[Federal Register Volume 60, Number 48 (Monday, March 13, 1995)]
[Notices]
[Pages 13457-13475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6118]



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DEPARTMENT OF LABOR
[Application No. D-09595, et al.]


Proposed Exemptions; Norwest Bank Minnesota, N.A., et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
request for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing. A request for a hearing must also state the issues to be 
addressed and include a general description of the evidence to be 
presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, D.C. 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, NW., Washington, D.C. 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Norwest Bank Minnesota, N.A. Located in Minneapolis, MN

[Application No. D-09595]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990).<SUP>1

    \1\For purposes of this exemption, reference to provisions of 
Title I of the Act, unless otherwise specified, refer also to the 
corresponding provisions of the Code.
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Section I. Exemption for the In-Kind Transfer of Assets

    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) of the Code, 
shall not apply, as of September 30, 1994, to the in-kind transfer of 
assets of plans for which Norwest Bank Minnesota, N.A. or any of its 
affiliates (collectively, the Bank) serves as a fiduciary (the Client 
Plans), including plans established or maintained by the Bank (the Bank 
Plans; collectively, the Plans), that are held in certain collective 
investment funds (the CIFs) maintained by the Bank, in exchange for 
shares of the Norwest Funds (the Funds), an open-end investment company 
registered under the Investment Company Act of 1940 (the '40 Act), as 
amended, for which the Bank acts as investment adviser, custodian, and 
shareholder servicing agent, in connection with the termination of such 
CIFs provided that the following conditions are met:
    (a) No sales commissions or other fees are paid by a Bank Plan or a 
Client Plan in connection with the purchase of shares of the Funds 
through the in-kind transfer of CIF assets and no redemption fees are 
paid in connection with the sale of such shares of the Funds.
    (b) All of the assets of a Bank Plan or a Client Plan that are held 
in the CIFs are transferred in-kind to the Funds in exchange for shares 
of such Funds. A Plan not electing to participate in the Funds receives 
a cash payment representing a pro rata portion of the assets of the 
terminating CIF before the final liquidation takes place.
    (c) Each Bank Plan and each Client Plan receives shares of the 
Funds which have a total net asset value that is equal to the value of 
such Plan's pro rata share of the assets of the CIF on the date of the 
transfer, based on the current market value of the CIF's assets, as 
determined in a single valuation performed in the same manner at the 
close of the same business day, using independent sources in accordance 
with the procedures set forth in Rule 17a-7(b) (Rule 17a-7) under the 
Investment Company Act of 1940 (the '40 Act), as 
[[Page 13458]] amended, and the procedures established by the Funds 
pursuant to Rule 17a-7 for the valuation of such assets. Such 
procedures must require that all securities for which a current market 
price cannot be obtained by reference to the last sale price for 
transactions reported on a recognized securities exchange or NASDAQ be 
valued based on an average of the highest current independent bid and 
lowest current independent offer, as of the close of business on the 
Friday preceding the weekend of the CIF transfers, determined on the 
basis of reasonable inquiry from at least three sources that are 
broker-dealers or pricing services independent of the Bank.
    (d) A second fiduciary who is independent of and unrelated to the 
Bank (the Second Fiduciary) receives advance written notice of the in-
kind transfer of assets of the CIFs and full written disclosure, which 
includes but is not limited to, the following information concerning 
the Funds:
    (1) A current prospectus for each portfolio of the Funds in which a 
Bank Plan or a Client Plan is considering investing;
    (2) A statement describing (i) the fees for investment advisory or 
similar services that are to be credited back to a Client Plan, (ii) 
the fees retained by the Bank for Secondary Services, as defined in 
paragraph (g) of Section III below, and (iii) all other fees to be 
charged to or paid by the Bank Plan or the Client Plan and by such 
Funds to the Bank or to unrelated third parties. Such statement also 
includes the nature and extent of any differential between the rates of 
the fees;
    (3) The reasons why the Bank considers such investment to be 
appropriate for the Bank Plan or the Client Plan;
    (4) A statement describing whether there are any limitations 
applicable to the Bank with respect to which assets of a Bank Plan or a 
Client Plan may be invested in the relevant Funds, and, if so, the 
nature of such limitations; and
    (5) Upon request of the Second Fiduciary, a copy of the proposed 
exemption and/or a copy of the final exemption, if granted.
    (e) On the basis of the foregoing information, the Second Fiduciary 
authorizes in writing the in-kind transfer of the Bank Plan's or the 
Client Plan's CIF assets to a Fund in exchange for shares of the Funds, 
the investment of such assets in corresponding portfolios of the Funds, 
the fees received by the Bank in connection with its services to the 
Funds and, in the case of a Client Plan only, the purchase by such 
Client Plan of additional shares of the corresponding Funds with the 
fees credited back to the Client Plan by the Bank. Such authorization 
by the Second Fiduciary will be consistent with the responsibilities, 
obligations and duties imposed on fiduciaries under Part 4 of Title I 
of the Act.
    (f) For all subsequent transfers of CIF assets to a Fund following 
the publication of the proposed exemption in the Federal Register, the 
Bank sends by regular mail to each affected Bank Plan and Client Plan a 
written confirmation, not later than 30 days after the completion of 
the transaction, containing the following information:
    (1) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4) of the '40 Act;
    (2) The price of each such security involved in the transaction; 
and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such securities.
    (g) For all subsequent transfers of CIF assets to a Fund following 
the publication of the proposed exemption in the Federal Register, the 
Bank sends by regular mail, no later than 90 days after completion of 
each transfer, a written confirmation that contains the following 
information:
    (1) The number of CIF units held by the Plan immediately before the 
transfer, the related per unit value and the total dollar amount of 
such CIF units;
    (2) The number of shares in the Funds that are held by the Plan 
following the conversion, the related per share net asset value and the 
total dollar amount of such shares.
    (h) The conditions set forth in paragraphs (c), (d), (e), (o) and 
(p) of Section II below as they would relate to all Plans are 
satisfied.

Section II. Exemption for the Receipt of Fees

    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) of the Code, 
shall not apply, as of November 11, 1994, to (1) the receipt of fees by 
the Bank from the Funds for acting as an investment adviser to the 
Funds; and (2) the receipt and proposed retention of fees by the Bank 
from the Funds for acting as custodian or shareholder servicing agent 
to the Funds, as well as for any other services provided to the Funds 
which are not investment advisory services (i.e., the Secondary 
Services), in connection with the investment in shares of the Funds by 
the Client Plans, other than the Bank Plans, for which the Bank serves 
as fiduciary.
    The aforementioned transactions are subject to the following 
conditions:
    (a) No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the Funds and no redemption fees 
are paid in connection with the sale of shares by the Client Plans to 
the Funds.
    (b) The price paid or received by the Client Plans for shares in 
the Funds is the net asset value per share, as defined in paragraph (d) 
of Section III, at the time of the transaction and is the same price 
which would have been paid or received for the shares by any other 
investor at that time.
    (c) Neither the Bank nor an affiliate, including any officer or 
director, purchases from or sells to any of the Client Plans shares of 
any of the Funds.
    (d) The combined total of all fees received by the Bank for the 
provision of services to the Client Plans, and in connection with the 
provision of services to any of the Funds in which the Client Plans 
invest, are not in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act.
    (e) The Bank does not receive any fees payable, pursuant to Rule 
12b-1 of the '40 Act (the 12b-1 Fees) in connection with the 
transactions involving the Funds.
    (f) Each Client Plan receives a credit, either through cash or, if 
applicable, the purchase of additional shares of the Funds, pursuant to 
an annual election, which may be revoked at any time, made by the 
Client Plan, of such Plan's proportionate share of all investment 
advisory fees charged to the Funds by the Bank, including any 
investment advisory fees paid by the Bank to third party sub-advisers, 
within not more than one business day after the receipt of such fees by 
the Bank.
    (g) The Second Fiduciary receives, in advance of investment by a 
Client Plan in the Funds, full and detailed written disclosure of 
information concerning the relevant Funds as set forth above in Section 
I(d).
    (h) On the basis of the information described in paragraph (d) of 
Section I, the Second Fiduciary authorizes in writing:
    (1) The ongoing investment of assets of the Client Plans in shares 
of the Funds, in connection with the transactions set forth in Section 
II;
    (2) The investment portfolios of the Funds in which the assets of 
the Client Plans may be invested; and
    (3) The fees to be paid by the Funds in which Client Plans invest 
to the Bank [[Page 13459]] and the purchase of additional shares of the 
Funds by the Client Plan with the fees credited to the Client Plan by 
the Bank.
    (i) The authorization referred to in paragraph (h) is terminable at 
will by the Client Plan, without penalty to the Client Plan. Such 
termination will be effected by the Bank selling the shares of the 
Funds held by the affected Client Plan within the period of time 
specified by the Client Plan but not more than one business day 
following receipt by the Bank from the Second Fiduciary, of the 
termination form (the Termination Form), as defined in paragraph (h) of 
Section III below, or any other written notice of termination; provided 
that, if due to circumstances beyond the control of the Bank, the sale 
cannot be executed within one business day, the Bank shall have one 
additional business day to complete such sale.
    (j) In the event of an increase in the contractual rate of any fees 
paid by the Funds to the Bank regarding investment advisory services or 
fees for similar services that had been authorized by the Second 
Fiduciary in accordance with paragraph (h) of this Section II, the Bank 
provides written notice to the Second Fiduciary in a prospectus for the 
Funds or otherwise, of any increases in the contractual rate of fees 
charged by the Bank to the Funds for investment advisory services even 
though such fees will be credited to the Client Plans as required by 
paragraph (f) of Section II.
    (k) In the event of an additional Secondary Service, as defined in 
paragraph (g) of Section III below, provided by the Bank to the Funds 
for which a fee is charged or an increase in the contractual rate of 
any fee due from the Funds to the Bank for any Secondary Service, as 
defined in paragraph (g) of Section III below, that results from an 
increase in the rate of such fee or from the decrease in the number or 
kind of services performed by the Bank for such fee over an existing 
rate for such Secondary Service which had been authorized by the Second 
Fiduciary of a Client Plan in accordance with paragraph (h) of this 
Section II, the Bank will, at least 30 days in advance of the 
implementation of such additional service for which a fee is charged or 
fee increased, provide written notice to the Second Fiduciary 
explaining the nature and amount of the additional service for which a 
fee is charged or the nature and amount of the increase in fees of the 
affected Fund. Such notice will be accompanied by the Termination Form, 
as defined in paragraph (h) of Section III below.
    (l) The Second Fiduciary is supplied with a Termination Form at the 
times specified in paragraphs (k) and (m) of this Section II, which 
expressly provides an election to terminate the authorization, 
described above in paragraph (h) of this Section II, with instructions 
regarding the use of such Termination Form including statements that:
    (1) The authorization is terminable at will by any of the Client 
Plans, without penalty to such Plans. The termination will be effected 
by the Bank selling the shares of the Funds held by the Client Plans 
requesting termination within the period of time specified by the 
Client Plan, but not later than one business day following receipt by 
the Bank from the Second Fiduciary of the Termination Form or any 
written notice of termination; provided that if, due to circumstances 
beyond the control of the Bank, the sale of shares of such Client Plans 
cannot be executed within one business day, the Bank shall have one 
additional business day to complete such sale; and
    (2) Failure by the Second Fiduciary to return the form on behalf of 
the Plan will be deemed to be an approval of the additional Secondary 
Service for which a fee is charged or increase in the rate of any fees 
and will result in the continuation of the authorization, as described 
in paragraph (h) of this Section II, of the Bank to engage in the 
transactions on behalf of the Client Plan.
    (m) The Second Fiduciary is supplied with a Termination Form, at 
least once in each calendar year, beginning with the calendar year that 
begins after the date of the grant of this proposed exemption is 
published in the Federal Register and continuing for each calendar year 
thereafter; provided that the Termination Form need not be supplied to 
the Second Fiduciary, pursuant to paragraph (m) of this Section II, 
sooner than six months after such Termination Form is supplied pursuant 
to paragraph (k) of this Section II, except to the extent required by 
said paragraph (k) of this Section II to disclose an increase in fees.
    (n) On an annual basis, the Bank will provide the Second Fiduciary 
of a Client Plan investing in the Funds with:
    (1) A copy of the current prospectus for the Funds and upon such 
fiduciary's request, a copy of the Statement of Additional Information 
which contains a description of all fees paid by the Funds to the Bank.
    (2) A copy of the annual financial disclosure report prepared by 
the Bank which contains information about the portfolios of the Funds 
and includes audit findings of an independent auditor (the Auditor) 
within 60 days of the preparation of the report.
    In addition, the Bank will respond to oral or written responses to 
inquiries of the Second Fiduciary as they arise.
    (o) All dealings between the Client Plans and the Funds are on a 
basis no less favorable to the Client Plans than dealings between the 
Funds and other shareholders holding the same class of shares as the 
Client Plans.
    (p) The Bank maintains for a period of six years the records 
necessary to enable the persons described below in paragraph (q) 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 the Bank, the 
records are lost or destroyed prior to the end of the six year period, 
and
    (2) No party in interest shall be subject to the civil penalty that 
may be assessed under section 502(i) of the Act or to the taxes imposed 
by section 4975(a) and (b) of the Code if the records are not 
maintained or are not available for examination as required by 
paragraph (q) of Section II below; and
    (q)(1) Except as provided in paragraph (p)(2) and notwithstanding 
any provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (p) are unconditionally available at their 
customary location for examination during normal business hours by--
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (ii) Any fiduciary of a Client Plan who has authority to acquire or 
dispose of shares of the Funds owned by the Client Plan, or any duly 
authorized employee or representative of such fiduciary, and
    (iii) Any participant or beneficiary of a Client Plan or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraphs (q)(1) (ii) and 
(iii) shall be authorized to examine trade secrets of the Bank, or 
commercial or financial information which is privileged or 
confidential.

Section III. Definitions

    For purposes of this proposed exemption:
    (a) The term ``Bank'' means Norwest Bank Minnesota, N.A. and any 
affiliate of the Bank, as defined in paragraph (b) of this Section III.
    (b) An ``affiliate'' of the Bank includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, [[Page 13460]] controlling, controlled by, or under 
common control with the Bank. (For purposes of this paragraph, 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 officer, director, employee, relative or partner in such 
person, and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (c) The term ``Fund'' or ``Funds'' refers to the Norwest Funds or 
to any diversified open-end investment company or companies registered 
under the '40 Act for which the Bank serves as an investment adviser 
and may also serve as a custodian, shareholder servicing agent, 
transfer agent or provide some other ``Secondary Service'' (as defined 
below in paragraph (g) of this Section IV) which as been approved by 
such Funds.
    (d) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
each of the portfolios in such Fund, less the liabilities chargeable to 
each portfolio, by the number of outstanding shares.
    (e) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or member of the family'' as that 
term is defined in section 4975(e)(6) of the Code), or a brother, a 
sister, or a spouse of a brother or a sister.
    (f) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to the Bank. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to the Bank if:
    (1) Such Second Fiduciary directly or indirectly controls, is 
controlled by, or is under common control with the Bank;
    (2) Such Second Fiduciary, or any officer, director, partner, 
affiliate, employee, or relative of such Second Fiduciary is an 
officer, director, partner or employee of the Bank or is a relative of 
such persons);
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration for his or her own personal account 
in connection with any transaction described in this proposed 
exemption; provided, however that with respect to Bank Plans, the 
Second Fiduciary may receive compensation from the Bank in connection 
with the transactions contemplated herein, but the amount or payment of 
such compensation may not be contingent upon or be in any way affected 
by the Second Fiduciary's ultimate decision regarding whether the Bank 
Plans participate in such transactions.
    With the exception of the Bank Plans, if an officer, director, 
partner, affiliate or employee of the Bank (or relative of such 
persons), is a director of such Second Fiduciary, and if he or she 
abstains from participation in (i) the choice of the Plan's investment 
adviser, (ii) the approval of any such purchase or sale between the 
Client Plan and the Funds, and (iii) the approval of any change of fees 
charged to or paid by the Client Plan, any of the transactions 
described in Sections I and II above, then paragraph (f)(2) of this 
Section IV, shall not apply.
    (g) The term ``Secondary Service'' means a service, other than 
investment advisory or similar services which is provided by the Bank 
to the Funds, including, but not limited to, custodial or shareholder 
services. However, the term ``Secondary Service'' does not include any 
brokerage services provided by the Bank to the Funds.
    (h) The term ``Termination Form'' means the form supplied to the 
Second Fiduciary at the times specified in paragraphs (i), (k), (l), 
and (m) of Section II which expressly provides an election to the 
Second Fiduciary to terminate on behalf of a Plan the authorization 
described in paragraph (h) of Section II. Such Termination Form is to 
be used at will by the Second Fiduciary to terminate such authorization 
without penalty to the Plan and to notify the Bank in writing to effect 
such termination by selling the shares of the Fund held by the Plan 
requesting termination not later than one business day following 
receipt by the Bank of written notice of such request for termination; 
provided that if, due to circumstances beyond the control of the Bank, 
the shares of such Client Plans cannot be executed within one business 
day, the Bank shall have one additional business day to complete such 
sale.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of September 30, 1994 with respect to the transactions described in 
Section I and as of November 11, 1994 with respect to the transactions 
described in Section II.

Summary of Facts and Representations

    1. The parties or entities involved in the subject transactions are 
described as follows:
    a. The Bank and its affiliates are direct or indirect wholly owned 
subsidiaries of Norwest Corporation, a bank holding company. The Bank 
is a national bank that is principally located in Minneapolis, 
Minnesota. It serves as trustee, directed trustee, investment manager 
or custodian to approximately 7,500 employee benefit plans. As 
custodian or directed trustee of a plan, the Bank has custody of a 
Client Plan's assets but it has no duty to review investments or make 
investment recommendations with respect to such assets. Instead, it 
must act only as directed by an authorized third party. When the Bank 
serves as a discretionary trustee or investment manager of a Client 
Plan, it generally invests, with the sponsor's approval, the assets of 
a Client Plan account in a series of CIFs it manages. The Bank may also 
provide investment advice to other fiduciaries who have investment 
discretion over a Client Plan's assets or manage an individual 
investment portfolio for a Client Plan.
    As of December 31, 1992, the Bank had discretionary and 
nondiscretionary pension and welfare plan assets under management 
totaling $16.25 billion. Of this total, $3.2 billion of pension and 
welfare plan assets were held in 30 CIFs maintained by the Bank. Also 
as of December 31, 1992, the Bank had total discretionary assets under 
management for all trust clients, CIFs and investment advisory clients 
of approximately $22.35 billion and total trust assets (both 
discretionary and nondiscretionary) of approximately $90.75 billion.
    With respect to the CIFs discussed herein, the Bank receives a 
single, Plan-level management fee negotiated with each Client Plan. The 
typical annualized fee range for the management fee is from .25 percent 
to 1.50 percent of invested Client Plan assets. The management fee is 
dependent upon such factors as asset class and negotiation. The Bank 
charges a minimum fee of $500 to $1,000 for small accounts but it 
charges no fee for Secondary Services (e.g., shareholder and custodial 
services) provided to a Client Plan.
    b. The Funds individually constitute a separate investment 
portfolio or a series of portfolios having a separate prospectus and 
representing a distinct investment vehicle. In the aggregate, the Funds 
comprise a Delaware business trust currently registered as an open-end 
investment company under the '40 Act. The Funds include seventeen new 
portfolios ranging from money market funds to bond funds. In some 
situations, the shares of a Fund will be divided into different classes 
and charge different levels of expenses. Except for these differences, 
the shares of each Fund will [[Page 13461]] represent the same 
proportionate interest in the assets of that Fund.
    c. The Board of Trustees (the Trustees) manages the Funds, 
negotiates the investment advisory contracts and contracts for 
Secondary Services described below. A majority of the Trustees are 
independent of the Bank. The Trustees are elected by the shareholders 
of the Funds, except that in certain cases following a vacancy on the 
Board of Trustees, the Trustees can appoint a new Trustee without 
advance shareholder approval.
    The Bank serves as the investment adviser to each Fund and receives 
investment advisory fees from the Funds. The Bank also serves as 
custodian, shareholder servicing agent and transfer agent to the Funds 
and is compensated by the Funds for the Secondary Services it renders 
to such Funds in these capacities.
    d. Forum Financial Services (FFS), a Delaware corporation which is 
wholly independent of the Bank, serves as distributor of the shares of 
the Funds and provides administrative and accounting services to the 
Funds. FFS is compensated and reimbursed by the Funds for certain 
expenses it incurs in performing these functions.
    e. The Bank Plans consist of the Norwest Corporation Master Savings 
Trust (the Savings Trust) and the Norwest Corporation Master Pension 
Trust (the Pension Trust). As of June 30, 1994, the Savings Trust had 
total assets of $747,976,484 and two participating Bank Plans, the 
Norwest Corporation Savings-Investment Plan (the Norwest Savings Plan) 
and the Ford Bank Group, Inc. Savings Plan (the Ford Savings Plan). 
Also, as of June 30, 1994, the Norwest Savings Plan and the Ford 
Savings Plan had 32,259 participants and 616 participants, 
respectively.
    The Pension Trust holds the assets of the Norwest Corporation 
Pension Plan (the Norwest Plan), the First Minnesota Employee's Pension 
Plan (the First Minnesota Plan) and the United Bank of Colorado, Inc. 
Retirement Income Plan (the United Bank Plan). As of June 30, 1994, the 
Pension Trust had total assets of $625,781,748. As of January 1, 1994, 
the Norwest Pension Plan had 27,725 participants, the First Minnesota 
Plan had 868 participants and the United Bank Plan had 3,437 
participants.
    f. The Client Plans include various pension, profit sharing, and 
stock bonus plans as well as voluntary employees' beneficiary 
associations, supplemental unemployment benefit plans, simplified 
employee benefit plans, Keogh Plans and IRAs for which the Bank 
presently serves (or will serve in the future) as a fiduciary 
(including those plans whose assets are currently invested in the 
Bank's CIFs).
    g. Wilmington Trust Company (WTC) of Wilmington, Delaware, has been 
retained by the Bank to serve as the Second Fiduciary for the Bank 
Plans proposing to invest in the Funds. WTC, the primary subsidiary of 
Wilmington Trust Corporation, was established in 1903. WTC is wholly 
independent of the Bank and its affiliates.
    As of December 31, 1993, WTC exercised discretionary investment 
authority over approximately $25.7 billion of fiduciary assets, 
including approximately $14.5 billion of assets of plans covered by the 
Act and non-qualified employee benefit plans. As of December 31, 1993, 
WTC also served as directed trustee, agent or custodian with respect to 
more than $2.5 billion of assets of plans covered by the Act and non-
qualified employee benefit plans.

Description of the Transactions

    2. The Bank maintains CIFs in which both Bank Plans and Client 
Plans have invested. To better serve the interests of these Plans, the 
Bank has decided, subject to approval of such Plans, to terminate 
twelve of its CIFs and transfer the assets currently invested in the 
CIFs to the corresponding Funds. The Bank notes that mutual funds are 
subject to supervision by the SEC, place greater emphasis on 
participant disclosure than do bank CIFs and provide an effective 
mechanism for disclosure. Moreover, the Bank represents that Plan 
sponsors and participants will be able to monitor more easily the 
performance of their investments in the Funds on a daily basis since 
information concerning investment performance of the Funds will be 
available in daily newspapers of general circulation.
    Accordingly, the Bank requests retroactive exemptive relief with 
respect to the transfer of a Bank Plan's or a Client Plan's assets from 
certain terminating CIFs to the Funds. In addition, the Bank requests 
prospective exemptive relief for the receipt of fees from the Funds in 
connection with the investment of assets of Client Plans for which the 
Bank acts as a trustee, directed trustee, investment manager, or 
custodian, in shares of the Funds in instances where the Bank is an 
investment adviser, custodian, and shareholder servicing agent for the 
Funds.\2\ The exemptive relief provided for the receipt of fees would 
cover Client Plans only, specifically those Plans for which the Bank 
exercises investment discretion as well as Client Plans where 
investment decisions are participant-directed by a Second Fiduciary.

    \2\The Bank is not requesting an exemption for investments in 
the Funds by the Bank Plans. The Bank represents that Bank Plans may 
acquire or sell shares of the Funds pursuant to Prohibited 
Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977). PTE 
77-3 permits the acquisition or sale of shares of a registered, 
open-end investment company by an employee benefit plan covering 
only employees of such investment company, employees of the 
investment adviser or principal underwriter for such investment 
company, or employees of any affiliated person (as defined therein) 
of such investment adviser or principal underwriter, provided 
certain conditions are met. The Department expresses no opinion on 
whether any transactions with the Funds by the Bank Plans would be 
covered by PTE 77-3.
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In-Kind Transfers to the Funds by Bank Plans and Client Plans

    3. During the weekends of September 30, 1994-October 2, 1994 and 
November 11-13, 1994, the Bank began transferring the assets of 12 
terminated CIFs to the Funds. Specifically, during the weekend 
beginning September 30, 1994, the Bank transferred the assets of two 
CIFs, namely, ``Stock Fund S'' and ``Bond Fund R'' to the ``Contrarian 
Stock Fund'' and the ``Total Return Bond Fund.'' Then, during the 
weekend of November 11-13, 1994, the Bank terminated the assets of the 
ten remaining CIFs. Once terminated, the assets from these CIFs were 
transferred to fifteen ``Advantage Funds'' portfolios which also 
comprise the Funds. Following the transfers, the Bank commenced 
offering shares in the Funds to the Bank Plans and the Client Plans.\3\

    \3\At present, the Bank does not intend to terminate or convert 
two other CIFs, the ``Short Term Investment Fund'' and the ``Stable 
Return Fund.'' Nevertheless, if at some future date the Bank were to 
decide to terminate and convert these two CIFs as well, the Bank 
represents that it will comply with the conditions of the final 
exemption and it will value the assets of both the CIFs and the 
transferee Funds in accordance with Rule 17a-7 of the '40 Act, as 
amended, and the procedures established by the Funds pursuant to 
Rule 17a-7 for the valuation of such assets. (See Representation 3.)
    Although the Bank does not currently anticipate that either of 
these CIFs will invest in the Funds, if such an investment were to 
be made, the fee arrangements will be structured to comply with 
Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732, April 8, 
1977). In pertinent part, PTE 77-4 permits the purchase and sale by 
an employee benefit plan of shares of a registered, open-end 
investment company when a fiduciary with respect to the plan is also 
the investment adviser of the investment company.
    The Bank also represents that it will continue to comply with 
PTE 77-4 in connection with the crediting of fees paid to it or its 
affiliates by the Total Return Bond Fund and the Contrarian Stock 
Fund.
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    To the extent legally permissible, all transfers were effected in-
kind. However, because certain CIFs had already invested in other 
mutual funds and transfers of those mutual fund investments to the 
Funds would violate federal securities laws applicable to the 
[[Page 13462]] mutual funds, the Bank decided to liquidate those 
investments on the date of the transfer. The Funds then purchased 
substantially the same securities held by the mutual funds in whose 
shares the CIFs had previously been invested.
    The Bank represents that the transfers of assets were conducted in 
accordance with Rule 17a-7 of the '40 Act and the procedures 
established by the Funds pursuant to Rule 17a-7 for the valuation of 
such assets so as to make the transactions ministerial and as 
nondiscretionary in nature as possible.\4\ In this regard, the asset 
transfers to the funds occurred over one or more weekends selected by 
the Trustees using market values as of the close of business on the 
preceding Friday. Thus, the transfers of the securities were completed 
on Friday prior to the opening of business on Monday, the next business 
day. As of that day, a Bank Plan or a Client Plan whose assets were 
transferred from a CIF would hold shares in the corresponding Fund. The 
value of the Plan's assets in the Fund would be at the same aggregate 
value as the units held in the CIF as of the close of trading on the 
preceding Friday. The value of a CIF's portfolio was determined by FFS 
in coordination with the Bank. In this regard, it is represented that 
the current market price for specific types of CIF securities involved 
in the in-kind transfers was determined as follows:

    \4\In pertinent part, Rule 17a-7 mandates that such transactions 
be effected at the ``independent current market price'' for such 
security, involve no brokerage commissions or other remuneration, 
and comply with valuation procedures adopted by the board of 
directors of the investment company to ensure that all requirements 
of the Rule are satisfied.
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    a. If the security was a ``reported security'' as the term is 
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 
(the '34 Act), the last sale price with respect to such security 
reported in the consolidated transaction reporting system (the 
Consolidated System); or if there were no reported transactions in 
the Consolidated System that day, the average of the highest 
independent bid and the lowest independent offer for such security 
(reported pursuant to Rule 11Ac1-1 under the '34 Act), as of the 
close of business; or
    b. If the security was not a reported security, and the 
principal market for such security was an exchange, then the last 
sale on such exchange; or if there were no reported transactions on 
such exchange that day, the average of the highest independent bid 
and lowest independent offer on such exchange as of the close of 
business; or
    c. If the security was not a reported security and was quoted in 
the NASDAQ system, then the average of the highest independent bid 
and lowest independent offer reported on Level 1 of NASDAQ as of the 
close of business; or
    d. For all other securities (i.e., securities not listed on an 
exchange and for which no bid and ask quotations are readily 
available), valuation determined by (1) averaging prices obtained 
from at least three independent matrix pricing services\5\ or (2) 
averaging bid and ask quotations as of the close of trading on the 
Friday preceding the in-kind transfers from three independent 
brokers.

    \5\According to the applicant, the SEC has permitted securities 
not listed on an exchange and for which no bid and ask quotations 
are readily available to be valued by a matrix pricing methodology. 
The applicant explains that matrix pricing methodology is intended 
to approximate what the actual market values of securities would be 
if an active secondary market for those securities exists and takes 
into account a variety of factors such as the most recent market 
activity with respect to a subject security, liquidity, yield, 
rating, type of industry, coupon rate, maturity and economic 
conditions. If a matrix pricing service is used, the applicant 
explains that the pricing entity will not be affiliated with the 
Bank or the Funds.
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    In essence, the Bank represents that the transfer transactions were 
ministerial, performed in accordance with procedures prescribed by Rule 
17a-7 and previously approved by the disinterested members of the 
Fund's Board of Trustees. The Bank also represents that the pricing of 
the securities was accomplished by reference to independent sources 
such that the transaction would result in an affected Bank Plan or 
Client Plan holding mutual fund shares of equal aggregate value to the 
previously-held CIF units. No sales commissions or redemption fees were 
or would be paid by a Bank Plan or a Client Plan in connection with 
investments of shares in the Funds. In addition, no fees for 
distribution expenses pursuant to Rule 12b-1 under the '40 Act were or 
would be paid to FFS or the Bank by a Bank Plan or a Client Plan with 
respect to transactions involving the Funds. Any fees charged by the 
independent brokers for bid and ask prices were the responsibility of 
the Bank. Further, the Bank represents that neither it nor its 
affiliates, including any officer or director of the Bank, had 
purchased or would purchase from or sell to any Bank Plan or Client 
Plan shares of any of the Funds.\6\

    \6\The Department notes that this representation is not intended 
to limit the ability of Client Plans to deal with the Bank's account 
representatives on matters involving the funds and is not meant to 
prohibit purchases or sales of shares of the Funds that are placed 
through personnel of the Bank when such personnel are acting as 
agents for the Client Plans.
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    4. As stated above, prior to investing a Plan's assets in the 
Funds, the Bank was required to obtain the affirmative written approval 
of an independent Second Fiduciary who is typically, in the case of a 
Client Plan, the named fiduciary, trustee or sponsoring employer. In 
the case of a Bank Plan, the Bank retained the services of WTC to 
approve the in-kind transfer of assets of such Plan to the Funds.
    The Bank provided advance written notice of the in-kind transfer of 
assets of the CIFs and full written disclosure of information 
concerning the Funds to the Second Fiduciary of a Bank or Client Plan. 
In this regard, the Bank provided the Second Fiduciary with a current 
prospectus for each portfolio of the Funds in which a Bank or Client 
Plan is investing. The disclosure statement described the fees for 
investment advisory or similar services to be credited back to the 
Client Plan, including any fees for Secondary Services and all other 
fees to be charged to or paid by a Bank Plan, a Client Plan or by the 
Funds to the Bank. Such disclosure included the nature and extent of 
any differential between the rates of fees. The disclosure statement 
also explained why the Bank believed that the investment in the Funds 
by a Bank Plan or a Client Plan was appropriate. As applicable, the 
disclosure statement further described any limitations on the Bank 
regarding which Plan assets may be invested in shares of the Funds and, 
if so, the nature of such limitations.\7\ Upon request of the Second 
Fiduciary, the Bank is required to provide a copy of the proposed 
exemption and/or a copy of the final exemption, if granted.

    \7\Section II(d) of PTE 77-4 requires, among other things, that 
an independent plan fiduciary receive a current prospectus issued by 
the investment company and a full and detailed written disclosure of 
the investment advisory and other fees charged to or paid by the 
plan and the investment company, including a discussion of whether 
there are any limitations on the fiduciary/investment adviser with 
respect to which plan assets may be invested in shares of the 
investment company and, if so, the nature of such limitations.
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    On the basis of information noted above, the Second Fiduciary could 
authorize, in writing, that the Bank transfer a Bank Plan's or a Client 
Plan's CIF assets to a Fund in exchange for shares of the Funds and 
invest the Plan's assets in corresponding portfolios of the Funds. For 
Client Plans, the written authorization also allowed the Bank to 
receive fees from the Funds and to purchase additional shares of the 
Funds with the fees credited back to the Client Plan by the Bank.
    5. The Bank anticipated that the transfer of assets from the CIFs 
to the Funds would be accomplished in stages as sufficient numbers of 
approvals were received from Second Fiduciaries.\8\ If 
[[Page 13463]] the Second Fiduciary had not provided the Bank with 
approval of investment in the Funds by the time the last transfer of 
assets from a terminating CIF to a Fund was to occur, a pro rata 
portion of the assets of the terminating CIF was distributed in cash to 
the trust account of a Bank Plan or a Client Plan before the final 
liquidation of the CIF took place.

    \8\According to the applicant, the conversion of the CIFs into 
the Funds could be accomplished in stages for reasons of efficiency 
and economy. Given the large number of Plans that had interests in 
the CIFs, the applicant anticipated that it would take an extended 
period of time to gather all of the necessary consents from Second 
Fiduciaries. If consent was given promptly, the applicant saw no 
reason to delay a Plan's investing in the Funds since a Second 
Fiduciary would desire the timely investment of the Plan's assets.
    Further, the applicant did not believe a staggered conversion 
would operate to the detriment of a Plan. This was because all asset 
transfers would be effected at fair market value and proratably 
among the Plans. Therefore, Plans would have the same asset value 
immediately before and after the conversion.
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    6. Following each in-kind transfer, the Bank provided each affected 
Plan with a written confirmation statement. This statement set forth 
the number of CIF units held by the Plan immediately before the 
conversion, the related per unit value and the total dollar amount of 
the CIF units. The confirmation statement also included the number of 
shares in the Funds that were held by the Bank Plan or the Client Plan 
following the conversion, the related per share net asset value and the 
total dollar amount of the shares. The confirmation statement further 
disclosed (a) the identity of each security that was valued for 
purposes of the transaction in accordance with Rule 17a-7(b)(4); (b) 
the price of each such security for purposes of the transaction; and 
(c) the identity of each pricing service or market maker consulted in 
determining the value of such securities.
    For all subsequent transfers of CIF assets to a Fund following the 
publication of the proposed exemption in the Federal Register, the Bank 
will send by regular mail to each affected Bank Plan and Client Plan a 
written confirmation, not later than 30 days after the completion of 
the transaction, containing the following information: (a) The identity 
of each security that was valued for purposes of the transaction in 
accordance with Rule 17a-7(b)(4) of the '40 Act; (b) the price of each 
such security involved in the transaction; and (c) the identity of each 
pricing service or market maker consulted in determining the value of 
such securities. In addition, for all subsequent transfers of CIF 
assets to a Fund following the publication of the proposed exemption in 
the Federal Register, the Bank will send by regular mail, no later than 
90 days after completion of each transfer, a written confirmation that 
contains the following information: (a) The number of CIF units held by 
the Plan immediately before the transfer, the related per unit value 
and the total dollar amount of such CIF units; and (b) the number of 
shares in the Funds that are held by the Plan following the conversion, 
the related per share net asset value and the total dollar amount of 
such shares.

Representations of the Second Fiduciary for the Bank Plans Regarding 
the In-Kind Transfers

    7. As stated above, the Bank retained WTC as the Second Fiduciary 
to oversee the in-kind transfers of CIF assets to the Funds as such 
transactions affect the Bank Plans. In such capacity, WTC represented 
that it understood and would accept the duties, responsibilities and 
liabilities in acting as a fiduciary for the Bank Plans, including 
those imposed on fiduciaries under the Act.
    WTC stated that it considered the effect of the in-kind transfer 
transactions on the Bank Plans and noted that this investment 
opportunity was being offered to Client Plans on the same terms and 
conditions as the Bank Plans. Based on the foregoing, WTC believed that 
the terms of the in-kind transfers were fair to participants of the 
Bank Plans and comparable to and no less favorable than the terms that 
would have been reached among unrelated third parties. Accordingly, WTC 
represented that the in-kind transfer transactions were in the best 
interest of the Bank Plans and their participants and beneficiaries for 
the following reasons: (a) The impact of the in-kind transfers on the 
Bank Plans was de minimus because the Funds substantially replicate the 
CIFs in terms of the investment policies and objectives; (b) the Funds 
would probably continue to experience relative performance similar in 
nature to the CIFs given the continuity of investment objectives and 
policies, management oversight and portfolio management personnel; (c) 
the in-kind transfers would not adversely affect the cash flows, 
liquidity or investment diversification of the Bank Plans; and (d) the 
benefits to be derived by the Bank Plans and their participants by 
investing in the Funds (e.g., broader distribution permitted of the 
Funds to different types of plans impacting positively on asset size of 
the Funds and resulting in cost savings to shareholders) would more 
than offset the impact of minimum additional expenses that may be borne 
by the Bank Plans.
    In opining on the appropriateness of the in-kind transfers, WTC 
represented that it conducted an overall review of the Bank Plans, 
including the Bank Plan documents. WTC stated that it also examined the 
total investment portfolios of the Bank Plans to ascertain whether or 
not the Bank Plans were in compliance with their investment objectives 
and policies. Further, WTC stated that it examined the liquidity 
requirements of the Bank Plans and reviewed the concentration of the 
Bank Plans' assets invested in the CIFs as well as the portion of the 
CIFs comprised of the assets of the Bank Plans. Finally, WTC stated 
that it reviewed the diversification provided by the investment 
portfolios of the Bank Plans. Based on its review and analysis of the 
foregoing, WTC represented that the in-kind transfer transactions would 
not adversely affect the total investment portfolios of the Bank Plans, 
compliance by such Plans with their stated investment objectives and 
policies, or the cash flows, liquidity or diversification requirements 
of the Bank Plans.
    As Second Fiduciary, WTC represented that it was provided by the 
Bank with the confirmation statements described in Representation 6. In 
addition, WTC stated that it supplemented its findings following review 
of the post-transfer account information to confirm whether or not the 
in-kind transfer transaction had resulted in the Bank Plans' receipt of 
shares in the Funds equal in value to the Plans' pro rata share of 
assets of the CIFs on the conversion date. WTC further represented that 
it would take such action as it deemed necessary to safeguard the 
interests of the Bank Plans in the event the confirmation statements 
did not confirm the foregoing.

Other Opportunities Available for a Client Plan to Invest in the Funds

    8. Besides the one-time, in-kind transfer of assets from the CIFs 
to a comparable Fund, a Client Plan's assets may be invested in the 
Funds in three other ways. First, a Client Plan may purchase shares in 
the Funds directly through the Bank. Second, the Bank may transfer a 
Client Plan's assets from one Fund to another Fund. Third, the Bank may 
effect a daily automated sweep of uninvested cash of a Client Plan into 
one or more Funds designated by the Bank.<SUP>9 However, all 
investments [[Page 13464]] for Client Plans in the Funds must be made 
pursuant to the Second Fiduciary's written authorization.

    \9\The Bank represents that shares of the Funds may also be 
purchased through CIFs that are not being terminated particularly if 
the relevant CIF seeks to invest in cash equivalents such as those 
being held in money market funds. The Bank explains that CIFs that 
are not being terminated may invest in shares of mutual funds with 
similar objectives or in money market funds. The Bank further 
explains that the authorizations of Second Fiduciaries will be 
contained in adoption agreements for these CIFs and purchases of 
shares of the Funds for the CIFs will be effected in accordance with 
PTE 77-4. The Department, however, offers no opinion on whether PTE 
77-4 would apply to investments in the Funds by the non-terminating 
CIFs.
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    With respect to sweep services, where the Bank has investment 
discretion over a Client Plan, it will not charge separately for the 
provision of sweep services for uninvested cash balances. Instead, the 
Bank will charge a single, Plan-level fee, which covers both the sweep 
service and the management of assets in the sweep vehicle (generally, a 
short-term investment fund). Such single fee is determined as a 
percentage of the assets so invested. If the Bank does not have 
investment discretion with respect to a Client Plan's assets invested 
in the Funds, it may charge a separate fee for sweep services.<SUP>10

    \10\The Department in a letter, dated August 1, 1986, to Robert 
S. Plotkin, Assistant Director, Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System, 
addressed the application of section 408(b)(2) of the Act to 
arrangements involving ``sweep services.'' In that letter, the 
Department set forth several examples to illustrate various 
circumstances under which violations of section 406(b) of the Act 
would arise with respect to such arrangements. Conversely, the 
letter provided that, if a bank provides ``sweep'' services without 
the receipt of additional compensation or other consideration (other 
than reimbursement of direct expenses properly and actually incurred 
in the performance of such services), then the provision of 
``sweep'' services by the bank would not, in itself, constitute a 
violation of section 406(b) of the Act. Moreover, including 
``sweep'' services under a single fee arrangement for investment 
management services which is calculated as a percentage of the 
market value of the total assets under management would not, in 
itself, constitute an act described in section 406(b)(1), because 
the bank would not be exercising its fiduciary authority or control 
to cause a plan to pay an additional fee.
    In addition, the letter also discusses the applicability of the 
statutory exemptions under section 408(b)(6) of the Act (fees for 
``ancillary services'') and under section 408(b)(8) of the Act 
(investments in collective trust funds maintained by such bank) to 
such ``sweep'' service arrangements.
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Receipt of Fees by Bank

    9. To avoid charging its existing Client Plans any additional Fund-
level fees in connection with investment in the Funds and to 
accommodate the specific needs of certain new Client Plans, the Bank is 
implementing a fee structure under which, depending on each Client 
Plan's provisions and the fee arrangements negotiated with the Second 
Fiduciary, the Plan will not be required to bear any part of the 
investment advisory fees charged to the Funds by the Bank.<SUP>11 This 
fee structure is an alternative to the crediting mechanisms provided 
under PTE 77-4, which is also available if (a) negotiated by the Second 
Fiduciary (provided the conditions contained in PTE 77-4 are met) or 
(b) investments in the Total Return Bond Fund and Contrarian Stock Fund 
are involved.<SUP>12

    \11\The fact that certain transactions and fee arrangements are 
the subject of an administrative exemption does not relieve the 
fiduciaries of the Client Plans from the general fiduciary 
responsibility provisions of section 404 of the Act. Thus, the 
Department cautions the fiduciaries of Client Plans investing in the 
Funds that they have an ongoing duty under section 404 of the Act to 
monitor the services provided to the Client Plans to assure that the 
fees paid by the Client Plans for such services are reasonable in 
relation to the value of the services provided. Such 
responsibilities would include determinations that the services 
provided are not duplicative and that the fees are reasonable in 
light of the level of services provided.
    \12\PTE 77-4 conditions exemptive relief on a plan not paying an 
investment management, investment advisory or similar fee with 
respect to the plan assets invested in such shares for the entire 
period of such investment. Section II(c) of PTE 77-4 states that 
this condition does not preclude the payment of investment advisory 
fees by the investment company under the terms of an investment 
advisory agreement adopted in accordance with section 15 of the '40 
Act. Section II(c) states further that this condition does not 
preclude the payment of an investment advisory fee by the plan based 
on total plan assets from which a credit has been subtracted 
representing the plan's pro rata share of investment advisory fees 
paid by the investment company.
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    For providing custody and shareholder services to the Funds, the 
Bank is retaining fees for Secondary Services.<SUP>13 With respect to 
fees for Secondary Services, the Funds are paying the Bank monthly 
transfer agency fees ranging from .10 percent to .30 percent of the 
daily net asset value of the Funds.<SUP>14 In some instances, fees for 
Secondary Services may be determined on a per item or a per account 
basis subject to a cap based on the Funds' daily net asset value.

    \13\As stated above, the term ``Secondary Service'' does not 
include brokerage services. In this regard, the applicant 
anticipates that neither it nor its affiliates will provide 
brokerage services to the Funds.
    \14\The Bank represents that it will continue its practice of 
waiving secondary fees for the Contrarian Stock Fund and the Total 
Return Bond Fund. As mentioned previously, the Bank states that PTE 
77-4 will apply to transactions involving these Funds.
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    10. Under the fee structure, the Bank is charging its previously 
agreed upon Plan-level fees to each Client Plan for services rendered 
to such Plans as a trustee, directed trustee, investment manager or 
custodian.\15\ All such fees are billed on a quarterly basis and may be 
paid by the Client Plan sponsor rather than the Client Plan.

    \15\The applicant represents that all fees paid by the Client 
Plans directly to the Bank for services performed by the Bank are 
exempt from the prohibited transaction provisions of the Act by 
reason of section 408(b)(2) of the Act. The Department notes that to 
the extent there are prohibited transactions under the Act as a 
result of any services provided by the Bank directly to the Client 
Plans which are not covered by section 408(b)(2) and the regulations 
thereunder, no relief is being proposed herein for such 
transactions.
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    The Bank is entitled to receive Fund-level investment advisory fees 
at a different rate for each Fund that is based on the average net 
assets for the respective Fund. The investment advisory fees range from 
.10 percent to .85 percent for the Advantage Funds. With respect to the 
Ready Cash Investment Fund, the investment advisory fees are tiered. 
For example, Client Plans investing in the Ready Cash Investment Fund 
will pay the Bank .40 percent for the first $300 million of average 
daily net assets of the Fund, .36 percent of the next $400 million and 
.32 percent for any additional average daily net assets. (At present, 
the Bank has agreed to waive any fees in excess of .30 percent of 
average daily net assets until further notice.)
    The investment advisory agreements and any changes in the fees will 
be approved by a majority of the independent members of the Trust's 
Board of Trustees. The investment advisory fees paid by each of the 
Funds will be accrued on a daily basis and billed by the Bank to the 
Funds at the beginning of the month following the month in which the 
fees have accrued.
    11. For most Client Plans,<SUP>16 at the beginning of each month 
and on the same business day as the receipt of such fees by the Bank, 
the Bank will credit to each Plan such Plan's pro rata share of all 
investment advisory fees charged by the Bank to the Funds<SUP>17 
(including investment advisory fees paid by the Bank to third party 
subadvisers<SUP>18) pursuant to a credit procedure (the Credit Method). 
The Bank represents that the credited fees will be paid to the Client 
Plan in cash, except that the credit may be effectuated through the 
purchase of additional shares of the Funds if the Client Plan makes an 
election. The purchase of additional shares will occur in lieu of the 
cash credit on the same day that such credit would have been paid to 
the Client [[Page 13465]] Plan. Again, all decisions regarding the use 
of the Credit Method will be made by the Second Fiduciary at the time 
such fiduciary provides its original written approval of the investment 
of a Plan's assets in the Funds.

     <SUP>16As stated in Representation 9, a Second Fiduciary of a 
Client Plan who is not interested in using the rebate mechanism 
discussed in this proposed exemption will invest in the Funds 
pursuant to PTE 77-4.
     <SUP>17As stated above, investments in the Total Return Bond 
Fund and the Contrarian Stock Fund will be made in conformance with 
PTE 77-4 and not in accordance with the rebate mechanism described 
herein.
      <SUP>18The Bank notes that if the fee it credits to a Client 
Plan already includes a third party sub-adviser's fee, no additional 
credits will be required with respect to the portion of such fee 
actually paid by the Bank to the sub-adviser.
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    12. The Bank notes that Section II(c) of PTE 77-4 (id. at 18733) 
prohibits the payment of double fees to the fiduciary/investment 
adviser, by requiring that the plan not pay the investment adviser a 
plan-level investment management or advisory-type fee with respect to 
plan assets that are invested in mutual fund shares. The Bank also 
explains that the condition against duplicate fees can be complied with 
either by excluding the affected plan assets in determining the plan-
level investment management/advisory fee (the Offset Method) or by 
subtracting a credit representing the plan's pro rata share of the 
mutual fund- level advisory fee from the plan-level fee (the 
Subtraction Method).
    The Bank represents that the Credit Method satisfies the objective 
of the double fee prohibition by netting out any additional fees 
generated for the Bank by investment in the Funds. However, instead of 
reducing the fees charged at the Plan-level, as is done by the Offset 
and Subtraction Methods, the Bank states that the Credit Method 
assesses full fees at both levels and then credits back the Fund-level 
fees (with the exception of fees for Secondary Services) directly to 
the Client Plan. Thus, on an ongoing basis, the Bank indicates that 
Client Plans would pay only the fees previously agreed upon between the 
Bank and the Second Fiduciary for investment management services 
without regard to the conversions.
    The Bank explains that the Subtraction Method would accomplish 
essentially the same economic result as the Credit Method. However, 
under the Subtraction Method, the Bank notes that its fees from the 
Funds would be deducted from the amounts billed to the Client Plan by 
the Bank for services, rather than being credited directly to the 
Client Plan. The Bank states that the Credit Method will restore a 
Client Plan's investment in the Funds (or overall investment position 
if it receives the credit in cash) to the level it would have been if 
the Client Plan had not been charged the Bank's Fund-level fees. The 
Bank represents that the Credit Method will allow the Bank to maintain 
its fiduciary fee schedules for its services to Client Plans which is 
more efficient and less costly than a system employing credits against 
fiduciary fees. Finally, the Bank explains that use of the Credit 
Method will permit the Client Plans to retain their fiduciary fee 
structures despite the change to a new investment vehicle.

Authorization Requirements for Client Plans

    13. As stated in Representation 4, the transfer of a Bank Plan's or 
a Client Plan's assets in exchange for shares of the Funds must be 
preceded by the prior written authorization of the Second Fiduciary. 
The Second Fiduciary must also approve the fees to be paid by the Funds 
to the Bank and, in the case of a Client Plan, the purchase of 
additional shares of such Funds by the Client Plan with fees credited 
to the Client Plan by the Bank. In the case of the Bank Plans, the Bank 
has represented that it intends to use PTE 77-3 with respect to the 
purchase or sale of shares of the Funds by the Bank Plans and for the 
receipt of compensation by the Bank.<SUP>19 Accordingly, the following 
authorization requirements would apply to Client Plans only.

      <SUP>19The Department is not expressing an opinion herein on 
the applicability of PTE 77-3 with respect to ongoing investments by 
the Bank Plans in shares of the Funds or to the receipt of fees from 
the Funds by the Bank.
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    For a Client Plan, the authorization is terminable at will by the 
Second Fiduciary without penalty to the Client Plan upon receipt by the 
Bank of written notice of termination. A Termination Form expressly 
providing an election to terminate the authorization with instructions 
on the use of the form will be supplied to the Second Fiduciary. In 
general, the Termination Form will be furnished by the Bank to the 
Second Fiduciary at least once every twelve months or whenever there 
are increases in the contractual rates of fees due from the Funds to 
the Bank, for Secondary Services. (See Representation 14.) Termination 
will be effected by the Bank selling the shares of the Funds held by 
the affected Client Plan within the period of time specified by the 
Client Plan but not more than one business day following receipt by the 
Bank from the Second Fiduciary, of the Termination Form or any other 
written notice of termination; provided that, if due to circumstances 
beyond the control of the Bank, the sale cannot be executed within one 
business day, the Bank will have one additional business day to 
complete such sale.
    The Termination Form will instruct the Second Fiduciary of a Client 
Plan that the authorization is terminable at will by the Plan, without 
penalty to the Plan, upon receipt by the Bank of written notice from 
the Second Fiduciary, and that failure to return the form will result 
in the continued authorization of the Bank to engage in the subject 
transactions on behalf of the Client Plan.
    14. In the event of an increase in the contractual rate of any fees 
paid by the Funds to the Bank regarding investment advisory services or 
fees for similar services that had been authorized by the Second 
Fiduciary, the Bank will provide written notice to the Second Fiduciary 
in a prospectus for the Funds or otherwise, of any increases in the 
rate of such fees even though these fees will be rebated by the Bank to 
the Client Plans. Although the notice will explain the nature and 
amount of the fee increase of the affected Fund or Funds, it will not 
be accompanied by the Termination Form. This is because all increases 
in investment advisory or similar fees will be subject to the annual 
reauthorizations described in Representation 16.
    15. In the event of an addition of a Secondary Service provided by 
the Bank to the Funds for which a fee is charged or an increase in the 
contractual rate of any fee due from the Funds to the Bank for any 
Secondary Service that results from an increase in the rate of such fee 
or from the decrease in the number or kind of services performed by the 
Bank for such fee over an existing rate for such Secondary Service 
which had been authorized by the Second Fiduciary of a Client Plan, the 
Bank will provide, to the Second Fiduciary, at least 30 days in advance 
of the implementation of such increase, written notice explaining the 
nature and amount of the additional service for which a fee is charged 
or fee increased for the affected Fund.<SUP>20 Under these 
circumstances, the notices will be accompanied by the Termination Form 
with instructions on the use of such form. The instructions will 
expressly provide an election to the Second Fiduciary to terminate at 
will any prior authorizations without penalty to the Client Plan and 
stipulate that failure to return the form will result in the 
continuation of all authorizations [[Page 13466]] previously given to 
the Second Fiduciary. Termination of the authorization by a Client Plan 
to invest in the Funds will be effected by the Bank selling the shares 
of the Funds held by the affected Client Plan within the period of time 
specified by the Client Plan, but not later than one business day 
following receipt by the Bank of the Termination Form or any other 
written notice of termination. If, due to circumstances beyond the 
control of the Bank the sale cannot be executed within one business 
day, the Bank will have one additional day to complete such sale.

      <SUP>20An increase in the amount of a fee for an existing 
Secondary Service (other than through an increase in the value of 
the underlying assets in the Funds) or the imposition of a fee for a 
newly-established Secondary Service shall be considered an increase 
in the rate of such Secondary Fee. However, in the event a Secondary 
Fee has already been described in writing to the Second Fiduciary 
and the Second Fiduciary has provided authorization for the amount 
of such Secondary Fee, and such fee was waived, no further action by 
the Bank would be required in order for the Bank to receive such fee 
at a later time. Thus, for example, no further disclosure would be 
necessary if the Bank had received authorization for a fee for 
custodial services from Client Plan investors and subsequently 
determined to waive the fee for a period of time in order to attract 
new investors but later charged the fee. However, reinstituting the 
fee at an amount greater than previously disclosed would necessitate 
the Bank providing notice of the fee increase and a Termination 
Form.
---------------------------------------------------------------------------

    16. The Second Fiduciary will be supplied with a Termination Form 
at least once each year beginning with the calendar year that begins 
after the date of the notice granting this proposed exemption is 
published in the Federal Register and continuing for each calendar year 
thereafter, regardless of whether there have been any changes in the 
fees payable to the Bank or changes in other matters in connection with 
the services rendered to the Funds. However, if the Termination Form 
has been provided to the Second Fiduciary in the event of an addition 
of a Secondary Service for which a fee is charged or an increase in any 
fees for Secondary Services paid by the Funds to the Bank, then such 
Termination Form need not be provided again to the Second Fiduciary 
until at least six months have elapsed, unless such Termination Form is 
required to be sent sooner as a result of an addition of a Secondary 
Service for which a fee is charged or any increase in any fees for 
Secondary Services.

Audit Requirements

    17. The Bank is responsible for establishing and maintaining a 
system of internal accounting controls for the crediting of the fees. 
In this regard, the Bank has retained the services of KPMG Peat 
Marwick, an independent accounting firm, to audit annually the 
crediting of fees to Client Plans under this program. Such audits will 
provide independent verification of the proper crediting to the Client 
Plans. Information regarding fees may be used in the preparation of 
required financial disclosure reports of the Funds for the benefit of 
the Client Plans.
    By letter dated November 11, 1993, the Auditor has described the 
procedures that will be utilized in the annual audit of the Credit 
Method program. Specifically, in performing its audit, the Auditor 
will: (a) Review and test compliance with the specific operational 
controls and procedures established by the Bank for making credits; (b) 
verify, on a test basis, the daily credit factors transmitted to the 
Bank (or its affiliates) by the Funds; (c) verify, on a test basis, the 
proper assignment of credit identification fields to the Client Plans; 
(d) verify, on a test basis, the credits paid in total to the sum of 
all credits paid to each Client Plan; (e) recompute, on a test basis, 
the amount of the credit determined for selected Client Plans and 
verify that the proper credit was made to the proper Client Plan. The 
Bank and FFS will be the sources of the factual information upon which 
the Auditor will rely.
    In the event that either the internal audit by the Bank or the 
independent audit by the Auditor identifies an error made in the 
crediting of fees to the Client Plans, the Bank will correct the error. 
With respect to any shortfall in credited fees to a Client Plan 
involving cash credits, the Bank will make a cash payment to the Client 
Plan equal to the amount of the error plus interest paid at money 
market rates offered by the Bank for the period involved. With respect 
to any shortfall in credited fees involving a Client Plan where the 
Second Fiduciary's prior election was to have credited fees invested in 
shares of a particular Fund, the Bank will make a cash payment to the 
Client Plan equal to the amount of the error plus interest based on the 
greater of either (a) the money market rate offered by the Bank for the 
period involved or (b) the total rate of return for shares of the 
Funds, including dividends, that would have been acquired during such 
period. Any excess credits made to a Client Plan will be corrected by 
an appropriate deduction and reallocation of cash during the next 
payment period to reflect accurately the amount of total credits due to 
the Plan for the period involved.

Ongoing Disclosures to Client Plans

    18. On an annual basis, the Bank will provide the Second Fiduciary 
of a Client Plan with a copy of the current prospectus for the Funds 
and upon such fiduciary's request, a copy of the Statement of 
Additional Information which contains a description of all fees paid by 
the funds to the Bank. In addition, the Bank will provide the Second 
Fiduciary with a copy of a financial disclosure report prepared by the 
Bank which contains information about the portfolios of the Funds and 
includes the Auditor's findings within 60 days of the preparation of 
the report. Further, the Bank will respond to oral or written responses 
to inquiries of the Second Fiduciary as they may arise.
    19. In summary, the Bank represents that the transactions described 
herein will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The Funds will provide the Bank Plans and Client Plans with a 
more effective investment vehicle than the CIFs maintained by the Bank 
without any increase in investment advisory or similar fees paid to the 
Bank.
    (b) With respect to the transfer of a Bank Plan's or a Client 
Plan's CIF assets into a Fund in exchange for Fund shares, a Second 
Fiduciary has or will authorize in writing, such transfer prior to the 
transaction only after full written disclosure of information 
concerning the Fund.
    (c) Each Bank Plan or Client Plan has or will receive shares of the 
Funds in connection with the transfer of assets of a terminating CIF 
which have a total net asset value that is equal to the value of such 
Plan's pro rata share of the CIF assets on the date of the transfer as 
determined in a single valuation performed in the same manner and at 
the close of the business day, using independent sources in accordance 
with procedures established by the Funds which comply with Rule 17a-7 
of the '40 Act, as amended, and the procedures established by the Funds 
pursuant to Rule 17a-7 for the valuation of such assets.
    (d) For all subsequent transfers of CIF assets to a Fund following 
the publication of the proposed exemption in the Federal Register, the 
Bank will send by regular mail to each affected Bank Plan and Client 
Plan a written confirmation, not later than 30 days after the 
completion of the transaction, containing the following information: 
(1) The identity of each security that was valued for purposes of the 
transaction in accordance with Rule 17a-7(b)(4) of the '40 Act; (2) the 
price of each such security involved in the transaction; and (3) the 
identity of each pricing service or market maker consulted in 
determining the value of such securities.
    (e) For all subsequent transfers of CIF assets to a Fund following 
the publication of the proposed exemption in the Federal Register, the 
Bank will sends by regular mail, no later than 90 days after completion 
of each transfer, a written confirmation that contains the following 
information: (1) The number of CIF units held by the Plan immediately 
before the transfer, the related per unit value and the total dollar 
amount of such CIF units; and (2) the number of shares in the Funds 
that are held by the Plan following the conversion, the related per 
share net asset value and the total dollar amount of such shares. 
[[Page 13467]] 
    (f) The price that has been or will be paid or received by a Bank 
Plan or a Client Plan for shares of the Funds is the net asset value 
per share at the time of the transaction and is the same price for the 
shares which was or would have been paid or received by any other 
investor at that time.
    (g) No sales commissions or redemption fees have or will be paid by 
a Bank Plan or a Client Plan in connection with the purchase of shares 
of the Funds.
    (h) The Bank has not and will not receive any 12b-1 fees in 
connection with the transactions.
    (i) Any authorizations made by a Client Plan regarding investments 
in a Funds and fees paid to the Bank (including increases in the 
contractual rates of fees for Secondary Services that are retained by 
the Bank) will be terminable at will by the Client Plan, without 
penalty to the Client Plan and will be effected within one business day 
following receipt by the Bank, from the Second Fiduciary, of the 
Termination Form or any other written notice of termination, unless 
circumstances beyond the control of the Bank delay execution for no 
more than one additional business day.
    (j) The Second Fiduciary has received or will receive written 
notice accompanied by the Termination Form with instructions on the use 
of the form at least 30 days in advance of the implementation of any 
increase in the rate of any fees for Secondary Services that the Bank 
provides to the Funds.
    (k) All dealings by or between the Client Plans, the Funds and the 
Bank will be on a basis which is at least as favorable to the Client 
Plans as such dealings are with other shareholders of the Funds.

Notice to Interested Persons

    Notice of the proposed exemption will be given to interested 
persons who have investments in the terminating CIFs and from whom 
approval is being sought for the transfer of Plan assets to the Funds. 
In this regard, interested persons will include WTC, the Second 
Fiduciary of the Bank Plans; active participants in the Bank Plans; and 
Second Fiduciaries of the Client Plans. Notice will be provided to each 
Second Fiduciary by first class mail and to active particpants in the 
Bank Plans by posting at major job sites. Such notice will be given to 
interested persons within 14 days following the publication of the 
notice of pendency in the Federal Register. The notice will include a 
copy of the notice of proposed exemption as published in the Federal 
Register and give interested persons the right to comment on and/or to 
request a hearing with respect to the proposed exemption. Comments and 
requests for a public hearing are due within 44 days of the publication 
of the 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.)

General Motors Hourly-Rate Employees Pension Plan; General Motors 
Retirement Program for Salaried Employees; Saturn Individual Retirement 
Plan for Represented Team Members; and Saturn Personal Choices 
Retirement Plan for Non-Represented Team Members (Collectively, the 
Plans) Located in New York, New York

[Application Nos. D-09694 thru D-09697]

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 in accordance with the procedures set forth in 29 CFR Part 2570, 
Subpart B (55 FR 32836, August 10, 1990). If the exemption is granted, 
the restrictions of section 406(b)(2) of the Act shall not apply to the 
stock index ``exchange of futures for physicals'' (EFP) transaction 
between the General Motors Retirement Program for Salaried Employees 
(the Salaried Plan) and the General Motors Hourly-Rate Employees 
Pension Plan, Saturn Individual Retirement Plan for Represented Team 
Members, and Saturn Personal Choices Retirement Plan for Non-
Represented Team Members (together, the Hourly Plan) which occurred on 
November 30, 1993 in the amount of approximately $730 million, provided 
the following conditions were met:
    (a) The terms of the EFP transaction were at least as favorable to 
the Plans as the terms which would have been available in an arm's-
length EFP transaction involving unrelated parties;
    (b) Each Plan received a price in the EFP transaction which was 
equal to the midpoint between the highest independent bid and lowest 
independent offer for buying and selling the futures involved on 
November 30, 1993, based on EFP quotations obtained from at least six 
independent broker-dealers capable of engaging in such an EFP at the 
time of the transaction;
    (c) Wells Fargo Institutional Trust Company, N.A. (WFITC), as an 
independent fiduciary for the Salaried Plan, determined that the EFP 
transaction was prudent and in the best interests of the Salaried Plan 
and its participants and beneficiaries at the time of the transaction;
    (d) WFITC monitored the EFP transaction on behalf of the Salaried 
Plan and took whatever action was necessary to safeguard the interests 
of the Salaried Plan at the time of the transaction;
    (e) General Motors Investment Management Corporation (GMIMCo), as 
the fiduciary for the Hourly Plan, determined that the EFP transaction 
was prudent and in the best interests of the Hourly Plan and its 
participants and beneficiaries at the time of the transaction; and
    (f) GMIMCo monitored the EFP transaction on behalf of the Hourly 
Plan and took whatever action was necessary to safeguard the interests 
of the Hourly Plan at the time of the transaction.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption 
will be effective November 30, 1993.

Summary of Facts and Representations

    1. The Plans were established by General Motors Corporation (GMC) 
to provide retirement benefits for eligible hourly and salaried 
employees of GMC and its affiliates. The aggregate fair market value of 
the assets of the Plans was approximately $40.5 billion as of September 
30, 1993. The Plans covered a total of approximately 831,532 active and 
retired participants or their beneficiaries as of October 1, 1993.
    The assets of the Plans involved in the transaction described 
herein were held by: (i) Mellon Bank, N.A., acting as directed master 
trustee and custodian; (ii) Bankers Trust Company, acting as directed 
master trustee and custodian; (iii) WFITC, acting as custodian for 
assets its manages; and (iv) Chemical Bank, acting as custodian for 
certain assets managed by other investment managers.
    2. The Pension Investment Committee of GMC (the PIC) is a committee 
established by the Finance Committee of the Board of Directors of GMC 
(the Finance Committee). The Finance Committee is the ``named 
fiduciary'' for the Plans. Certain fiduciary responsibilities have been 
delegated by the Finance Committee to the PIC, including the 
responsibility for allocating funds among asset classes within broad 
investment guidelines, recommending changes in broad investment 
guidelines to the Finance Committee, and monitoring the investment 
performance of the assets of the Plans. The PIC is comprised of 
officers of GMC and its affiliates.
    The PIC carries out its in-house investment oversight 
responsibility through GMIMCo, a separately- 
[[Page 13468]] incorporated, wholly-owned subsidiary of GMC. Certain 
members of the PIC serve on the Board of Directors of GMIMCo. All 
GMIMCo activities are subject to the general direction of the PIC.
    The Finance Committee, as the ``named fiduciary'' for the Plans, 
reviews the actions of the PIC to evaluate performance and to assure 
that the Finance Committee's delegation of authority continues to be 
prudent.
    3. On November 30, 1993, the Plans entered into an EFP with each 
other in the amount of approximately $730 million. An EFP is an 
integrated transaction where one party buys the underlying (or 
``physical'') commodity/security and simultaneously sells a related 
futures contract while the other party sells the underlying commodity/
security and simultaneously buys a futures contract.<SUP>21 However, 
unlike an exchange-traded futures contract, an EFP is privately 
negotiated and is not required to be competitively executed in an 
exchange trading pit.<SUP>22 The parties to an EFP typically negotiate 
a private contract outside the trading pit covering the terms of the 
exchange of the underlying commodity/security and the futures position. 
The price, quantity and characteristics of the underlying commodity/
security that is bought or sold will affect the final price and 
quantity of the futures position exchanged.

    \21\A futures contract is an agreement in which one party agrees 
to sell and another party agrees to buy a specific quantity of a 
commodity at a future date. Upon entering into a futures contract, 
the parties establish the price for the future sale or purchase. The 
Commodity Futures Trading Commission (CFTC) is the federal agency 
responsible for regulating futures trading in all tangible and 
intangible ``commodities'' including securities. Unless exempted by 
the CFTC, all futures contracts must be traded on CFTC-designated 
exchanges called contract markets.
    \22\See Section 4c(a) of the Commodity Exchange Act and CFTC 
Rule 1.38 (17 CFR 1.38(a)) which require that all futures 
transactions be executed openly and competitively except for 
transactions which are executed noncompetitively in accordance with 
written rules of the exchange which have been submitted to and 
approved by the CFTC, specifically providing for the noncompetitive 
execution of such transactions. The applicant states that this 
exception applies to EFPs and that all futures exchanges have CFTC-
approved rules permitting EFPs to be consummated.
---------------------------------------------------------------------------

    In a typical stock-index EFP, a customer (such as an employee 
benefit plan) will sell a portfolio of common stocks which generally 
replicates the Standard & Poors 500 Composite Stock Price Index (the 
S&P 500 Index). In exchange for the stocks, the customer will receive 
cash in an amount equal to the current value of the stock portfolio and 
a corresponding long S&P 500 futures position.<SUP>23 To effect the 
transaction, the customer will contact its various broker-dealer/
futures commission merchants (``broker-dealers''), and will offer the 
stocks in return for (1) a cash payment equal to the market price of 
the stocks at the close of the New York equities market (e.g. the New 
York Stock Exchange or American Stock Exchange) on that date and (2) a 
corresponding long S&P 500 futures position established through that 
broker-dealer and priced at a ``basis'' between the index and the 
futures such that the cash plus futures is roughly equivalent in both 
value and market exposure to the stocks.<SUP>24

    \23\The futures contract ``bought'' by the customer represents a 
commitment to pay the cash value of the portfolio of S&P 500 
securities at a specified time in the future.
    \24\The applicant states that the market price of an S&P 500 
futures contract will normally exceed the market price of the 
underlying portfolio of stocks comprising the index (the ``cash 
price'') by a certain amount (i.e. the ``basis'') primarily due to 
the ``cost of carry.'' The ``cost of carry'' relates to the 
difference between the U.S. Treasury Bill rate and the dividend 
yield on the stock portfolio. In addition, the ``basis'' reflects 
the deliverable supply of the underlying stocks and the expectations 
of market participants.
---------------------------------------------------------------------------

    However, the applicant states that two customers may negotiate such 
an EFP transaction between themselves and use the broker-dealer merely 
to facilitate the trade's execution by reporting and documenting the 
stock and futures trades, as required by exchange rules.
    4. On November 30, 1993, the Hourly Plan sold approximately $730 
million of stock and simultaneously purchased approximately $730 
million of S&P 500 futures contracts in an EFP transaction with the 
Salaried Plan.<SUP>25 Thus, the Salaried Plan purchased approximately 
$730 million of stocks and sold approximately $730 million of S&P 500 
futures in the transaction. WFITC acted as an independent fiduciary for 
the Salaried Plan in the EFP transaction (as discussed further below).

    \25\The applicant represents that GMIMCo consulted with the 
Chicago Mercantile Exchange (CME) and the CFTC, both of which 
advised that an EFP between the Plans would be consistent with their 
applicable rules.
---------------------------------------------------------------------------

The Hourly Plan

    5. With respect to the Hourly Plan, the applicant states that in 
November 1993 the Plan needed to raise cash for upcoming benefit 
payments to the participants and beneficiaries. In addition, the PIC 
had modified the Hourly Plan's asset allocation strategy by increasing 
the allocation for investments in asset classes other than the Canadian 
and U.S. large capitalization equity securities.
    GMIMCo was responsible for implementing the PIC's asset allocation 
strategy in the most cost-effective manner. GMIMCo analyzed the Hourly 
Plan's equity holdings, futures positions, overall asset mix, 
allocation of assets among equity investment managers, and upcoming 
liquidity needs. Based on this review, GMIMCo determined that 
approximately $730 million of equity holdings, managed by twelve equity 
managers, eleven of whom were external investment advisers, should be 
liquidated to raise cash to meet benefit payments and to fund 
investments in other asset classes to meet the PIC's asset allocation 
guidelines.
    GMIMCo also determined that, simultaneous with the sale of stocks, 
the Hourly Plan should purchase approximately $730 million of S&P 500 
futures contracts so that the designated funds would continue to be 
exposed to the equity markets until the cash was either used to pay 
benefits or placed with managers in other investment areas. The PIC had 
previously authorized the use of futures to facilitate the Hourly 
Plan's asset allocation objectives.
    6. GMIMCo evaluated the following alternatives for selling stocks 
and purchasing equity futures for the Hourly Plan:
    (a) Direct each of the twelve investment managers to independently 
liquidate securities in the open market and GMIMCo would independently 
purchase futures;
    (b) Direct each of the twelve investment managers to transfer 
stocks to a central account and GMIMCo would sell the stocks via 
portfolio trades in the open market with simultaneous futures 
purchases;
    (c) Engage in an EFP with a broker-dealer; or
    (d) Engage in an EFP with the Salaried Plan.
    7. GMIMCo states that separate open market trades through the 
investment managers under alternative (a) would have involved the 
greatest risks and potentially the highest costs. Under this 
alternative, as each manager sold stocks, the manager would have 
advised GMIMCo of its actions and GMIMCo would have then purchased 
futures to maintain the overall equity exposure. Since each individual 
stock could have moved in a different direction and by a different 
amount relative to the broader equity index (i.e. ``tracking 
error''),<SUP>26 the Hourly Plan could have incurred significant costs. 
Since the futures purchases would not have been simultaneous with the 
stock sales, the [[Page 13469]] Hourly Plan would have also experienced 
``timing mismatches'' which could have resulted in significant costs. 
GMIMCo states that tracking error and timing mismatches could have 
resulted in costs in excess of $4 million and concluded that there was 
no incentive to undertake these risks when lower cost alternatives were 
available.

    \26\Tracking error is the mismatch of price movement on the 
individual stock versus the index.
---------------------------------------------------------------------------

    In addition, under alternative (a), the market impact cost 
associated with the stock transactions could have been approximately $7 
million. GMIMCo calculated this cost by considering such factors as: 
(i) The managers in the aggregate held over 1500 stocks, and over 600 
were stocks common to more than one manager, which would have caused 
the managers to compete with each other in selling the stocks; (ii) for 
over 50% of the individual stocks in the portfolio, the amount of the 
stock held represented more than 10% of the average daily trading 
volume for such stock; (iii) for about 25% of the individual stocks in 
the portfolio, the amount of the stock held exceeded 50% of the average 
daily trading volume for such stock; and (iv) for over 10% of the 
individual stocks in the portfolio, the amount of the stock held 
represented more than one day's trading volume for such stock. The 
market impact costs associated with the futures transactions, which 
would have represented about 10% of the daily volume on the CME, were 
estimated to be at least $1 million.
    Under alternative (a), GMIMCo estimated that the commission costs 
at approximately $.06/share on 21.1 million shares would have been 
approximately $1.3 million. With twelve managers with over 1500 stock 
names, GMIMCo estimated that the master trustee recordkeeping fees 
would have been approximately $30,000.
    In total, GMIMCo estimated that alternative (a) would have cost the 
Hourly Plan approximately $13 million.
    8. With respect to separate open market trades through GMIMCo under 
alternative (b), GMIMCo states that such transactions would have 
resulted in lower costs resulting from tracking error (approximately $2 
million). In addition, the timing mismatches would have been eliminated 
because GMIMCo could have simultaneously executed both the sale of the 
stocks and the purchase of the futures. GMIMCo states that alternative 
(b) would have resulted in lower market impact cost (approximately $3.5 
million) since the time period for execution would have been more 
effectively controlled and one manager would not be selling in 
competition with another manager. However, the market impact cost for 
the futures would still have been approximately $1 million.
    GMIMCo states that the commission costs on equity portfolio trades 
versus individual stock trades would have been lower (approximately $.5 
million) under alternative (b), but master trustee fees would have been 
higher at about $50,000.
    In total, GMIMCo estimated that alternative (b) would have cost the 
Hourly Plan approximately $7 million.
    9. With respect to an EFP with a broker-dealer under alternative 
(c), GMIMCo states that such a transaction would have eliminated the 
timing mismatch risk and incorporated the market impact, tracking error 
and commission costs into the pricing of the EFP quoted by the broker-
dealer. Therefore, on November 30, 1993, the date of the proposed EFP, 
GMIMCo sought EFP bids and offers from eight broker-dealers--First 
Boston, Goldman Sachs, J.P. Morgan, Lehman Bros., Merrill Lynch, Morgan 
Stanley, Paine Webber, and Salomon Brothers. GMIMCo requested bid and 
offer quotes from each broker-dealer on the proposed transaction. 
GMIMCo provided the broker-dealers with the characteristics of the 
portfolio, for example, how many stocks traded on exchanges such as the 
NYSE and AMEX and on the NASDAQ. The broker-dealers were advised that 
the portfolio was valued at approximately $730 million, based on the 
prior day's closing value, and involved approximately 21,147,800 
shares. The broker-dealers also were advised regarding the tracking 
error of the portfolio versus the S&P 500 Index. The broker-dealers 
were provided with the general liquidity characteristics of the 
portfolio, including the fact that: (i) For over 50% of the individual 
stocks in the portfolio, the amount of stock held represented more than 
10% of the average daily trading volume for such stock, (ii) for about 
25% of the individual stocks in the portfolio, the amount of the stock 
held exceeded 50% of the average daily trading volume for such stock, 
and (iii) for over 10% of the individual stocks in the portfolio, the 
amount of the stock held represented more than one day's trading volume 
for such stock.
    Based on these characteristics, two broker-dealers declined to 
participate. The remaining six broker-dealers provided the following 
EFP quotations, with a bid to buy the futures and an offer to sell the 
futures expressed as a discount or premium on the S&P 500 Index closing 
price on the date of the transaction, as noted in the table below. In 
each case, the broker-dealers agreed to buy or sell the stocks involved 
at the S&P 500 Index closing price as of the date of the transaction.

------------------------------------------------------------------------
                           B-D's bid to                   B-D's offer to
   Broker-dealer (B-D)      buy futures     EFP quotes     sell futures 
------------------------------------------------------------------------
A.......................           -2.37  ..............            1.86
B.......................           -2.39  ..............            3.29
C.......................           -3.15  ..............            3.85
D.......................           -3.95  ..............            4.55
E.......................           -5.50  ..............            5.90
F.......................           -5.37  ..............            6.07
Best Prices.............           -2.37  ..............            1.86
Midpoint Between Best                                                   
 Prices.................  ..............          -0.255                
S&P 500 Index Close (11-                                                
 30-93).................  ..............         461.79                 
EFP Futures Price                                                       
 (agreed to by parties                                                  
 based on midpoint).....  ..............         461.535                
------------------------------------------------------------------------

Of all of the broker-dealers providing quotes, Broker-Dealer A offered 
the best price for the Hourly Plan to buy futures--i.e. 1.86, the 
lowest premium above the S&P 500 Index closing price.
    GMIMCo determined that an EFP with the Salaried Plan under 
alternative (d) would be the least costly alternative. Under this 
alternative, the Hourly Plan would engage in the EFP with the Salaried 
Plan at the midpoint of the best EFP bid quoted by the broker-dealers 
to sell stocks and buy futures (i.e. -2.37) versus the best EFP offer 
quoted by the broker-dealers to buy stocks and sell futures (i.e. 
1.86). Thus, alternative (d) provided the Hourly Plan with a better 
price to buy the futures because the price of the futures based on the 
-0.255 midpoint (i.e. 461.79 - 0.255 = 461.535) would be more favorable 
to the [[Page 13470]] Hourly Plan than the price offered by Broker-
Dealer A based on the 1.86 premium above the closing price of the index 
(i.e. 461.79 + 1.86 = 463.65).
    GMIMCo states that alternative (d) saved the Hourly Plan 
approximately $3.4 million, which otherwise would have been paid to 
Broker-Dealer A. This cost savings resulted from the fact that the 
difference between 463.65 (the best price at which the Hourly Plan 
could have bought futures in an EFP with Broker-Dealer A) and 461.535 
(the price at which the Hourly Plan bought futures in the EFP with the 
Salaried Plan) was 2.115 index points or approximately 46 basis 
points.<SUP>27

    \27\Note: 2.115/461.79 = .00458 = .458% or 45.8 basis points, 
since .01% equals one basis point. Thus, the Hourly Plan would have 
paid Broker-Dealer A approximately $3.4 million ($730 million  x  
.0046).
---------------------------------------------------------------------------

    GMIMCo states that the transaction eliminated the tracking error, 
timing mismatch risk and market impact costs. The Hourly Plan also 
reduced costs under alternative (d) since the stock transfers were 
directly between the respective investment managers via master trustee 
bookkeeping entries, which reduced one layer of stock transfers and 
resulted in savings of approximately $30,000.
    GMIMCo determined that it was in the best interests of the Hourly 
Plan and its participants and beneficiaries to sell the stocks and 
purchase the futures through an EFP with the Salaried Plan. 
Accordingly, on November 30, 1993, the Hourly Plan purchased from the 
Salaried Plan 948 December S&P 500 futures contracts at a price of 
461.50 and 2216 December S&P 500 futures contracts at a price of 461.55 
or 3164 total contracts for an average price of 461.535.

The Salaried Plan

    10. On November 19, 1993, GMIMCo appointed WFITC to act as an 
independent fiduciary for the Salaried Plan for the proposed EFP with 
the Hourly Plan. GMIMCo granted WFITC complete discretion to act on 
behalf of the Salaried Plan for the proposed transaction and to take 
any appropriate action necessary to safeguard the interests of the 
Salaried Plan. WFITC was engaged as independent fiduciary prior to the 
transaction with the understanding that it would determine whether it 
was in the best interests of the Salaried Plan and its participants and 
beneficiaries: (i) To purchase stocks and sell futures in the amount of 
approximately $730 million; (ii) to engage in an EFP for the purchase 
of stock and the sale of futures; and (iii) to engage in the EFP with 
the Hourly Plan.
    11. With respect to the determination for the Salaried Plan to 
purchase stocks and sell futures, WFITC represents that the Salaried 
Plan's holdings in equities and equity futures were approximately equal 
to the PIC's designated asset allocation to the U.S. and Canadian 
equity markets. The policy structure for the Salaried Plan established 
by the PIC had allocated a specified percentage of the Plan's assets to 
large capitalization U.S. and Canadian equity securities. This fact 
coupled with the fact that the Plan held futures in an amount valued 
well in excess of the value of the proposed transaction led WFITC to 
conclude that the sale of long futures and their replacement by 
purchasing U.S. and Canadian equity securities would be consistent with 
the asset allocation policy of the PIC. In this regard, WFITC believed 
that the PIC's asset allocation strategy for the Salaried Plan was 
reasonable. Thus, WFITC concluded that the proposed sale of the futures 
by the Salaried Plan would be appropriate for and in the best interest 
of the Salaried Plan. This conclusion was based upon WFITC's view that 
while financial futures are a legitimate method of achieving temporary 
exposures to markets, there are differences in holding financial 
futures as opposed to securities for the long term. These differences 
include ``tracking error risk'' and ``basis risk.''
    WFITC states that ``tracking error risk'' is defined in this 
instance as the variance in performance of a given portfolio of 
securities as compared to the index underlying a particular stock index 
futures contract. In the case of the proposed transaction, WFITC 
determined that such tracking error risk existed between the stock 
index futures contracts held temporarily by the Salaried Plan and the 
portfolio of cash securities that it had determined by policy to hold 
for the long term. Therefore, WFITC concluded that the best interests 
of the Salaried Plan would be served by replacing the stock index 
futures contracts with stocks reflecting the strategies of the selected 
investment managers.
    WFITC states further that ``basis risk'' is defined in this 
instance as the variance in value between an index and a fully 
collateralized position in stock index futures contracts that is based 
on the return of the same index. Such variance in value arises because, 
while stock index futures are priced to equal the underlying index at 
expiration, prior to expiration they are priced in an auction market 
that is partially independent of the auction markets in which the 
securities in the underlying index are priced. Therefore, WFITC 
concluded that the interests of the Salaried Plan would be served by 
eliminating the basis risk of the Salaried Plan by replacing the stock 
index futures contracts with stocks in an amount up to $730 million 
reflecting the strategies of the selected investment managers.
    12. With respect to the determination for the Salaried Plan to 
engage in an EFP, WFITC evaluated the various methods the Plan could 
use in selling futures and purchasing equity securities. WFITC began 
its analysis with the premise that the Salaried Plan should reduce or 
eliminate transaction costs, including brokerage commissions, dealer 
bid/offer spreads, market impact and opportunity costs. Based on 
WFITC's experience in the futures and equity markets, WFITC believed 
that EFP transactions are often the most cost effective method for 
simultaneously selling index futures and buying equity securities. 
WFITC states that because in an EFP both the sale of futures and the 
purchase of securities is achieved in a single simultaneous transaction 
with a single counterparty, all sources of transaction costs are 
subsumed in a single negotiated price, reflected in the price at which 
the futures in the EFP are traded.
    WFITC represents that the negotiated price of an EFP can be readily 
compared for cost-effectiveness against an ideal hypothetical 
transaction with no transaction costs whatsoever. Such an ideal 
transaction would consist of simultaneously (1) buying stocks at the 
last reported sale price for each stock as of the moment of the 
transaction, and (2) selling the stock index futures position such that 
the futures are priced at or above a ``fair economic value'' with no 
brokerage commissions, dealer bid/offer spread, market impact, or 
opportunity cost.
    WFITC determined the fair economic value of the futures by 
calculating the difference between (1) the interest income foregone 
through the expiration date of the futures by having to liquidate 
positions in money-market instruments in order to provide cash required 
to settle the stock purchases, and (2) the dividend income estimated to 
be earned by holding stocks rather than futures contracts through the 
expiration date of the futures. On November 30, 1993, the date of the 
transaction, there were 20 days remaining until the expiration of the 
futures contracts held by the Salaried Plan. WFITC states that the 
prevailing money market interest rates at the time were 3.10%. 
Therefore, the amount of interest that would have been earned for 20 
days on the cash required to settle the stock purchases, expressed 
[[Page 13471]] in S&P 500 Index points based on the closing price of 
461.79, was equal to a premium of approximately 0.78 index 
points.<SUP>28 In addition, WFITC represents that the dividend income 
that was expected to be earned on the stocks through the expiration 
date of the futures, expressed in S&P 500 Index points based on the 
closing price of 461.79, was equal to a premium of approximately 0.59 
index points.<SUP>29 Given these factors, WFITC calculated that the 
fair economic value of the futures contracts to be equal to a premium 
of 0.19 S&P 500 Index points above the quoted price of the 
index.<SUP>30 Thus, with the S&P 500 Index published at 461.79 at the 
close of trading, the fair economic value of the futures contracts as 
of November 30, 1993 was calculated by WFITC to be 461.98 (i.e. 461.79 
+ 0.19 = 461.98). The applicant states that the actual closing price 
for the December futures contracts on November 30, 1993 was 461.85, as 
traded on the CME.

     <SUP>28Note: 0.78/461.79 = .00168 = .168% or approximately 16.8 
basis points. The interest income expected through expiration would 
have been calculated in dollars as follows: $730 million  x  .00168 
= 1,226,400.
     <SUP>29Note: 0.59/461.79 = .00127 = .127% or approximately 12.7 
basis points. The dividend income expected through expiration would 
have been calculated in dollars as follows: $730 million  x  .00127 
= $927,100.
     <SUP>30Note: 0.19/461.79 = .00041 = .041% or approximately 4.1 
basis points. The fair economic value of the futures contracts would 
have been calculated in dollars as follows: $730 million  x  .00041 
= $299,300.
---------------------------------------------------------------------------

    WFITC also represents that the negotiated price of an EFP can be 
readily compared for cost-effectiveness against the estimated 
transaction costs of selling the futures in the open futures market and 
purchasing stock in the open stock market. For purposes of this 
analysis, WFITC assumed that the transaction would be approximately 
$730 million of stocks reflecting the then current value of the 
securities held by the selected investment managers. WFITC estimated 
commissions by assuming a rate of $.01 per share. At this rate, the 
Salaried Plan would have paid brokerage commissions for purchasing 
listed securities of approximately $186,286 or 2 basis points 
(expressed as a percentage of the total value of the stocks).<SUP>31 
WFITC estimated the dealer bid/offer spread by measuring the difference 
between the last reported sale for each security and its quoted offered 
price. Using this technique, the Salaried Plan would have paid a total 
dealer bid/offer spread of approximately $2,050,384 or 28 basis 
points.<SUP>32 WFITC states that it did not estimate any savings to the 
Salaried Plan for brokerage commissions on the sale of the futures 
contracts because such commissions would have been paid regardless of 
whether the transaction was made in the open market or through an 
EFP.<SUP>33 WFITC states further that it made no estimate of market 
impact or opportunity costs. Thus, WFITC estimated that the total costs 
to execute the transactions in the open market would have been at least 
$2,236,670 or approximately 30 basis points.

    \31\Note: $186,286/$730 million = .0002 or .02%.
    \32\Note: $2,050,384/$730 million = .0028 or .28%.
    \33\With respect to the futures portion of the EFP, WFITC and 
GMIMCo mutually agreed upon an independent CME clearing member 
broker-dealer that presented the EFP to the CME, and conducted the 
necessary reporting and documentation, ensuring that the EFP was 
accepted by the CME and that the futures positions were properly 
recorded. The broker-dealer received the customary commission for 
such services from each Plan. Neither WFITC nor GMIMCo received any 
of this compensation.
---------------------------------------------------------------------------

    Using the pricing methodology described below, WFITC determined 
that the total cost to the Salaried Plan of transacting the EFP with 
the Hourly Plan would be approximately $701,225 or 9.6 basis points 
(expressed as a percentage of the total value of the stocks). This cost 
figure was calculated by comparing the price of the futures contracts 
negotiated in the EFP based on the midpoint between the best EFP 
quotations (461.535) to the fair economic value of the futures as 
calculated by WFITC based on a premium of 0.19 S&P 500 Index points 
above the closing price of the index (461.98), resulting in a 
difference of 0.445 S&P 500 Index points (461.98 - 461.535 = 0.445). 
The difference of 0.445 index points represented approximately 9.6 
basis points based on the S&P 500 Index closing price of 461.79.<SUP>34

    \34\Note: 0.445/461.79 = .00096 or .096%, which is 9.6 basis 
points.
---------------------------------------------------------------------------

    WFITC compared the cost of 9.6 basis points to transact the EFP 
with the Hourly Plan to the estimate of approximately 30 basis points 
to execute the proposed transaction in the open market, and concluded 
that there was an advantage of 20.4 basis points to transacting the EFP 
with the Hourly Plan (or approximately $1,535,445). WFITC believed that 
a projected savings of 20.4 basis points for the EFP transaction was a 
conservative estimate of the advantages for the Salaried Plan because, 
in establishing the cost estimates for the open market alternative, 
WFITC had assumed a low commission rate of $.01 per share and had 
assumed no market impact or opportunity costs for open market trading. 
Thus, WFITC believed that 20.4 basis points would be the minimum 
advantage to transacting the EFP with the Hourly Plan.
    13. WFITC determined that it would permit the Salaried Plan to 
engage in an EFP only if the price determination methodology was fair 
to the Salaried Plan, was in the best interests of the Salaried Plan 
and was consistent with general market standards. In this regard, WFITC 
represents that it was involved in the EFP transaction, including the 
pricing determinations that would be made, throughout the proceedings. 
For example, prior to the consummation of the transaction, WFITC 
determined along with GMIMCo the broker-dealers from which bids should 
be solicited.
    WFITC reviewed the information that was delivered to these brokers 
as to the nature of the securities portfolios to be transacted as part 
of the EFP. Additionally, WFITC performed an analysis of the portfolio, 
using analytic software provided by BARRA, an independent investment 
technology firm. This analysis provided WFITC with the correlation 
between the securities in the portfolio and the S&P 500 futures 
contracts.
    WFITC and GMIMCo each determined independently that a single 
broker--Broker-Dealer A--had quoted both the highest bid and the lowest 
offer of any of the brokers who provided EFP quotations. Specifically, 
Broker-Dealer A bid to sell the stocks at the closing price of the S&P 
500 Index and buy the futures at a discount of 2.37 S&P 500 Index 
points below the closing value of the S&P 500 Index. Since the other 
brokers had bid larger discounts to buy the futures, Broker-Dealer A's 
bid was the best price from the prospective of the Salaried Plan. As 
noted above in the discussion involving GMIMCo, Broker-Dealer A had 
also offered to buy the stocks at the S&P 500 Index closing price and 
sell the futures at a premium of 1.86 S&P 500 Index points, or 
approximately 40 basis points above the closing price of the S&P 500 
Index. Since no other broker had offered to sell futures at a lower 
premium relative to the index, Broker-Dealer A's offer price was also 
best from the perspective of the Hourly Plan.
    WFITC determined that the Salaried Plan's transacting the EFP with 
the Hourly Plan at the midpoint between Broker-Dealer A's bid price and 
offered price was better than trading in an EFP directly with Broker-
Dealer A at its bid price. Specifically, by trading with the Hourly 
Plan, the Salaried Plan bought stocks at the closing price of the S&P 
500 Index and sold futures at a discount of 0.255 S&P 500 Index points, 
or approximately 5 basis points below the [[Page 13472]] closing price 
of the S&P 500 Index.<SUP>35 If the Salaried Plan had traded with 
Broker-Dealer A directly, it would have bought stocks at the identical 
price that was transacted via the EFP (i.e. the closing price of the 
S&P 500 Index). However, the Salaried Plan would have sold futures to 
Broker-Dealer A at a discount of 2.37 S&P 500 Index points, or 
approximately 51 basis points below the value of the S&P 500 
Index.<SUP>36 Thus, the price for selling the futures would have been 
46 basis points lower than the price the Salaried Plan received in the 
EFP transaction with the Hourly Plan.

    \35\Note: 0.255/461.79 = .0005 or .05%.
    \36\Note: 2.37/461.79 = .0051 or .51%.
---------------------------------------------------------------------------

    WFITC determined that the price determination methodology was fair 
to the Salaried Plan, was in the best interests of the Salaried Plan, 
and was consistent with general market standards, because the 
methodology included a thorough exploration of EFP prices in the 
marketplace. WFITC states that the EFP price achieved for the Salaried 
Plan was at least as favorable as any price the Plan could have 
received from an independent broker-dealer capable of executing the 
transaction on November 30, 1993.
    14. In summary, the applicant represents that the transaction met 
the statutory criteria contained in section 408(a) of the Act because: 
(a) The terms of the EFP were at least as favorable to both the 
Salaried Plan and the Hourly Plan as the terms which either Plan could 
have received in an arm's-length transaction involving an unrelated 
party; (b) each Plan received a price in the EFP transaction which was 
equal to the midpoint between the highest independent bid and lowest 
independent offer for buying and selling the futures involved, based on 
EFP quotations obtained from independent broker-dealers capable of 
engaging in such an EFP at the time of the transaction; (c) WFITC, as 
an independent fiduciary for the Salaried Plan, determined that an EFP 
with the Hourly Plan was in the best interests of the Salaried Plan and 
its participants and beneficiaries; (d) WFITC monitored the EFP 
transaction and took appropriate actions necessary to safeguard the 
interests of the Salaried Plan; (e) GMIMCo, as fiduciary for the Hourly 
Plan, determined that an EFP with the Salaried Plan was in the best 
interests of the Hourly Plan and its participants and beneficiaries; 
and (f) GMIMCo monitored the EFP transaction and took appropriate 
actions necessary to safeguard the interests of the Hourly Plan.

Notice to Interested Persons

    The applicant states that notice to interested persons shall be 
made within twenty (20) business days following the publication of the 
proposed exemption in the Federal Register. This notice shall include a 
copy of the notice of proposed exemption (the Proposal) as published in 
the Federal register and a supplemental statement (see 29 CFR 
2570.43(b)(2)) which informs interested persons of their right to 
comment on and/or request a hearing with respect to the proposed 
exemption. The applicant will post a copy of the Proposal and the 
supplemental statement in areas customarily used for notices to 
employees regarding employee benefit and labor relations matters at GMC 
locations where employees covered by the Plans are employed. The 
applicant will send to each of the unions representing such employees a 
copy of the Proposal and will request that each union post these 
materials at local union halls within twenty (20) business days of the 
publication of the Proposal in the Federal Register. Finally, the 
applicant will send a copy of the Proposal and supplemental statement 
to the presidents (or comparable officers) of the approximately 230 GMC 
retiree organizations and clubs as a reasonable means of providing 
notice to Plan participants who are retirees of GMC or an affiliate.
    Comments or requests for a public hearing must be received by the 
Department within sixty (60) days following the publication of the 
Proposal in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department at 
(202) 219-8194. (This is not a toll-free number.)

Law Offices of Bryson and Berman, P.A. Employees' Pension Plan and 
Trust (Pension Plan) and Law Offices of Bryson and Berman, P. A. 
Employees' Profit Sharing Plan and Trust (P/S Plan, Collectively; the 
Plans) Located in Miami, Florida

[Application Nos. D-09884 and D-09885]

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 by the two individual 
accounts in the Plans of Rodney W. Bryson of two adjacent parcels of 
vacant land (Lots 3 and 4, collectively; the Lots) to Mr. Rodney Bryson 
(Mr. Bryson), a trustee of the Plans and a party in interest with 
respect to the Plans; provided that the following conditions are 
satisfied:
    (a) the proposed sale will be a one-time cash transaction;
    (b) the Accounts in this transaction will receive the current fair 
market value of the Lots established at the time of the sale by an 
independent qualified appraiser; and
    (c) the Accounts will pay no expenses associated with the sale.

Summary of Facts and Representations

    1. The Plans were established in 1976 and have a total of three 
participants, including Mr. Bryson and Mark S. Berman (Mr. Berman). Mr. 
Bryson and Mr. Berman are the trustees of the Plans and are also the 
sole stockholders of Law Offices of Bryson and Berman, P.A. (the 
Employer). The Plans are a money purchase pension plan and a profit 
sharing plan. The Plans provide for individually directed accounts. As 
of June 30, 1994, the Pension Plan and the P/S Plan had $386,380 and 
$487,419 in net assets, respectively. As of the same date, Mr. Bryson's 
account in the Pension Plan (P/P Account) and the P/S Plan (P/S 
Account, collectively; the Accounts) had $175,201 and $214,134 in net 
assets, respectively. The Employer is a professional association 
incorporated in the State of Florida, which specializes in trial law.
    2. The Lots were originally acquired as follows. Pursuant to the 
direction of Mr. Bryson, on December 14, 1989, the Accounts purchased 
twenty acres of vacant land located in Broward County, Ft. Lauderdale, 
Florida, from Suzanne F. Sinaiko, an unrelated third party for a total 
consideration of $375,000. On the same day, the Accounts sold one half 
of the twenty acres to Richard French and Mrs. Claudia French (the 
Frenchs), unrelated third parties, for $187,500. As a result, at the 
close of business on December 14, 1989, the Accounts owned ten acres of 
vacant unimproved land (the Land) in Broward County, Ft. Lauderdale, 
Florida. The applicant represents that at the time of acquisition, the 
Lots represented 38% of the P/P Account and 38% of the P/S 
Account.<SUP>37

    \ 37\The Department expresses no opinion as to whether the 
Plans' acquisition and holding of the Lots in the Accounts violated 
any provision of part 4 of title I of the Act. [[Page 13473]] 
---------------------------------------------------------------------------

    3. Consequently, the Accounts, in conjunction with the Frenchs, 
made certain improvements to the Land. These improvements were made by 
independent third party companies, and consisted of platting the Land, 
constructing an access road, providing fill and landscaping. In this 
regard, it is represented that the P/P Account paid $16,628 in capital 
improvement costs, and the P/S Account paid $20,322 in capital 
improvement costs. The Land was platted into two residential lots of 
approximately 5 acres each (Lots 3 and 4). The Lots were allocated 
among the Accounts as follows. The P/P Account owned 45% of Lot 3 and 
Lot 4 (two 45% Interests), and the P/S Account owned 55% of Lot 3 and 
Lot 4 (two 55% Interests, collectively; Four Interests).
    4. Lot 3 was appraised on April 19, 1994 (the Appraisal), by Thomas 
R. Wachtstetter A.S.A, I.F.A., an independent general appraiser 
certified in the State of Florida (Mr. Wachtstetter). In the Appraisal, 
Mr. Wachtstetter stated that Lot 3 contains 4.98 acres and is vacant 
land. In establishing the fair market value of Lot 3, Mr. Wachtstetter 
relied on the sales comparison approach to value and determined that 
the fair market value of Lot 3 was $135,000. On October 26, 1994, Mr. 
Wachtstetter submitted an addendum to the Appraisal (the Addendum), 
which addressed the fair market value of Lot 4. In the Addendum he 
stated that all information contained in the Appraisal of Lot 3 is also 
applicable in estimating the value of Lot 4. Specifically, Mr. 
Wachtstetter represented that Lot 3 and Lot 4 are adjacent, nearly the 
same size, and neither Lot has any apparent easements, encroachments or 
environmental concerns which would adversely affect the value of that 
Lot. Mr. Wachtstetter concluded that the estimated value of each Lot is 
$135,000 each, for an aggregate fair market value of $270,000. Mr. 
Wachtstetter also addressed the assemblage value of Lots 3 and 4 as a 
ten acre parcel, and concluded that the aggregate fair market value of 
the Lots does not exceed the fair market value of five acre Lot 3 or 
Lot 4, if purchased separately. The applicant represents that the Lots 
are currently not encumbered by any debt, and that the Lots were never 
used by any related persons, and are not adjacent to other real 
property owned by Mr. Bryson or other parties in interest or related 
persons. Since original acquisition, the Lots have remained vacant and 
unutilized by any person, and have yielded no income to the Accounts.
    5. Mr. Bryson now desires to purchase the Lots from the Accounts in 
a one time cash transaction for their current aggregate fair market 
value in order to build a personal residence. Once the transaction is 
consummated, the P/S Account will receive fifty five percent (55%) of 
the sale proceeds and the P/P Account will receive forty five percent 
(45%) of the sale proceeds. It is represented that the proposed 
transaction is in the best interest of the Accounts because the 
transaction will enable the Accounts to divest of a non-income 
producing asset which constitutes a relatively high percentage of the 
Accounts' assets, and will provide the Accounts with liquidity. The 
transaction is protective of the Accounts because as a result of the 
sale the Accounts will receive the current fair market value of the 
Lots, and the Accounts will incur no expenses as a result of the 
proposed transaction. The applicant maintains that a real estate broker 
has been attempting to sell the Lots since the summer of 1993, but the 
Accounts received no reasonable offers.
    6. In summary, the applicant represents that the transaction 
satisfies 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 one-time cash transaction;
    (b) The Accounts will receive the current fair market value of the 
Lots established at the time of the sale by an independent qualified 
appraiser;
    (c) The Accounts will pay no expenses associated with the sale; and
    (d) The sale will enable the Accounts to diversify its investment 
portfolio and will provide the Accounts with liquidity.

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

Welborn Clinic Employees' Retirement Plan (the Plan) Located in 
Evansville, Indiana

[Application No. D-09890]

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 by the Plan of certain 
improved real property (the Property) located in Evansville, Indiana, 
to WANC Leasing Company (WANC), a party in interest with respect to the 
Plan; provided the following conditions are satisfied:
    (A) All terms and conditions of the transaction are no less 
favorable to the Plan than those which the Plan could obtain in an 
arm's-length transaction with an unrelated party;
    (B) The Plan receives a cash purchase price of no less than the 
greater of (1) $8,555,000, or (2) the Property's fair market value as 
of the sale date; and
    (C) The Plan does not incur any expenses with respect to the 
transaction.

Summary of Facts and Representations

    Introduction: The Plan owns the Property, which is improved real 
property leased to and occupied by the Plan sponsor, Welborn Clinic 
(the Employer), as its principal place of business. The Employer 
requires substantial improvements of the Property to accommodate 
updated and modernized operations, but the Plan trustee has determined 
that it is not in the best interests of the Plan to finance such 
improvements. Instead, WANC (a partnership owned by principals of the 
Employer) proposes to purchase the Property from the Plan, complete the 
necessary improvements, and lease the Property to the Employer. The 
exemption proposed herein would enable the Plan's sale of the Property 
to WANC as described below.
    1. The Plan is a defined contribution plan with 643 participants 
and total net assets of $55,721,511 as of December 31, 1993. The 
Employer is a multi-specialty group medical practice with its principal 
place of business situated in the Property, located at 421 Chestnut 
Street in the downtown sector of Evansville, Indiana. The Employer is 
an Indiana business trust which is controlled by the physicians who 
hold staff memberships with the Employer. The trustee of the Plan is 
the Citizens National Bank of Evansville (the Trustee), which 
represents itself to be independent of and unrelated to the Employer, 
except as Plan Trustee. WANC is an Indiana general partnership in which 
all of the 65 general partners are staff member physicians of the 
Employer.
    2. The Property is owned by the Plan and leased to the Employer 
(the Employer Lease) pursuant to an individual administrative 
exemption, PTE 89-4 (54 FR 2241, January 19, 1989). The rights of the 
Plan with respect to the Property, including the Employer Lease and PTE 
89-4, are represented for all purposes by the Trustee. The Property is 
a 4.437 acre [[Page 13474]] parcel of land located in downtown 
Evansville, Indiana, and is improved with a three-level, 99,500 square 
foot medical office building (the Main Building) which constitutes the 
main facility for the Employer's medical clinic (the Clinic). The 
entire Clinic consists of three components: (1) the Main Building, (2) 
a nearby medical facility building owned by WANC (the WANC Building) 
and leased to the Employer, and (3) a two-story structure (the 
Connector Building), owned by WANC and leased to the Employer, 
connecting the Main Building with the WANC Building. Pursuant to an 
additional administrative exemption, PTE 93-24 (58 FR 8991, February 
18, 1993), the Employer Lease was modified in 1993 to enable an 
exchange of land parcels between the Plan and WANC in connection with 
WANC's construction of the Connector Building. As a result of the 
property exchange covered by PTE 93-24, the Plan acquired a parking lot 
(the New Parking Lot) adjacent to the Main Building, and WANC acquired 
a parcel of property abutting both the Main Building and the WANC 
Building, on which it constructed the Connector Building. The Connector 
Building and the land underlying it are owned by WANC, leased to the 
Employer, and utilized between the Main Building and the WANC Building 
as the main entrance and reception area for the Clinic. Only the Main 
Building is located on the Property owned by the Plan, which includes 
the New Parking Lot.
    The Trustee represents that the Employer has complied with, and 
continues in compliance with, all terms and conditions of the Employer 
Lease and the individual exemptions, PTE 89-4 and PTE 93-24.
    3. The Employer represents that with the aid of consultants, it has 
determined that the Main Clinic is in need of at least $3,000,000 of 
expansion and renovation work in order to satisfy the Employer's needs. 
As a result of WANC's 1993 construction of the Connector Building and a 
recent renovation of the WANC Building, those two components of the 
Clinic are new, updated medical facilities. However, the Employer 
represents that the Main Building remains in need of substantial 
refurbishing and refitting to provide updated, modernized workspace for 
surgery, urology, oncology, hematology, dermatology, allergy, ear/nose/
throat, eyecare, the Employer's health maintenance organization, and 
administrative/business offices. The Trustee is unwilling to commit 
Plan assets to finance the necessary renovations of the Main Building 
because the Trustee considers such expenses to be the obligation of the 
Employer, and because the Trustee finds that the participants and 
beneficiaries would receive very little short-term or intermediate-term 
benefit from such additional investment of capital in the Clinic. The 
Employer, as tenant and occupant of the Main Building, is unwilling to 
bear the expense of the renovations because the improvements to the 
Main Building would eventually increase the Employer's rent under the 
Employer Lease, assuming such improvements would increase the 
Property's fair market value. The Employer represents that even if it 
were willing to finance renovations currently required, it is likely a 
similar problem would arise again in the future, whereby the Main 
Building would require renovations and the Trustee, on behalf of the 
Plan, and the Employer would each be unwilling to finance the 
improvements. The principals of WANC, however, have expressed a 
willingness to finance the necessary renovations of the Main Building 
pursuant to a proposed purchase of the Property from the Plan and its 
lease to the Employer.
    4. Accordingly, the Trustee, the Employer and WANC propose that the 
Plan sell the Property to WANC, and are requesting an exemption for the 
sale transaction. The proposed sale transaction will proceed in 
accordance with a written agreement (the Agreement) executed between 
the Trustee, on behalf of the Plan, and WANC after the exemption 
proposed herein, if granted, is published in the Federal Register.
    Under the Agreement, the Plan will sell the Property, consisting of 
the Main Building, the underlying land, and the New Parking Lot, for a 
cash purchase price of no less than $8,555,000 (the Minimum Purchase 
Price). In an appraisal of the Property effective June 24, 1994, Brian 
D. Shelton and William R Bartlett II, MAI, SRA (Shelton and Bartlett), 
determined that the fair market value of the Property, inclusive of the 
Employer Lease, was $8,250,000. Shelton and Bartlett are professional 
real estate appraisers with Appraisal Company, Inc. in Evansville, 
Indiana. In another appraisal of the Property, inclusive of the 
Property, C. David Matthews (Matthews) determined that the Property had 
a fair market value of $8,860,000 as of December 31, 1993. The Minimum 
Purchase Price represents the mean of the two appraisals. Pursuant to 
the Agreement, the Property will be reappraised by Matthews and 
Bartlett (the Reappraisals) no earlier than the date of the Agreement 
and no later than 30 days after the date of the Agreement. If the mean 
of the Reappraisals is higher than $8,555,000, then the purchase price 
of the Property shall be the mean of the Reappraisals. In no event will 
the purchase price be lower than the Minimum Purchase Price.
    5. The Trustee represents that the agreement to set the purchase 
price for the Property at no less than the Minimum Purchase Price 
resulted from arm's-length negotiations between the Trustee and WANC 
over a two-month period. The Trustee initially proposed a sale of the 
Property to WANC for a purchase price of $8,860,000, consistent with 
Matthews' 1993 appraisal. The Trustee states that WANC considered this 
price to be excessive, in light of the more recent appraisal by Shelton 
and Bartlett, and WANC counter-proposed a purchase price of $8,250,000. 
The Trustee represents that the two appraisals were reviewed and 
analyzed by the Trustee's appraisal expert, Darrell Woehler (Woehler), 
who noted differences in the approach of the two appraisers and 
determined that substantial subjectivity could be expected among such 
appraisals. Woehler noted that Matthews had considered the current rent 
under the Employer Lease to be in excess of fair market rent, whereas 
Shelton and Bartlett had found the current rent to be equivalent to 
fair market rent. After Woehler's review, the Trustee continued 
discussions with representatives of WANC, until both parties agreed on 
the Minimum Purchase Price and the Reappraisals. The Trustee represents 
that the Plan's depreciated net cost basis of the Property was 
$3,751,070.42 as of December 31, 1993.
    6. The Trustee represents that after careful consideration of all 
facts and circumstances surrounding the proposed sale of the Property 
to WANC, it has determined that it will be in the best interests and 
protective of the participants and beneficiaries of the Plan. The 
Trustee states that it has determined that the proposed purchase price 
of at least $8,555,000 is not less than the fair market value of the 
Property, and the Reappraisals ensure that the Plan will benefit from 
any increase in fair market value as of the date of the sale. The 
Trustee states that although the Plan has benefitted from favorable 
returns on the Property, it is time for the Plan to dispose of the 
Property and invest in other assets, in light of the pressing need for 
renovations and modernization of the Property's improvements.
    The Trustee notes that due to the nature of the Property as a 
component [[Page 13475]] in a three-part medical facility, the other 
two parts of which are owned by WANC, it would be very difficult to 
find a buyer other than WANC willing to offer a purchase price as 
favorable to the Plan as that offered by WANC.
    7. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 408(a) of the Act for the 
following reasons: (1) The Plan will receive a cash purchase price of 
no less than the Minimum Purchase Price, subject to possible upward 
adjustment pursuant to the Reappraisals, which the Trustee has 
determined to be no less than the fair market value of the Property; 
(2) The Plan will incur no costs or expenses relating to the 
transaction; (3) The Trustee has determined that retention of the 
Property would not be in the best interests of the Plan due to the 
necessity of renovation expenses; and (4) The Trustee has determined 
that the Plan is unlikely to secure an unrelated buyer willing to pay a 
purchase price for the Property as favorable to the Plan as the 
proposed purchase price under the Agreement.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department, 
telephone (202) 219-8881. (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 of 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 8th day of March, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration Department of Labor.
[FR Doc. 95-6118 Filed 3-10-95; 8:45 am]
BILLING CODE 4510-29-P