of the Act and the sanctions

resulting from the application of section

4975 of the Code, by reason of section

4975(c)(1)(A) through (E) of the Code,

shall not apply to the proposed sale of

a certain residential lot (the Property) by

the Plan to Mr. Brian Skeuse and Mrs.

Jan Skeuse (the Skeuses), parties in

interest with respect to the Plan;

provided that the following conditions

are satisfied:

(a) the sale is a one-time cash

transaction;

(b) the Plan receives the greater of

either: (i) $105,000; or (ii) the current

fair market value for Property

established at the time of the sale by an

independent qualified appraiser; and

(c) the Plan pays no commissions or

other expenses associated with the sale.

Summary of Facts and Representations

1. The Plan was adopted on December

12, 1962. The Plan is a defined

contribution plan with approximately

309 participants. As of July 22, 1999, the

Plan had approximately $30,438,854 in

total assets. Reagent Chemical &

Research, Inc. (RCR) is the sponsor of

the Plan. RCR is a subchapter ‘‘S’’

corporation organized under the laws of

State of Delaware. RCR is in the

business of manufacture, distribution

and sale of specialty chemicals. The

Plan’s current trustees are John T.

Skeuse, brother of Brian Skeuse, and

Stephen T. Finney, brother-in-law of

Brian Skeuse.

2. On November 3, 1980, the Plan

purchased approximately 34.58 acres of

land (the Land) from Joe and Wenona

Russo, unrelated third parties, for

$225,000.8 The Property is a 2.5 acre

parcel of the Land. Therefore, the

applicant represents that the cost of the

Property to the Plan, based on the per

acre price paid for the Land, was

$16,304.35. The Property is adjacent to

the Skeuses’ personal family residence.

It is represented that the decision to

purchase the Property as a investment

for the Plan was made by Robert Dallas

and Thomas Skeuse, Sr., who were the

Plan’s trustees at the time of the

transaction.9

The Property is held in the Plan’s

aggregate portfolio and has not been

allocated to any participant’s account in

the Plan. At the time of the Plan’s

purchase in 1980, the Property

represented less than 1% of the Plan’s

total assets. The applicant represents

that as of November 27, 2000, the

Property continued to represent less

than 1% of the total value of the Plan’s

assets.

3. The applicant represents that the

Property has not been used or leased by

anyone, including the parties in interest

described herein, since it was acquired

by the Plan. Thus, the applicant states

that the Property has not been an

income-producing asset and has been

held for possible appreciation.

The Plan has paid for taxes, insurance

and maintenance on the Property since

the acquisition (the Holding Costs).

Specifically, the Plan has paid a total of

approximately $34,870 in property taxes

for the Property during this period.

Further, the Plan has paid

approximately $4,500 for the design and

approval of a residential septic tank

system for the Property. The applicant

estimates that the insurance costs

incurred by the Plan for the Property

during the period from 1980 until 1999

were approximately $1,000. The

applicant states that the Holding Costs

for the Property have been

approximately $40,370. Therefore, the

total cost for the Property (i.e, the

acquisition price of $16,304, plus the

Holding Costs of approximately

$40,370) was approximately $56,674 as

of December 2000.

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6689

4. The Property is located on 30 Old

Hill Road, Raritan Township,

Hunterdon County, New Jersey. The

Property was appraised on May 11,

1999, as having a fair market value of

$95,000 (the Appraisal). The Appraisal

was prepared by George A. Copeland,

Jr., MAI (Mr. Copeland), who is an

independent, qualified real estate

appraiser in the State of New Jersey. Mr.

Copeland is with Copeland Appraisal

Associates, Inc., located at 971 U.S.

Route 202 in Somerville, New Jersey.

Mr. Copeland states that consideration

was given in the Appraisal to three

approaches to value, i.e., the cost

approach, sales comparison approach,

and income approach. However, Mr.

Copeland relied on the sales comparison

approach to determine the fair market

value of the Property.

Mr. Copeland also submitted several

updates to the Appraisal of the Property.

The first update is dated March 23, 2000

(Update I). Update I states that the fair

market value of the Property was

$100,000 as of March 23, 2000.

The second update to the Appraisal of

the Property is dated November 20,

2000 (Update II). Update II states that

the fair market value of the Property was

$105,000, as of November 20, 2000.

Finally, the applicant also submitted

a supplement to the Update II dated

December 22, 2000 (the Supplement).

Because the Property is adjacent to the

Skeuses’ personal family residence, Mr.

Copeland considered whether a sale of

the Property by the Plan to the Skeuses

would merit a premium above the fair

market value for the Property. However,

in the Supplement, Mr. Copeland states

that the Property would not merit a

premium above its fair market value in

any sale to an adjacent property owner.

5. The applicant now proposes that

the Skeuses purchase the Property from

the Plan in a one-time cash transaction.

The applicant represents that the

proposed transaction would be in the

best interest and protective of the Plan.

The Plan will pay no commissions or

other expenses associated with the sale.

The Skeuses will pay the Plan the

greater of either: (a) $105,000; or (b) the

current fair market value of the

Property, as established by a qualified

independent appraiser at the time of the

transaction. In this regard, Mr. Copeland

or another independent qualified

appraiser will update the Appraisal to

determine the current fair market value

for the Property at the time of the

proposed sale. The sale of the Property

will enable the Plan to sell an illiquid

non-income producing asset and

reinvest the sale proceeds in assets that

may yield higher returns.

6. In summary, the applicant

represents that the transaction will

satisfy the statutory criteria of section

408(a) of the Act and section 4975(c)(2)

of the Code because:

(a) The proposed sale will be a onetime cash transaction;

(b) the Plan will receive the greater of

either: (i) $105,000; or (ii) the current

fair market value for the Property, as

established at the time of the sale by an

independent qualified appraiser;

(c) the Plan will pay no fees,

commissions or other expenses

associated with the sale; and

(d) the sale will enable the Plan to

divest itself of a non-income producing

asset and acquire investments which

may yield higher returns.

Notice to Interested Persons

The applicant represents that notice

of the proposed exemption (the Notice)

will be distributed to interested persons,

by first class mail, or by posting in

RCR’s facilities, within thirty (30) days

of the date the Notice is published in

the Federal Register. Such interested

persons will include all participants in

the Plan, all fiduciaries of the Plan, and

any officer or director of RCR. The

distribution to interested persons shall

include a copy of the Notice, as

published in the Federal Register, and

a supplemental statement, as required

pursuant to 29 CFR 2570.43(b)(2), which

shall inform such persons of their right

to comment and/or request a hearing

with respect to the Notice.

Comments and requests for a public

hearing with respect to the Notice are

due sixty (60) days following the

publication of the Notice in the Federal

Register.

FOR FURTHER INFORMATION CONTACT:

Ekaterina A. Uzlyan of the Department

at (202) 219–8883. (This is not a toll-free

number.)

Ibbotson Associates, Inc. (Ibbotson)

Located in Chicago, Illinois

[Exemption Application No.: D–10897]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

and section 4975(c)(2) of the Code and

in accordance with the procedures set

forth in 29 CFR Part 2570, Subpart B (55

FR 32836, 32847, August 10, 1990). If

the exemption is granted, the

restrictions of sections 406(a) and 406(b)

of the Act and the sanctions resulting

from the application of section 4975 of

the Code, by reason of section

4975(c)(1)(A) through (F) of the Code,

shall not apply to the provision of asset

allocation services (the Service) by

Ibbotson to Plan participants and the

receipt of fees by Ibbotson from Service

Providers in connection with the

provision of such asset allocation

services, provided that the following

conditions are met.

I. General Conditions

A. The retention of Ibbotson to

provide the Service will be expressly

authorized in writing by an independent

fiduciary of each Plan.

B. Ibbotson shall provide the

independent fiduciary of each Plan with

the following, in writing:

(1) Prior to authorization, a complete

description of the Service and

disclosures of all fees and expenses

associated with the Service.

(2) Any other reasonably available

information regarding the Service that

the independent fiduciary requests.

(3) A contract for the provision of the

Service which defines the relationship

between Ibbotson, the Service Providers

and the Plan sponsor, and the

obligations thereunder. Such contract

shall be accompanied by a termination

form with instructions on the use of the

form. The termination form must

expressly state that a Plan may

terminate its participation in the Service

without penalty at any time. However,

a Plan which terminates its

participation in the Service before the

expiration of the contract will pay its

pro-rata share of the fees that it would

otherwise owe for the Service under the

contract and, if applicable, any direct

costs actually incurred by Ibbotson

which would have been recovered from

the Plan but for the termination of the

contract, including any direct setup

expenses not previously recovered.

Thereafter, the termination form shall be

provided no less than annually.

(4) At least 45-days prior to the

implementation of any material change

to the Service or increase in fees or

expenses charged for the Service,

notification of the change and an

explanation of the nature and the

amount of the change in the Service or

increase in fees or expenses.

(5) A copy of the proposed and final

exemption, if granted, as published in

the Federal Register.

(6) An annual report of Plan activity

which summarizes the performance of

the asset allocation categories provided

to the Plan and provides a breakdown

of all fees and expenses paid to Ibbotson

in connection with the provision of the

Service to the Plan for the year. Such

report shall be provided no more than

45 days after the period to which it

relates. Upon the independent

fiduciary’s or Plan sponsor’s request,

6690 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

such report may be provided more

frequently.

C. Ibbotson will provide each Plan

participant with the following:

(1) Written notice that the Service is

available and provided by Ibbotson, an

entity independent of the Service

Provider and the Plan sponsor.

(2) Prior to using the Service, full

written disclosures that will include

information about Ibbotson and a

description of the Service.

(3) Access to Ibbotson’s web site or

paper-based communications which

will clearly indicate that the Plan

participant is receiving the Service from

Ibbotson, and that Ibbotson is

independent of the Service Provider.

(4) A tolerance questionnaire which

must be completed prior to utilization of

the Service.

(5) An investment advisory service

agreement under which the Plan

participant will acknowledge his or her

understanding that the Service is

provided by Ibbotson and not the

Service Provider. This agreement must

be completed prior to utilization of the

Service.

D. Any investment advice given to a

Plan participant by Ibbotson under the

Service will be based solely on the

responses provided by the Plan

participant through the Service’s

interactive computer program or

through a paper or telephone interview

and will be based on the application of

an objective methodology developed by

Ibbotson.

E. Any investment advice given to a

Plan participant will be implemented

only at the express direction of the Plan

participant.

F. The total fees paid to Ibbotson and

a Service Provider, in connection with

the provision of the Service, by each

Plan does not exceed ‘‘reasonable

compensation’’ within the meaning of

section 408(b)(2) of the Act.

G. The only fees which are payable to

Ibbotson in connection with the

provision of the Service include, subject

to negotiation, one or more of the

following:

(1) An annual flat fee based on a fixed

dollar amount per Plan participant for

the Service. This fee may be paid by the

Plan, Plan sponsor, Plan participant or

the Service Provider.

(2) A technology licensing fee payable

by the Service Provider in the first year

that the Service is provided to a Plan.

The fee will be a fixed dollar amount

based on the number of Plan

participants and beneficiaries contained

on the Service Provider’s record-keeping

system. Each time the number of Plan

participants and beneficiaries on the

Service Provider’s record-keeping

system increases by at least 10%, an

additional fixed dollar amount based on

the increase in Plan participants and

beneficiaries will be assessed and

charged to the Service Provider for the

new Plan participants and beneficiaries

(the Revised Technology Fee).

(3) For subsequent years, Ibbotson

will charge the Service Provider an

annual technology maintenance fee

equal to up to 20% of the technology

licensing fee charged to the Service

Provider in the first year plus up to 20%

of the Revised Technology Fee.

(4) Ibbotson will charge the Plan or

Plan sponsor an Internet customization

fee where a Plan sponsor contracts

directly with Ibbotson for the provision

of the Service. This flat fee will be based

on the time spent by Ibbotson personnel

on its customization of the Service for

the particular Plan.

(5) For those Plan sponsors electing to

receive a Plan analysis report, an annual

flat fee based on a fixed dollar amount

per Plan investment analysis report.

This fee will be paid by the Plan

sponsor or Service Provider.

H. No portion of any fee or other

consideration payable by the Plan or the

Plan sponsor to Ibbotson in connection

with the Service will be received or

shared with a Service Provider.

I. Neither the fees charged nor the

compensation received by Ibbotson will

be affected by the investment selections

or the decisions made by the Plan

participants and beneficiaries regarding

investments of the assets in their

accounts.

J. Each Service Provider shall

represent to Ibbotson that it will not

impose any additional fees and/or

charges (relating to the investment

products made available to Plans) on

Plans who contract for the Service

unless such fees and charges are

imposed on the Service Provider’s

similarly situated clients who do not

contract for the Service.

K. Ibbotson will maintain insurance

coverage from an insurer with a rating

in one of the three highest generic

categories by at least one nationally

recognized statistical rating service, in

the amount of at least $5 million for the

payment of any liabilities that may arise

with respect to the Service by reason of

a breach of fiduciary duty described in

section 404 of the Act or a violation of

the prohibitions of section 406 of the

Act or section 4975 of the Code. Such

insurance coverage will be provided

under a ‘‘claims made’’ policy. In the

event that Ibbotson changes insurers or

ceases to provide the Service, Ibbotson

will maintain ‘‘trail coverage’’ with

respect claims made during the period

in which the policy was in effect for a

period of three years following such a

change or cessation of the Service.

L. No Service Provider shall at any

time own any interest, by vote or value

in Ibbotson, and neither Ibbotson nor

any affiliate shall own any interest, by

vote or value, in a Service Provider.

M. The annual revenues derived by

Ibbotson from any one Service Provider

shall not constitute more than 5% of the

annual revenues of Ibbotson.

N. Ibbotson will maintain for a period

of six years, the records necessary to

enable the persons described in

paragraph (O) of this section to

determine whether the conditions of the

exemption are met, including records of

the recommendations made to Plan

participants and beneficiaries and their

investment choices, except that—

1. A prohibited transaction will not be

considered to have occurred if, due to

circumstances beyond the control of

Ibbotson, the records are lost or

destroyed prior to the end of the six year

period.

2. No party in interest, other than

Ibbotson shall be subject to the civil

penalty that may be assessed under

section 502(i) of the Act, or the taxes

imposed by section 4975(a) and (b) of

the Code if records are not maintained

or not available for examination as

required by this paragraph and

paragraph O(1) below.

O. (1) Except as provided in

subparagraph (2) of this paragraph and

notwithstanding any provisions of

subsections (a)(2) and (b) of Section 504

of the Act, the records referred to

paragraph (N) of this section are

unconditionally available at their

customary location for examination

during normal business hours by—

(a) Any duly authorized employee or

representative of the Department of

Labor, 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 representative of such

employer, or an employee organization

whose members are participants and

beneficiaries of a participating Plan; or

(d) Any Plan participant or

beneficiary of any participating Plan or

any duly authorized representative of

such Plan participant or beneficiary.

(2) None of the persons described in

paragraph (1)(b)–(d) of this paragraph

(O) shall be authorized to examine trade

secrets of Ibbotson, or commercial or

financial information which is

privileged or confidential.

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6691

10 In this regard, the Department notes that the

fiduciary responsibility provisions of the Act apply

to the decision of a Plan’s independent fiduciary to

authorize the Plan’s participation in the Service.

Section 404 of the Act requires, among other things,

that a fiduciary of a plan must act prudently, solely

in the interest of the plan’s participants and

beneficiaries, and for the exclusive purpose of

providing benefits to participants and beneficiaries.

Accordingly, the Plan’s independent fiduciary must

act prudently when deciding to participate in the

Service, and in considering the fees associated with

the Service. The Department expects that the Plan’s

independent fiduciary, prior to authorizing the

Plan’s participation in the Service, will understand

fully the operation of the Service, and the

compensation paid thereunder, following

disclosure by Ibbotson of all relevant information

pertaining to the Service.

11The provision of investment advisory services

to plans would be exempt from the prohibitions of

section 406(a) of ERISA if the conditions of section

408(b)(2) are met. Section 2550.408b–2(a) of the

Department’s regulations provides that section

408(b)(2) of the Act exempts from the prohibitions

of section 406(a), payment by a Plan to a party in

interest, including a fiduciary for * * * any service

(or combination of services) if (1) such service is

necessary for the establishment or operation of the

Plan; (2) such * * * service is furnished under a

contract or arrangement which is reasonable; and

(3) no more than reasonable compensation is paid

for such * * * service. The regulation also provides

that section 408(b)(2) does not contain an

exemption from acts described in a section 406(b)

even if such act occurs in connection with a

provision of services that is exempt under section

Continued

III. Definitions

A. The term ‘‘Service’’ means the

asset allocation service provided by

Ibbotson to Plans which is accessed

through computer software and other

written communications in order to

provide personalized recommendations

to Plan participants regarding the

allocation of their investments among

the options offered under their Plan.

B. The term ‘‘Service Provider’’ means

an entity that has been in the financial

services business for at least three years,

and during such period, has not been

convicted of a felony offense involving

abuse or misuse of such entity’s

employee benefit plan position or

employment, or any felony arising out

of the conduct of the business of a

broker, dealer, investment adviser, bank,

insurance company or fiduciary. Such

entity is also described in one of the

following categories:

1. A bank, savings and loan

association, insurance company or

registered investment adviser which

meets the definition of a ‘‘qualified

professional asset manager’’ (QPAM) set

forth in section V(a) of Prohibited

Transaction Exemption 84–14 (49 Fed.

Reg. 9494 (Mar. 13, 1984)), as corrected

at 50 Fed. Reg. 41430 (Oct. 10, 1985)

and in addition, has, as of the last day

of its most recent fiscal year, total client

assets under management and control in

an amount not less than $250 million;

or

2. A broker dealer registered under

the Securities Exchange Act of 1934,

which has, as of the last day of its most

recent fiscal year, $1 million in

shareholders’ or partners’ equity, and

total client assets under management

and control in an amount not less than

$250 million.

C. The term ‘‘independent fiduciary’’

means a Plan fiduciary which is

independent of Ibbotson and its

affiliates and independent of the Service

Provider and its affiliates.

D. The term ‘‘affiliate’’ 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, relative of, or

partner in any such person; and

(3) Any corporation or partnership, of

which such person is an officer, director

or partner.

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 ‘‘Plan’’ means an

employee benefit pension plan as

defined in section 3(2) of the Act.

Summary of Facts and Representations

1. Ibbotson, founded by Professor

Roger Ibbotson in 1976, provides

products and services to help

investment professionals make asset

allocation decisions for their clients.

Ibbotson’s mission is to help its clients

gather, manage and retain assets. Its

clients include financial planners,

brokers, brokerage firms, mutual fund

companies, institutional and small

money managers, pension funds, 401(k)

providers, banks and private bankers

and insurance companies. In its

application, Ibbotson states that

Professor Ibbotson’s study, Stocks,

Bonds, Bills and Inflation, has become

an indispensable annual reference tool

for investment and financial

professionals.

2. The Applicant represents that the

Service will be beneficial to Plan

participants because it will provide Plan

participants with guidance involving

analytical techniques and financial

concepts that typically result in a more

focused and well thought out program

for Plan investments. The Applicant

further states that the Service, thereby,

allows Plan participants to more fully

exercise their rights to self-direct their

investments. The Service integrates

retirement planning and fund allocation

recommendations, including current

Plan savings, other retirement savings,

personal retirement income goals and

tolerance for risk, time horizon to

retirement and the fund choices

specifically available in a participant’s

Plan. According to Ibbotson, these

factors can be the most crucial in

developing an effective individual

retirement plan.

The Applicant further indicates that

the individual guidance which is

provided by the Service is not typically

available due to the hesitancy of Plan

sponsors and Service Providers to

provide such advice out of concern for

potential liability, and the high cost of

obtaining this type of advice on an

individual basis. Ibbotson believes that

the advice provided by the Service is

similar to that used by professional

investment managers for the allocation

of assets in a defined benefit plan.

3. Before a Plan’s independent

fiduciary may authorize the Plan’s

participation in the Service, Ibbotson

must provide the independent fiduciary

with a complete description of the

Service, written disclosures of all fees

and expenses associated with the

Service, and a written contract for the

provision of the Service which defines

the relationship between Ibbotson, the

Service Provider and the Plan sponsor

and the obligations thereunder.10 Such

contract will be renewable annually and

will include: (a) A provision under

which the Plan shall have 45 days

notice prior to implementation of any

material change to the Service or any fee

or expense increases in connection with

the provision of the Service by Ibbotson;

and (b) a provision which states that a

Plan may terminate its participation in

the Service at any time without penalty.

However, a Plan which terminates its

participation in the Service before the

expiration of the contract will be

responsible for the payment of its prorata share of the fees owed under the

contract as of the date of termination,

and, if applicable, any direct costs

actually incurred by Ibbotson which

would have been recovered by Ibbotson

but for the termination of the contract,

including any direct setup expenses not

previously recovered. In addition,

Ibbotson shall provide the independent

fiduciary with a copy of the proposed

and the final exemption, if granted, as

published in the Federal Register.

4. Ibbotson will provide the Service

either directly to Plan participants

through an agreement with the Plan

sponsor or through an agreement with

the Service Providers sponsoring the

investment vehicles offered to Plan

participants. In situations where

Ibbotson contracts directly with the Plan

Sponsor, Ibbotson will customize the

Service for each Plan.11 The fees

6692 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

408(b)(2). Section 2550.408b–2(e)(1) further

provides that a fiduciary does not engage in an act

described in section 406(b)(1) of the Act if the

fiduciary does not use any of the authority, control

or responsibility which makes such person a

fiduciary to cause the Plan to pay additional fees

for a service furnished by such fiduciary or to pay

a fee for a service furnished by a person in which

the fiduciary has an interest which may affect the

exercise of such fiduciary’s best judgment as a

fiduciary. In general, whether a violation of section

406(b) occurs during the operation of an investment

advisory program is an inherently factual matter.

See Advisory Opinion 84–04 (January 4, 1984).

12The recommendation will describe and identify

the specific investment options available through

the participant’s Plan and in which options the Plan

participant should invest.

13The Service will not, however, make any

recommendations will respect to investments in

employer stock. Instead the Service will treat the

participant-designated level of employer stock

holdings as an investment in the particular asset

class in which the stock falls (i.e., large capitalized

equity) with two times the volatility of that class

and develop an overall recommendation with this

assumption.

14These recommendation involve lower to high

risk portfolios.

charged for the Service will be based on

a flat fee per participant. In many

instances, Ibbotson will need to

coordinate with the Plan’s record-keeper

or another Service Provider in offering

the Service to a Plan’s participants.

Such entities will be independent of

Ibbotson. All fees for the Service will be

paid by the Plan sponsor or the Plan to

Ibbotson, and the Service Providers will

not receive any portion of such fees or

other consideration from Ibbotson.

In the second situation, Ibbotson will

provide the Service to Plan participants

pursuant to a contract that the Plan

sponsor enters into with a Service

Provider. In these instances, the fees for

the Service will still be based on a flat

dollar amount per Plan participant, but

will be paid to Ibbotson by the Service

Provider, the Plan or Plan participant. In

addition, Ibbotson will enter into a

written agreement with the Plan sponsor

defining the relationship between the

Plan sponsor, Ibbotson and the Service

Provider.

5. The Applicant states that, once a

Plan fiduciary has authorized its Plan’s

participation in the Service, Plan

participants will receive written notice

that the Service is available and

provided by Ibbotson, an entity which is

independent of the Service Provider.

Each Plan participant will receive an

investment advisory service agreement

under which each participant will

acknowledge his or her understanding

that the Service is provided by Ibbotson

and not the Service Provider. In

addition, Plan participants will receive

full disclosures about Ibbotson and the

Service.

Access to the Service will be provided

to Plan participants through the

Internet, or by written materials. A Plan

participant will answer a questionnaire

which consists of multiple questions

that are designed to evaluate a Plan

participant’s anticipated time horizon to

retirement, savings rate and other

personal financial factors. After the

interview is completed, the Plan

participant will receive

recommendations with respect to his or

her savings rate, retirement age and

asset allocation12 and the percentage of

assets that the Plan participant should

allocate to each option.

If a Plan participant elects to receive

his/her advice through the Internet, the

Plan participant will first access a

website provided by the Service

Provider or the Plan sponsor. There will

be an electronic link from the Plan

sponsor’s or Service Provider’s website

to Ibbotson’s website where the

questionnaire and investment advice is

housed. The Applicant represents that

Ibbotson will always retain sole control

over the content of the Service and the

advice contained therein. Ibbotson will

regularly monitor the contents of the

Service and the advice contained

therein to ensure that it remains the

product of the objective methodology

developed by Ibbotson. Ibbotson states

that it will be apparent to the Plan

participant that Ibbotson is the soleprovider of such advice.

For those Plan participants using the

Internet, the completed questionnaire is

scored by computer. For those Plan

participants who select to receive his/

her advice in paper form, Ibbotson will

mail the Service materials to Plan

sponsors or Plan participants after the

Plan sponsor has decided to hire

Ibbotson. The Plan participants will

mail their written responses back to

Ibbotson. Ibbotson will, in turn, score

the questionnaire and send its

recommendations, etc., directly back to

the Plan participant. The Plan

participant, will, if she or he chooses to

implement the recommendations, then

mail or telephone the instructions to the

Service Provider (or other designated

agent for receiving such investment

instructions.) All recommendations will

be generated by Ibbotson’s proprietary

forecasting engine based on an analysis

of Plan participant’s responses to the

questionnaire and an analysis of the

investment options offered under the

relevant Plan, including any employer

stock fund.13 Based on the score, the

Plan participant is categorized into one

of several investment

recommendations.14

Each recommendation contains a

description of the investor profile

associated with such recommendation

that a Plan participant can review to see

if he or she feels that he or she has been

correctly classified. The Service will

also allow Plan participants to

experiment with different risk/return

scenarios to better understand what

impact the recommended allocation will

likely have on his/her retirement.

6. The Applicant states that the advice

provided to Plan participants will be

based on the application of an objective

methodology developed by Ibbotson.

The investment recommendations

generated by the Service are

standardized. Such recommendations

are generated through an automated

process that is then applied to each Plan

and Plan participant advised by

Ibbotson. The advice provided to a Plan

participant through the Service may

only be implemented if it is expressly

authorized in writing by the Plan

participant. The Service will inform

Plan participants periodically of the

need to review their situation. Plan

participants are advised that the

investment advice is valid for one year

and it is advisable to repeat the

questionnaire process periodically and

if there are significant life events (such

as the birth of a child or an increase in

salary.)

7. The Applicant represents that its

role in performing the Service on behalf

of a Plan, includes gathering

information about the investment

options offered in a particular Plan, and

developing a recommended portfolio for

each investor type. First, each Plan’s

investment option style is analyzed.

Then, seven (or more) Plan-specific

asset allocation recommendations (from

lower to higher risk) are generated by

using proprietary Ibbotson software.

Finally, the allocations are

electronically transferred to a web site

‘‘server’’ (computer system) where one

of the asset allocations is recommended

to a Plan participant, based on his/her

inputs.

Ibbotson constructs portfolios with

different risk and return characteristics

using the investment options available

under the Plan. These portfolios form

the foundation of the advice which is

provided to a Plan participant. This

methodology can be broken into five

steps.

Step 1: Selection of asset classes.

Before creating specific portfolios for

each investment option, Ibbotson

believes that it is first necessary to

construct strategic asset-class level

portfolios. These strategic portfolios

reflect the underlying asset allocations

that Ibbotson would like to achieve

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6693

using the specific investment options

available under the Plan. Asset classes

used to create the strategic portfolios

may include: Large, mid and small cap

stocks, international stocks, emerging

stocks, long, intermediate and short

term government bonds, high-yield

bonds, municipal bonds, cash, and

company stock. The asset classes used

depend on the number and types of

investment options available in the

401(k) plan. Ibbotson requires that the

investment options in a plan provide

exposure to at least small and large

stocks, cash, and bonds for advice to be

given. If the exposure to each of these

asset classes is not available, Ibbotson

will not provide advice services.

Step 2: Develop expected returns.

Ibbotson uses historical relationships

and current yields on government bonds

to generate expected returns. This

approach separates the expected return

of each asset class into three

components. The first two components

are a real risk-free rate of return and an

estimate of future inflation. It is

Ibbotson’s belief that the current yield

on a long-term, zero coupon government

bond is the best estimate of these two

components. The third component is

the difference between the historical

return on any asset class and the

historical return on long-term, zero

coupon government bonds. This

difference represents the incremental

return over the risk free rate investors

have earned from taking on the risk of

investing in an asset class. The sum of

these components is the expected return

Ibbotson uses in the mean-variance

optimization process. Standard

deviations and correlations for the asset

classes are calculated using historical

data.

Step 3: Build model portfolios.

Ibbotson employs the standard meanvariance analysis from Modern Portfolio

Theory to evaluate and determine its

strategic, asset-level portfolio

recommendations. However, rather than

taking portfolios directly off of the

efficient frontier defined by the

estimates created in Step 2, Ibbotson

chooses portfolios that are very close to

the efficient frontier under many

different economic and investment

performance scenarios. Ibbotson

believes that choosing portfolios this

way ensures that the strategic portfolio

characteristics will be relatively stable

over time and will avoid drastic asset

class shifts. Ibbotson deems that it is

essential to build portfolios that have

these stable properties to minimize the

need for the Plan participant to make

frequent changes to his or her portfolio.

Step 4: Select funds. Once asset-level

model portfolios are developed, they are

implemented using the investment

options available under the plan. Since

at any time most funds are investing in

securities from several asset classes,

Ibbotson employs a statistical method to

determine what asset classes a fund’s

investment approach is exposing the

Plan participant to. Using the asset

exposures from this technique, Ibbotson

combines the funds so that the total

asset class exposure of the funds in the

portfolio equals the desired strategic

portfolio weights. Since consistency of

asset exposure in funds through time is

so important, investment options that

have little or no history must provide

sufficient additional information to base

reasonable expectations on. A mutual

fund’s manager tenure and fees and

expenses are also evaluated as part of

this process.

Step 5: Monitor and re-balance. The

portfolio choices must be reviewed

regularly and rebalanced. Portfolio

rebalancing is the process of moving a

fund’s asset class exposures toward its

strategic target. This process seeks to

reduce the relative performance risk

associated with moving the asset class

exposures away from what was

intended in the strategic asset

allocation. There are a variety of

conditions that could cause a

rebalancing of a portfolio. Market

movements, fund asset exposure

changes, removal and replacement of

mutual funds can trigger rebalancing.

As part of this ongoing process, the

funds are evaluated quarterly and the

strategic asset allocations are updated

once a year. A set of criteria, including

absolute and relative performance, is

used to evaluate the funds used in the

advice portfolios. Funds that do not

meet the criteria will be placed on a

watch list. The placement of a fund on

the watch list does not mean that the

fund will be replaced, it is a trigger to

begin further due diligence on the fund.

To be removed from the watch list,

certain pre-established qualitative and

quantitative measures must be met.

After a fund has been placed on the

watch list and further due diligence has

determined that the fund no longer

meets the objectives of one or more of

the portfolios, Ibbotson will advise the

plan sponsor to consider a suitable

replacement. Any new fund entering the

program will be studied and analyzed

using the same methodology for initial

fund selection outlined above.

8. Ibbotson next describes the steps

involved in providing individualized

advice to Plan participants. The steps

start with forecasting many possible

expected investment returns scenarios

and the collecting of the Plan

participant’s individual needs and risks.

These are then combined with the

relevant tax and plan rules to show the

Plan participant the risk of his or her

current investment path and to calculate

advice to optimize the 401(k) plan

portfolio. Rather than using a

questionnaire to approximate the risk

tolerance level of the Plan participant,

Ibbotson uses a simulation-based

forecasting approach designed to show

a Plan participant the risks of various

investment decisions personalized to

his or her individual circumstances. The

advice generated recommends a

portfolio risk level, a savings rate and a

retirement age appropriate to that Plan

participant’s retirement income goals.

Step 1: Generate return and inflation

data. Ibbotson’s first step in this process

is to generate hundreds of sets of asset

return and inflation data covering the

next 40 years. This data is randomly

calculated using historical data and the

relationships it has exhibited through

time. This forecasting software uses this

data to model the many possible wealth

and income paths a Plan participant

might face. By generating a variety of

possible future wealth patterns, the Plan

participant gets a better picture of not

just the average path his or her wealth

might take but also of shortfalls that are

possible.

Holdings of individual stocks are

modeled but company stock is modeled

as a separate asset class included along

with all of the asset classes in the

system. If a Plan participant is required

or chooses to hold company stock then

that will be included in the solution;

however, company stock is factored into

the solution with the same return as the

appropriate capitalization group asset

class with twice the standard deviation.

All of this simulation data is updated

annually along with the strategic asset

allocation portfolios.

Step 2: Gather data from plan

participant and record keeper.

Ibbotson’s forecasting process enables

the Plan participant to input data to take

into account all of the Plan participant’s

needs and assets (college funding, new

house, etc.) and assets (taxable and

nontaxable) before selecting the

appropriate portfolio. Ibbotson believes

that this approach yields a more

appropriate overall portfolio/savings

match with the Plan participant’s needs.

To the extent input is provided by the

Plan participant, the Ibbotson process

takes into account items such as

savings, current balances, investment

makeup, and projected cash in-flows

and out-flows for both Plan participant

and his or her spouse.

Step 3: Calculate current situation.

The Plan participant will be shown two

separate scenarios through the Ibbotson

6694 Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices

15The Department notes that the condition

requiring the maintenance of $5 million of

insurance coverage will not foreclose future

consideration by the Department of another

mechanism designed to assure some degree of

financial accountability in the event of breaches of

fiduciary duty described in section 404 or

violations of the prohibited transaction provisions.

16Bundled products provide employers with a

package of services including record-keeping, legal,

administrative, trust, educational, investment, etc.,

with respect to the establishment and maintenance

of plans by employers.

advice application. The first calculates

what chance the Plan participant might

have of making his or her retirement

goals if he or she continues with the

current portfolio risk level and savings

rate as entered in Step 2. The second

recommends an advice solution and is

described in Step 4.

To calculate what chances the Plan

participant has of making the retirement

goals if no change to the portfolio or

savings rate is made, the software uses

the simulation data to calculate the

wealth that might be accumulated under

hundreds of possible future scenarios.

These calculations take into account

Social Security payments, taxes, and all

of the other savings and withdrawals the

Plan participant has entered as well as

the various investment return and

inflation scenarios. Some of these future

wealth and income levels will be good,

some will be average and some will be

inadequate relative to the Plan

participant’s individual retirement

goals. The results of all of these

calculations are summarized into a few

probability statistics that are

communicated to the Plan participant.

Step 4: Calculate advice. Ibbotson

states that its advice methodology

provides the Plan participant with a

recommendation that includes the

portfolio risk level, savings rate and

retirement age. Since in the 401(k) plan

world, the advice can only be given on

that portfolio alone, the Ibbotson

methodology takes all of the Plan

participant’s total holdings into account

(taxable and tax deferred) and proposes

a 401(k) portfolio that gets the Plan

participant’s total holdings as close to

optimal as possible.

Ibbotson believes that this presents

the Plan participant with a more

balanced solution for achieving his or

her goals with the flexibility to change

the parameters if he or she sees fit.

Starting with a better balanced portfolio

means that Plan participants just

looking for an answer will get a sound

answer more quickly and Plan

participants that want to experiment

with different levels of risk, savings rate,

and or retirement age will start from a

more solid position.

Step 5: Present results. The advice

process has many steps. However, the

user only sees the results of Steps 4 and

5. The typical statistics that will be

shown include the most likely income

level that the Plan participant might

have along with the least likely

possibilities. These statistics for the

scenario where no changes are made

and for those where the Plan participant

implements the advice will be displayed

side by side so the Plan participant can

easily see the differences. When

compared to the level of income the

Plan participant would like in

retirement, this process shows the Plan

participant just how much risk is being

taken and just how likely the Plan

participant is of hitting his or her goals.

Ibbotson believes there is no better way

to show a Plan participant in terms that

can be understood of the risk and

reward of the decisions he or she makes.

Ibbotson also presents a short-term risk

measure to assist in understanding

volatility on the way to retirement and

its impact on long-term goals. A Plan

participant can further individualize the

solution if he or she wants to take more

risk, cannot save as much as

recommended, or wants to change his or

her retirement age.

Once finalized, the Plan participant

can then implement his or her decision.

Although the solution is a ‘‘snapshot’’

based on the then-inputted data, the

system will inform the Plan participant

periodically of the need to review his or

her situation. It will also be stated that

his revisiting is most important if there

have been any changes in the Plan

participant’s assumptions such as a

promotion or the birth of a child. Under

any circumstances, a Plan participant

will be cautioned to review his or her

situation once a year to update any

changes to the information upon which

the advice was based and to adjust their

401(k) portfolio, if needed.

9. Ibbotson represents that it will

maintain insurance coverage in the

amount of at least $5 million for the

payment of any liabilities that may arise

by reason of a breach of fiduciary duty

described in section 404 of the Act or a

violation of the prohibited transaction

provisions of section 406 of the Act or

section 4975 of the Code. This insurance

coverage will be available to provide

financial support to Ibbotson in the

event a breach of fiduciary duty claim

is brought against Ibbotson, and it is

determined that Ibbotson has incurred

liabilities by reason of such breach. The

insurance shall be provided pursuant to

a ‘‘claims made’’ policy which covers

claims made during the policy period.

In the event that Ibbotson changes

insurers or ceases to provide the

Service, Ibbotson will maintain ‘‘tail

coverage’’ with respect to claims made

for a period of up to three years after

such change.15

10. The Applicant represents that

potential Service Providers will include

banks and trust companies, mutual fund

companies, brokerage firms and

insurance companies. They will be

required to meet minimum standards

prior to participating in the provision of

the Service. To qualify as a Service

Provider, the entity must either be: (a)

A commercial bank or trust company,

savings and loan association, insurance

company, or registered investment

adviser which meets the definition of a

‘‘qualified professional asset manager’’

(QPAM) set forth in Part V(a) of

Prohibited Transaction Exemption 84–

14; and have total client assets under

management and control in an amount

no less than $250 million, or (b) a

broker-dealer regulated under the

Securities Exchange Act of 1934 and

which had, as of the last day of its most

recent fiscal year, $1 million in

shareholders’ and partners’ equity, or

total client assets under management

and control in an amount no less than

$250 million.

In addition, the Applicant will require

that each candidate meet minimum

standards to ensure: (1) The availability

of multiple investment options across a

number of asset classes, (2) adequate

service capabilities and service

performance standards, with an ongoing

adherence to those standards, (3) the

absence of dependence solely upon

bundled products 16 for defined

contribution Plans, and (4) the Service

Provider must in Ibbotson’s view, have

a high level of professionalism and

accountability.

Further, the entity must have

adequate capitalization; have been in

the financial services business for three

years and not been convicted of a felony

offense involving abuse or misuse of

such entity’s employee benefit plan

position or employment, or any felony

arising out of the conduct of the

business of a broker, dealer, investment

adviser, bank, insurance company or

fiduciary.

11. In providing the Service,

depending on the specific

circumstances surrounding a particular

Plan and the outcome of negotiations

between Ibbotson and the Plan sponsor

or Service Provider, the fees that

Ibbotson will charge will include some

or all of the following fees. A technology

licensing fee will be charged to the

Service Provider. This fee is a one-time

fee charged in the first year the Service

is provided to a Plan based on the

Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Notices 6695

number of Plan participants contained

on a Service Provider’s record-keeping

system. For subsequent years, Ibbotson

will charge to the Service Provider a flat

per Plan participant fee for each

occurrence of at least 10% growth in

Plan participants on its record-keeping

system (the Revised Technology Fee). In

the second year of operation with a

Service Provider, Ibbotson will charge a

Service Provider a technology

maintenance fee equaling up to 20% of

the first year’s technology licensing fee

plus up to 20% of the Revised

Technology Fee.

When a Plan sponsor contracts with

Ibbotson to customize the Service to its

particular Plan, Ibbotson will charge an

Internet customization fee to the Plan or

the Plan sponsor. This fee is based on

the time spent by Ibbotson personnel in

its customization of the Service to a

particular Plan. In addition, Ibbotson

will charge a flat annual per Plan

participant advice fee which may be

paid by the Plan, Plan sponsor, the Plan

participants or the Service Provider.

Finally, Ibbotson will also offer a Plan

investment analysis report to Plan

sponsors. This report is separate from

the investment analysis advice provided

to Plan participants and is optional.

Ibbotson will analyze the Plan and its

investment options. For those Plan

sponsors who elect to receive a Plan

investment analysis by Ibbotson,

Ibbotson will also charge a Plan

investment analysis fee based on a flat

dollar amount per year. This fee may be

paid by the Plan sponsor or the Service

Provider.

12. In summary, it is represented that

the proposed transaction will satisfy the

statutory criteria for an exemption

under section 408(a) of the Act because:

(a) The participation in the Service

will be expressly authorized in writing

by an independent fiduciary.

(b) Ibbotson shall provide the

independent fiduciary of each Plan with

written disclosure describing the

Service and all fees and expenses

associated with the Service, a written

contract for the provision of the Service,

a copy of the proposed and final

exemption, and summary of annual Plan

activity and expense reports.

(c) Ibbotson will furnish the Plan

participants with the following: notice

that the Service is provided by Ibbotson,

an entity that is independent from the

Service Provider and the Plan sponsor;

and full disclosure about the Service

and Ibbotson; and a risk tolerance

questionnaire.

(d) Any investment advice given to

Plan participants will be based on the

Plan participants’ responses to the

questionnaire and any investment

advice provided only will be

implemented at the express direction of

the Plan participant.

(e) The total fees paid to Ibbotson and

a Service Provider by each Plan

participant participating in the Service

does not exceed reasonable

compensation within the meaning of

section 408(b)(2) of the Act.

(f) No portion of any fee or other

consideration paid to Ibbotson or in

connection with the Service will be

shared or received by a Service

Provider.

(g) Neither the fees charged nor the

compensation received by Ibbotson will

be affected by the investment selections

of Plan participants.

(h) Participation in the Service will

not cause the Plan to pay any additional

fees or commissions with respect to

acquisitions or dispositions of

investments offered under the Plan.

(i) No Service Provider shall own any

interest in Ibbotson.

(j) Neither Ibbotson nor any affiliate

shall own an interest in a Service

Provider.

(k) The annual revenues derived by

Ibbotson from any one Service Provider

shall not be more than 5% of its annual

revenues.

(l) Ibbotson will maintain fiduciary

liability insurance in the amount of at

least $5 million.

Notice to Interested Persons

The Applicant represents that because

potentially interested Plan participants

and beneficiaries cannot be identified at

this time, the only practical means of

notifying such Plan participants and

beneficiaries of this proposed

exemption is by publication in the

Federal Register. Therefore, comments

and requests for a hearing must be

received by the Department not later

than February 21, 2001.

FOR FURTHER INFORMATION CONTACT:

Allison Padams Lavigne , US

Department of Labor, (202)219–8971.

(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 of the Act and/or the Code,

including any prohibited transaction

provisions to which the exemption does

not apply and the general fiduciary

responsibility provisions of section 404

of the Act, which, 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) Before an exemption may be

granted under section 408(a) of the Act

and/or section 4975(c)(2) of the Code,

the Department must find that the

exemption is administratively feasible,

in the interests of the plan and of its

participants and beneficiaries, and

protective of the rights of participants

and beneficiaries of the plan;

(3) The proposed exemptions, if

granted, will be supplemental to, and

not in derogation of, any other

provisions of the Act and/or the Code,

including statutory or administrative

exemptions and transitional rules.

Furthermore, the fact that a transaction

is subject to an administrative or

statutory exemption is not dispositive of

whether the transaction is in fact a

prohibited transaction; and

(4) The proposed exemptions, if

granted, will be subject to the express

condition that the material facts and

representations contained in each

application are true and complete, and

that each application accurately

describes all material terms of the

transaction which is the subject of the

exemption.

Signed at Washington, DC, this 10th day of

January, 2001.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits,

Administration, U.S. Department of Labor.

[FR Doc. 01–1197 Filed 1–19–01; 8:45 am]

BILLING CODE 4510–29–P

LEGAL SERVICES CORPORATION

Sunshine Act Meeting of the Board of

Directors

TIME AND DATE: The Board of Directors

of the Legal Services Corporation will

meet on January 27, 2001. The meeting

will begin at 10 a.m. and continue until

conclusion of the Board’s agenda.

LOCATION: Embassy Suites Hotel, 300

Tallapoosa Street, Montgomery, AL.

STATUS OF MEETING: Open, except that a

portion of the meeting may be closed

pursuant to a vote of the Board of

Directors to hold an executive session.

At the closed session, the Corporation’s

General Counsel will report to the Board

on litigation to which the Corporation is