Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18421

APPENDIX—Continued

[Petitions Instituted on 04/01/96]

TA–W Subject firm (petitioners) Location Date of

petition Product(s)

32,141 ..... Spartan Mills, Whitney (Comp) ..................... Spartanburg, SC ......... 03/11/96 Yarn.

32,142 ..... Stephenson Enterprises (Comp) ................... Folkston, GA ............... 03/19/96 Dress Pants and Shorts.

32,143 ..... Sun Belt Fixtures, Inc (Wkrs) ........................ El Paso, TX ................. 03/06/96 Paint Clothes Racks.

32,144 ..... Plastic Manufacturing Co (Wkrs) .................. Dallas, TX ................... 03/22/96 Styrene Drinkware and Melamine Dinnerware.

32,145 ..... Tampella Power Corp. (Comp) ..................... Williamsport, PA .......... 02/26/96 Municipal Solid Waste Boilers.

32,146 ..... TEX–MEX Sportswear (Wkrs) ...................... El Paso, TX ................. 03/14/96 Ladies’ and Men’s Pants, Shorts.

32,147 ..... Terminal Fabrication, Inc (Comp) ................. Freeport, IL ................. 02/28/96 Terminal Blocks for HVAC Industry.

32,148 ..... Ultima Fashions, Inc (Wkrs) .......................... Clifton, NJ ................... 02/02/96 Ladies’ Jackets.

32,149 ..... Vanity Fair Mills (Wkrs) ................................. McAllen, TX ................. 03/15/96 Bras, Panties, Girdles.

32,150 ..... Wave Tek Corp (Wkrs) ................................. San Diego, CA ............ 03/15/96 Multimeters, Portable Generators.

32,151 ..... Western Publishing Co (UAW) ..................... Racine, WI .................. 02/17/96 Books–Printed Material.

32,152 ..... Weyerhaeuser Western Lum. (Wkrs) ........... Kamiah, ID .................. 03/01/96 Lumber.

32,153 ..... Zenith Electronics Corp (Wkrs) ..................... McAllen, TX ................. 03/20/96 Televisions.

32,154 ..... Eastland Shoe Mfg. Corp. (Wkrs) ................. Freeport, ME ............... 01/16/96 Men’s, Women’s and Children’s Casual

Shoes.

[FR Doc. 96–10200 Filed 4–24–96; 8:45 am]

BILLING CODE 4510–30–M

Pension and Welfare Benefits

Administration

[Application No. D–09844, et al.]

Proposed Exemptions; Jacor

Communications Inc. Retirement Plan

(the Plan)

AGENCY: Pension and Welfare Benefits

Administration, Labor

ACTION: Notice of proposed exemptions.

SUMMARY: This document contains

notices of pendency before the

Department of Labor (the Department) of

proposed exemptions from certain of the

prohibited transaction restrictions of the

Employee Retirement Income Security

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing

Requests

Unless otherwise stated in the Notice

of Proposed Exemption, all interested

persons are invited to submit written

comments, and with respect to

exemptions involving the fiduciary

prohibitions of section 406(b) of the Act,

requests for hearing within 45 days from

the date of publication of this Federal

Register notice. Comments and request

for a hearing should state: (1) the name,

address, and telephone number of the

person making the comment or request,

and (2) the nature of the person’s

interest in the exemption and the

manner in which the person would be

adversely affected by the exemption. A

request for a hearing must also state the

issues to be addressed and include a

general description of the evidence to be

presented at the hearing. A request for

a hearing must also state the issues to

be addressed and include a general

description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and

request for a hearing (at least three

copies) should be sent to the Pension

and Welfare Benefits Administration,

Office of Exemption Determinations,

Room N–5649, U.S. Department of

Labor, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210. Attention:

Application No. stated in each Notice of

Proposed Exemption. The applications

for exemption and the comments

received will be available for public

inspection in the Public Documents

Room of Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–5507, 200 Constitution

Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions

will be provided to all interested

persons in the manner agreed upon by

the applicant and the Department

within 15 days of the date of publication

in the Federal Register. Such notice

shall include a copy of the notice of

proposed exemption as published in the

Federal Register and shall inform

interested persons of their right to

comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The

proposed exemptions were requested in

applications filed pursuant to section

408(a) of the Act and/or section

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

accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR

32836, 32847, August 10, 1990).

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978 (43 FR 47713, October 17, 1978)

transferred the authority of the Secretary

of the Treasury to issue exemptions of

the type requested to the Secretary of

Labor. Therefore, these notices of

proposed exemption are issued solely

by the Department.

The applications contain

representations with regard to the

proposed exemptions which are

summarized below. Interested persons

are referred to the applications on file

with the Department for a complete

statement of the facts and

representations.

Jacor Communications Inc. Retirement

Plan (the Plan), Located in Cincinnati,

Ohio

[Application No. D–09844]

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) and 407(a) of the Act and the

sanctions resulting from the application

of section 4975 of the Code, by reason

of section 4975(c)(1) (A) through (E) of

the Code shall not apply to (1) the past

receipt by the Plan of certain stockpurchase warrants (the Warrants)

pursuant to the restructuring of Jacor

Communications, Inc. (Jacor), excluding

that portion of Warrants which was

acquired by the Plan’s Qualified

Matching Contribution Account (the

QMCA, as described below); (2) the past

and proposed future holding of the

Warrants by the Plan; and (3) the
18422 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

1The Plan has special provisions which provide

increased investment options to Plan participants

once they attain age 55.

disposition or exercise of the Warrants

by the Plan; provided that the following

conditions are satisfied:

(A) With respect to all participant

accounts other than the QMCA, the

Warrants were acquired pursuant to

Plan provisions for individuallydirected investment of such accounts;

(B) The Plan’s receipt and holding of

the Warrants occurred in connection

with the restructuring of Jacor and the

Warrants were made available to all

shareholders of common stock of Jacor;

(C) The Plan’s receipt and holding of

the Warrants resulted from an

independent act of Jacor as a corporate

entity, and all holders of the common

stock of Jacor, including the Plan, were

treated in the same manner with respect

to the restructuring of Jacor; and

(D) With respect to Warrants allocated

to the QMCA, the authority for all

decisions regarding the holding,

disposition or exercise of the Warrants

by the Plan will be exercised by an

independent fiduciary acting on behalf

of the Plan, to the extent that such

decisions have not been passed through

to Plan participants; and

(E) With respect to all other accounts

(described below), the decisions

regarding the holding, disposition or

exercise of the Warrants have been, and

will continue to be made in accordance

with Plan provisions for individuallydirected investment of participant

accounts, by the individual Plan

participants whose accounts in the Plan

received Warrants in connection with

the restructuring.

EFFECTIVE DATE: This exemption, if

granted, will be effective as of January

11, 1993, except with respect to the

Warrants held by the QMCA. With

respect to those Warrants, the

exemption, if granted, will be effective

July 26, 1995.

Summary of Facts and Representations

1. Jacor, the Plan sponsor, has its

principal place of business in

Cincinnati, Ohio. Jacor owns and

operates radio stations across the United

States and is the parent company of an

affiliated group of corporations. The

Plan is a defined contribution employee

benefit plan intended to satisfy the

requirements of sections 401(a) and

401(k) of the Code. The Plan provides

for individual participant accounts (the

Accounts) and participant-directed

investment of the Accounts among five

investment funds, one of which invests

exclusively in common stock of Jacor

(the Jacor Securities Fund). Participants

can also choose to invest in the Money

Market Fund (replaced by the Stable

Asset Fund as of April 1, 1994), the

Bond Fund (replaced by the

International Fund as of April 1, 1994),

the Balanced Fund and the Growth

Fund. The various funds can be

described as follows:

(a) Money Market Fund, which invests

exclusively in short-term U.S. Treasury

obligations. The objective of this Fund

is to provide stability of principal and

current income consistent with that

stability;

(b) Bond Fund, which invests in U.S.

government and federal agency

securities along with high quality

corporate obligations. The objective of

this Fund is to provide more income

than short-term obligations, but greater

stability than long-term bonds;

(c) Balanced Fund, which invests in

equity securities issued by a broad range

of companies along with corporate and

government bonds. The objective of this

Fund is to provide a balance between

the growth potential of stock and the

current income of bonds;

(d) Growth Fund, which invests in

equity securities issued by a broad range

of companies. The objective of this

Fund is long-term growth;

(e) Jacor Securities Fund, which

invests in equity securities issued by

Jacor;

(f) Stable Asset Fund, which invests

in public and private debt securities and

mortgage loans. This Fund provides a

fixed rate of return that is adjusted

annually; and

(g) International Fund, which invests

in equity securities of foreign

corporations. The objective of this Fund

is to provide long-term growth with

international diversification.

2. Each participant may have as many

as four Accounts under the Plan, known

as the Elective Deferral Account, the

Qualified Non-Elective Contribution

Account, the QMCA and the Rollover

Account. As of December 31, 1993,

there were 416 participants in the Plan,

all of whom had at least one Account

with an investment in the Jacor

Securities Fund. As of that same date,

the Plan held total assets of

approximately $3,390,755. The trustees

of the Plan as of January 8, 1993, were

Terry S. Jacobs, R. Christopher Weber

and Jon M. Berry, all of whom were

officers and shareholders of Jacor. Terry

S. Jacobs resigned as trustee and officer

of Jacor effective June 7, 1993 and as of

the same date was replaced by Randy

Michaels.

3. Investment Direction.

In general, all contributions (and

related earnings) allocated to any of the

Accounts on or before December 31,

1991 are invested in the Jacor Securities

Fund. Contributions (and related

earnings) allocated on or after January 1,

1992 to any Account other than the

QMCA are subject to participantdirected investment. In general, all

contributions (and related earnings)

allocated to the QMCA on or after

January 1, 1992 continue to be invested

in the Jacor Securities Fund.1

In 1995, participants were given the

authority to transfer all contributions

(and related earnings) allocated to the

QMCA and all other pre-1992

contributions and earnings to any of the

other investment funds available under

the Plan, in accordance with the

following schedule:

(1) First Quarter of 1995—up to 25% of

formerly restricted funds

(2) Second Quarter of 1995—up to 50%

of formerly restricted funds

(3) Third Quarter of 1995—up to 75% of

formerly restricted funds

(4) Fourth Quarter of 1995—up to 100%

of formerly restricted funds

4. Jacor represents that it entered into

a restructuring agreement with Zell/

Chilmark in September, 1992. Zell/

Chilmark is a Delaware limited

partnership controlled by Samuel Zell

and David Schulte. Zell/Chilmark was

formed to invest in and provide capital

and management support to companies

that are engaged in significant

recapitalizations or corporate

restructuring. At the time of Jacor’s

restructuring, Zell/Chilmark had capital

commitments or investments in excess

of $1 billion. The Board of Directors of

Jacor selected Zell/Chilmark to work

with Jacor’s creditors to formulate a

restructuring plan. Zell/Chilmark was

chosen because Jacor’s Board believed

that it would be able to raise the cash

necessary to make a substantial equity

investment and because of its

experience in working with creditor

groups.

5. The restructuring consisted of an

equity infusion of approximately $6

million by Zell/Chilmark and was

accomplished by way of a merger of a

corporation wholly owned by Zell/

Chilmark into Jacor. As part of this

process, Zell/Chilmark acquired

approximately 91.44% of Jacor’s

outstanding Common Stock. Upon

approval by the Federal

Communications Commission of the

transfer of control of Jacor to Zell/

Chilmark on April 23, 1994, Jacor’s

Class B Common Stock automatically

converted to Class A Common Stock

(the combination of the 2 classes of

stock is now referred to as the New

Common Stock). As a result of the

restructuring, on January 11, 1993, all

shareholders not electing to receive
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18423

2The applicant explains that, although Plan

participants had no authority over the investment

of pre-1992 contributions, they were given the

authority to make decisions regarding the

acquisition of employer securities for all funds in

their Accounts other than the QMCA.

3The Department is not providing any exemptive

relief for any prohibited transactions that may have

arisen in connection with the Plan’s ability to

acquire such additional shares of New Common

Stock.

4Zell/Chilmark and creditors who retained New

Common Stock in the debt restructuring were also

given the opportunity to purchase stock in the

Additional Rights Offering.

5As part of the restructuring, 15,774 shares of

Jacor common stock were tendered by Plan

participants for cash. The remaining 850,740 shares

were converted to New Common Stock in the

restructuring.

6The Bank represents that it would only let the

Warrants expire without exercise if they had no

value, which could occur if the value of the New

Common Stock drops below the exercise price of

the Warrants ($8.30 per share) prior to the

expiration of the Warrants on January 14, 2000. As

of February 20, 1996, the value of the New Common

Stock was $21.25. As a result, it is not likely that

the Warrants would be allowed to expire without

exercise. In any case, it is not anticipated that the

Bank would be responsible for that decision since

all investment authority in connection with the

Warrants is currently with Plan participants.

cash, including the Plan, received for

each share of Common Stock held

.0423618 shares of New Common Stock

and .1611234 Warrants to purchase New

Common Stock. The New Common

Stock and the Warrants trade on the

National Association of Securities

Dealers Automated Quotation

(NASDAQ) National Exchange. The

Warrants are exercisable at $8.30 per

share and expire on January 14, 2000.

Jacor represents that the decision as to

whether to keep the New Common

Stock and Warrants held in the Jacor

Securities Fund or to sell those

securities for cash was passed through

to Plan participants for all Accounts

under the Plan other than the funds in

the QMCA.2 Decisions regarding

securities held in the QMCA were made

by the Trustees.

6. Along with the option of receiving

New Common Stock and Warrants,

shareholders who held shares as of

November 27, 1992, were given the right

to purchase additional New Common

Stock (the Additional Rights Offering) at

$5.74 per share.3 Holders of New

Common Stock could purchase 0.1237

additional shares of New Common

Stock for each share of New Common

Stock held immediately after the merger

of the subsidiary of Zell/Chilmark with

Jacor and after certain stock sales by

creditors of Jacor (who had been issued

stock in exchange for debt obligations)

to Zell/Chilmark.4 Pursuant to the

Additional Rights Offering, Jacor sold a

total of 1,000,000 shares of New

Common Stock. The Plan Trustees made

the decision, on behalf of the Plan, to

purchase 4,457 shares of New Common

Stock in the Additional Rights Offering.

7. Since the Warrants acquired by the

Plan fail to satisfy the definition of

‘‘qualifying employer securities’’

contained in section 407(d)(5) of ERISA,

the applicant is aware of the fact that

prohibited transactions have occurred in

violation of the Act. Accordingly, Jacor

represents that within 90 days of the

grant of this proposed exemption, Jacor

will file Forms 5330 with the Internal

Revenue Service and will pay all

applicable excise taxes due with respect

to past prohibited transactions not

covered by this exemption.

8. Under the restructuring described

above, the Plan received 36,038 shares

of New Common Stock and 137,074

Warrants. Prior to the restructuring,

there were 9,004,093 shares of Jacor

common stock, of which 866,514

shares, 5 or approximately 9.6%, were in

the Plan. After the restructuring, there

were 9,004,093 shares of New Common

Stock, so that the Plan held less than

.5% of that amount. Jacor represents

that, at the time the 137,074 Warrants

were issued to the Plan, they

represented 2.6% of the assets of the

Plan. Since that time, 11,290 of the

Warrants have been distributed to

terminated participants. As of December

31, 1993, the remaining 125,784

Warrants represented 22.6% of the

assets of the Plan. This increase is due

to the increase in the value of each

Warrant from $.20 on January 11, 1993

to $6.09 on December 31, 1993. Jacor

represents that the decision of whether

to hold, sell, or exercise the Warrants for

all Accounts under the Plan other than

the QMCA were passed through to the

Plan participants.

9. To the extent that Plan participants

do not have investment authority over

the Warrants, decisions regarding

Warrants held in the QMCA will be

made by an independent fiduciary

retained specifically for that purpose.

The Fifth Third Bank (the Bank) has

been retained as an independent

fiduciary to represent the interests of the

Plan with respect to all securities issued

by Jacor including the Warrants, except

to the extent that such investment

authority is being exercised by

participants in the Plan. At such time

that the participants in the Plan are

given full authority over all employer

securities held in the Plan, the Bank

states that it will no longer have any

investment authority under the terms of

its Trust Agreement. The Bank

represents that, as of February 23, 1996,

participants in the Plan have full

investment authority over employer

securities held by the Plan (see rep. 3,

above).

10. The Bank is a subsidiary of Fifth

Third Bancorp, Inc., a bank holding

company that is headquartered in

Cincinnati, Ohio. The Bank has been in

existence for over 100 years. The trust

department of the Bank has $6.6 billion

of assets under management, of which

$2.5 billion of assets is held by the Bank

as fiduciary of over 500 plans that are

subject to the Act. The Bank is not

related to Jacor.

11. The Bank represents that it is fully

aware of its duties and responsibilities

as a fiduciary under the Act. In fulfilling

its duties, the Bank reviewed the terms

and conditions of the Common Stock

and Warrants issued by Jacor and

reviewed the most recent financial

statements of Jacor and other material it

considered appropriate to determine the

financial condition of Jacor. Based on

this review, and a review of the current

market for the securities issued by Jacor,

the Bank concluded, as of July 26, 1995,

that it was currently in the best interest

of the Plan’s participants and

beneficiaries for the Plan to retain all

securities issued by Jacor that were

currently held by the Plan and that were

subject to the investment discretion of

the Bank.

12. The Bank represents that it will

continue to monitor the Plan’s holding

of those securities issued by Jacor that

are subject to the investment discretion

of the Bank. In exercising that discretion

as a fiduciary under the Act, the Bank

will on an on-going basis review all

relevant financial information related to

Jacor to determine whether the Plan

should continue to hold or should sell

the Jacor Common Stock and to

determine whether the Plan should

hold, sell or exercise the Warrants, or let

the Warrants expire without exercise.6

13. In summary, the applicant

represents that the transactions satisfy

the criteria of section 408(a) of the Act

for the following reasons: (a) the Plan’s

acquisition of the Warrants resulted

from an independent act of the

Employer; (b) with respect to all aspects

of the restructuring, all holders of the

Common Stock were treated in the same

manner, including the Plan; (c) all

decisions with respect to the Plan’s

acquisition, holding and control of the

Warrants were made by the individual

participants whose Accounts held

interests in the Jacor Securities Fund,

except with respect to the QMCA; (d)

with respect to the QMCA, the Bank, an

independent fiduciary reviewed the

investments as of July 26, 1995 and

determined that the Plan’s continued

holding of the employer securities was
18424 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

7For purposes of this proposed exemption,

reference to provisions of Title I of the Act, unless

otherwise specified, refer also to the corresponding

provisions of the Code.

8The Client Plans, the EAI Plan, the Harding Plan

and the Stockwood Plan are collectively referred to

herein as the Plans. In addition, the EAI Plan, the

Harding Plan and the Stockwood Plan are

collectively referred to herein as the Related Plans.

appropriate and in the Plan’s best

interest; and (e) the Bank continued to

monitor the holding of the employer

securities by the QMCA until such time

as Plan participants were given full

authority over the investment, and

determined whether the Plan should

hold, sell or exercise the Warrants or let

the Warrants expire without exercise.

FOR FURTHER INFORMATION CONTACT: Gary

H. Lefkowitz of the Department,

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

a toll-free number.)

EAI Partners, L.P. (EAI), Located in

Norwalk, CT

[Application No. D–10147]

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).7

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)(1)

(A) through (F) of the Code, shall not

apply, as of December 29, 1995, to the

in-kind transfer of assets of employee

benefit plans that are participantdirected account plans intended to

satisfy section 404(c) of the Act and as

to which EAI serves as a fiduciary (the

Client Plans), including a plan

established by EAI (the EAI Plan), as

well as two plans that are sponsored by

affiliates of EAI, namely, the Harding

Service Corporation et al. Profit Sharing

Plan and Trust (the Harding Plan) and

the Stockwood VII, Inc. 401(k) Plan (the

Stockwood Plan),8 that are held in the

Small Managers Equity Fund Trust

(SMEF) maintained by EAI in exchange

for shares of the EAI Select Managers

Equity Fund (the Fund), an open-end

investment company registered under

the Investment Company Act of 1940

(the ’40 Act) for which Evaluation

Associates Capital Markets, Inc.

(EACM), a wholly owned subsidiary of

EAI, acts as investment adviser, in

connection with the partial termination

of SMEF.

This proposed exemption is subject to

the following conditions:

(a) No sales commissions or other

fees, including any fees payable

pursuant to Rule 12b–1 of the ’40 Act

(the 12b–1 Fees), are paid by a Plan in

connection with the purchase of Fund

shares through the in-kind transfer of

SMEF assets.

(b) All of the assets of a Plan that are

held in SMEF are contributed by such

Plan in-kind to the Fund in exchange for

shares of such Fund. A Plan not electing

to invest in the Fund receives a

distribution of its allocable share of the

assets of SMEF either in cash or in-kind.

(c) Each Plan receives shares of the

Fund which have a total net asset value

that is equal in value to such Plan’s

allocable share of the assets of SMEF 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 1940 Act, as

amended, and the procedures

established by the Fund 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 in-kind

contribution of SMEF assets to the

Fund, determined on the basis of

reasonable inquiry from at least three

sources that are broker-dealers or

pricing services independent of EAI.

(d) On behalf of each Plan, a second

fiduciary who is independent of and

unrelated to EAI (the Second Fiduciary)

receives advance written notice of the

in-kind transfer of assets of SMEF to the

Fund and full written disclosure, which

includes, but is not limited to, the

following information concerning the

Fund:

(1) A current prospectus for the Fund

in which a Plan is considering

investing.

(2) A statement describing the fees for

investment advisory or similar services

that are to be paid by the Fund to

EACM; the fees retained by EACM for

secondary services (the Secondary

Services), as defined in paragraph g of

Section II below; and all other fees to be

charged to or paid by the Plan and by

such Fund to EAI, EACM or to unrelated

parties, including the nature and extent

of any differential between the rates of

the fees.

(3) The reasons why EAI considers

such investment to be appropriate for

the Plan.

(4) 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 a Plan’s assets invested in

SMEF to the Fund, in exchange for

shares of the Fund, and the fees

received by EACM in connection with

its investment advisory services to the

Fund. 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) EAI sends by regular mail to the

Second Fiduciary of each affected Plan,

the following information:

(1) Not later than 30 days after the

completion of the in-kind transfer

transaction, a written confirmation

which contains—

(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.

(2) Within 90 days after the

completion of each transfer, a written

confirmation which contains—

(A) The number of SMEF units held

by the Plan immediately before the

transfer, the related per unit value and

the total dollar amount of such SMEF

units; and

(B) The number of shares in the Fund

that are held by the Plan following the

transfer, the related per share net asset

value and the total dollar amount of

such shares.

(g) On an ongoing basis, EAI provides

a Plan investing in the Fund with—

(1) A copy of an updated prospectus

of such Fund, at least annually; and

(2) Upon request, a report or

statement (which may take the form of

the most recent financial report, the

current statement of additional

information, or some other written

statement) containing a description of

all fees paid by the Fund to EAI and its

affiliates.

(h) As to each Plan, the combined

total of all fees received by EAI and/or

its affiliates for the provision of services

to the Plan, and in connection with the

provision of services to the Fund in
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18425

which the Plan invests, is not in excess

of ‘‘reasonable compensation’’ within

the meaning of section 408(b)(2) of the

Act.

(i) All dealings between a Plan and

the Fund are on a basis no less favorable

to the Plan than dealings between the

Fund and other shareholders.

(j) EAI maintains for a period of six

years the records necessary to enable the

persons described below in paragraph

(k) 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

EAI, the records are lost or destroyed

prior to the end of the six year period,

and (2) no party in interest other than

EAI, 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 (k) of this Section

II; and

(k)(1) Except as provided in paragraph

(k)(2) and notwithstanding any

provisions of section 504 (a)(2) and (b)

of the Act, the records referred to in

paragraph (j) are unconditionally

available at their customary location for

examination during normal business

hours by—

(A) Any duly authorized employee or

representative of the Department, the

Internal Revenue Service or the

Securities and Exchange Commission

(the SEC);

(B) Any fiduciary of a Plan who has

authority to acquire or dispose of shares

of the Fund owned by such Plan, or any

duly authorized employee or

representative of such fiduciary;

(C) Any contributing employer to any

participating Plan or any duly

authorized employee representative of

such employer; and

(D) Any participant or beneficiary of

any participating Plan, or any duly

authorized representative of such

participant or beneficiary.

(2) None of the persons described in

paragraph (k)(1)(B)–(D) shall be

authorized to examine trade secrets of

EAI, or commercial or financial

information which is privileged or

confidential.

Section II. Definitions

For purposes of this proposed

exemption:

(a) The term ‘‘EAI’’ means EAI

Partners, L.P. and the term ‘‘EACM’’

refers to Evaluation Associates Capital

Markets, Inc.

(b) An ‘‘affiliate’’ of EAI includes—

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with EAI. (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’’ refers to the EAI

Select Managers Investment Fund, a

diversified open-end investment

company registered under the ’40 Act

for which EACM serves as an

investment adviser and may also

provide some other ‘‘Secondary

Service’’ (as defined below in paragraph

(g) of this Section II) which has been

approved by the Fund.

(d) The term ‘‘net asset value’’ means

the amount for purposes of pricing all

purchases and redemptions of Fund

shares, 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 the Fund, less the liabilities

chargeable to the 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 EAI.

For purposes of this exemption, the

Second Fiduciary will not be deemed to

be independent of and unrelated to EAI

if—

(1) Such Second Fiduciary directly or

indirectly controls, is controlled by, or

is under common control with EAI;

(2) Such Second Fiduciary, or any

officer, director, partner, employee, or

relative of such Second Fiduciary is an

officer, director, partner or employee of

EAI (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. However, with

respect to the Related Plans (i.e., the EAI

Plan, the Harding Plan and the

Stockwood Plan), the Second Fiduciary

may receive compensation from EAI in

connection with the transaction

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

Related Plans may participate in such

transaction.

With the exception of the Related

Plans, if an officer, director, partner or

employee of EAI (or relative of such

persons), is a director of such Second

Fiduciary, and if he or she abstains from

participation in the choice of a Client

Plan’s investment adviser, the approval

of any such purchase or sale between a

Client Plan and the Fund, and the

approval of any change of fees charged

to or paid by the Client Plan, the

transaction described in Section I above,

then paragraph (f)(2) of this Section II,

shall not apply.

(g) The term ‘‘Secondary Service’’

means a service, other than investment

advisory or similar service which is

provided by EACM to the Fund.

However, the term ‘‘Secondary Service’’

does not include any brokerage services

provided by EAI Securities Inc. (EAISI)

to the Fund.

EFFECTIVE DATE: If granted, this proposed

exemption will be effective December

29, 1995.

Summary of Facts and Representations

Description of the Parties

1. The parties involved in the subject

transaction are described as follows:

(a) EAI is a Delaware limited

partnership maintaining its principal

executive office in Norwalk,

Connecticut. EAI provides investment

consulting services to a number of

employee benefit plan clients through

SMEF, a collective investment fund. As

of October 1, 1995, EAI had

approximately $216 million of Plan

assets under management in SMEF, of

which $62 million was held for

participant-directed plans.

(b) SMEF, a collective investment

fund established by EAI, has been

organized to comply with Revenue

Ruling 81–100. SMEF is trusteed by

Boston Safe Deposit and Trust

Company. Following the in-kind

transfer transaction that is described

herein, SMEF has continued to exist

albeit with reduced assets.

(c) The Fund was organized on

September 27, 1995 as a Massachusetts

business trust. It is registered as a noload, open-end investment company

with the SEC under the ’40 Act. Shares

of beneficial interest are being offered

and sold pursuant to a registration

statement under the Securities Exchange

Act of 1933 Act, as amended.

(d) EACM, a wholly owned subsidiary

of EAI, manages the Fund and
18426 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

9Specifically, EAI and EACM both have officers

and directors and, in the case of EAI, equity holders

who are officers, directors and affiliates of Harding

and Stockwood.

10See Latham & Watkins, SEC No-Action Letter,

1994 SEC No Act. LEXIS 910 (December 28, 1994).

11EAI is not requesting an exemption with

respect to the investment in the Fund by the EAI

Plan, the Harding Plan or the Stockwood Plan. EAI

represents that the Related Plans may acquire or sell

share of the Fund 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 between the Fund and the Related

Plans would be covered by PTE 77–3.

Similarly, EAI is not requesting exemptive relief

with respect to future acquisitions or sales of shares

of the Fund by the Client Plans. EAI represents that

such transactions would be covered under 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. However,

again, the Department expresses no opinion on

whether any transactions between the Client Plans

and the Fund would be covered by PTE 77–4.

negotiates investment advisory contracts

and contracts for Secondary Services.

EACM also serves as the investment

adviser to the Fund and will receive

investment advisory fees from the Fund.

(e) EAISI, a wholly owned subsidiary

of EAI, serves as the distributor of

shares of the Fund but it does not

receive any compensation from the

Fund.

(f) The Plans which are covered by the

subject transaction include certain

Client Plans that are participantdirected account plans within the

meaning of section 404(c) of the Act for

which EAI formerly served as a

fiduciary through its management of

Plan assets that had been invested in

SMEF. Also covered by the subject

transaction are the EAI Plan as well as

Plans that are sponsored by the Harding

Services Corporation (Harding) and

Stockwood VII, Inc. (Stockwood), which

are affiliates of EAI.9 EAI formerly

provided investment management

services to the Related Plans by reason

of their investment in SMEF through the

end of 1995 but it did not charge the

Related Plans any fees with respect to

such services. The EAI Plan, the

Harding Plan and the Stockwood Plan

are participant-directed, defined

contribution plans.

As of September 30, 1995, the

participant, asset breakdown and the

identities of the trustees of the Related

Plans were as follows:

Related plans No. participants Total assets Trustees

EAI Plan ....................................................................................... 121 $11,877,063 Elke Bartel, Jeanne Gustafson and

Malin Zergiebel.

Harding Plan ................................................................................. 99 9,800,000 Kurt Borowsky and Frank Richardson.

Stockwood Plan ............................................................................ 10 371,000 Kurt Borowsky and Frank Richardson.

It is represented that none of the Related

Plans is a party in interest with respect

to the other within the meaning of

section 3(14) of the Act.

(g) Wilmington Trust Company (WTC)

of Wilmington, Delaware, has been

retained by EAI to serve as the Second

Fiduciary for the Related Plans. In such

capacity, WTC was hired to approve the

in-kind transfer of the assets of the

Related Plans that had been invested in

SMEF to the Fund, in exchange for

shares of the Fund. WTC, the primary

subsidiary of Wilmington Trust

Corporation, was established in 1903.

WTC is wholly independent of EAI and

its affiliates.

As of December 31, 1994, WTC

exercised discretionary authority over

approximately $26.5 billion of fiduciary

assets, including approximately $14.8

billion of the assets of plans covered by

the Act as well as non-qualified plans.

Also as of December 31, 1994, WTC

served as directed trustee, agent or

custodian with respect to more than $5

billion of assets of plans covered by the

Act and nonqualified employee benefit

plans.

Description of the Transaction

2. Prior to December 29, 1995, EAI

required the Plans involved herein to

withdraw their assets from SMEF. It

then provided these Plans with the

opportunity to contribute their

withdrawn SMEF assets to the Fund in

exchange for shares of the Fund. The

principal reason for the in-kind transfer

of the Plans’ assets that had been

invested in SMEF to the Fund was an

SEC ruling pertaining to section 3(c)(1)

of the ’40 Act.10 In that ruling, the SEC

opined that each participant in a Plan

providing for participant-directed

investments would be counted for

purposes of subjecting a collective

investment fund, such as SMEF, to

reporting and disclosure requirements

applicable to open-end companies. In

accordance with the SEC interpretation,

EAI believed that the assets of the

affected Plans had to be removed from

SMEF prior to January 1, 1996.

In addition, EAI believed that the

interests of these Plans would be

appropriately served by use of a mutual

fund, such as the Fund. According to

EAI, mutual funds are under the

supervision of the SEC, which places a

greater emphasis on participant

disclosure and which provides a

mechanism for approval of disclosure

documentation for the Fund. Moreover,

EAI noted that mutual funds would

afford Plan sponsors and participants

with easier monitoring of investments

since information concerning

investment performance of the Fund

would be available in daily newspapers

of general circulation.

Accordingly, EAI requests retroactive

exemptive relief from the Department

with respect to the in-kind transfer of

the assets of certain Plans that had been

invested in SMEF, in exchange for

shares of the Fund. The in-kind transfer

transaction occurred on December 29,

1995 in connection with the partial

termination of SMEF. If granted, the

proposed exemption would be effective

as of December 29, 1995.11

3. Plan assets formerly invested in

SMEF that were exchanged for shares of

the Fund occurred in two simultaneous

phases. First, EAI obtained written

approvals from all Second Fiduciaries

with respect to the in-kind transfer. EAI

then transferred to each Plan its

allocable share of all assets of SMEF. It

is represented that such assets consisted

of marketable securities and cash

balances. Second, the distributed assets

were transferred by the Plan to the

Fund, and, in exchange, the Fund

issued to each Plan an appropriate

number of shares of the Fund. These

shares had an aggregate value equal to

the aggregate value of each Plan’s

allocable share of SMEF assets that were

transferred to the Fund.

4. With respect to the initial

disclosures provided to each Second

Fiduciary, EAI represents that prior to
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18427

12Rule 17a–7 also includes the following

requirements: (a) the transaction must be consistent

with the investment objectives and policies of the

Fund, as described in its registration statement; (b)

the security that is the subject of the transaction

must be one for which market quotations are readily

available; (c) no brokerage commissions or other

remuneration may be paid in connection with the

transaction; and (d) the Fund’s board of directors

(i.e., those directors who are independent of the

Fund’s investment adviser) must adopt procedures

to ensure that the requirements of Rule 17a–7 are

followed, and determine no less frequently than

quarterly that the transactions during the preceding

quarter were in compliance with such procedures.

investing in the Fund, it obtained the

affirmative written approval of a Second

Fiduciary of a Plan who was generally

the Plan’s named fiduciary, trustee or

sponsoring employer. In the case of the

Related Plans, WTC was retained for

this purpose. EAI provided each Second

Fiduciary with a current prospectus for

the Fund. The disclosure statement

described the fees for investment

advisory or similar services, the fees for

Secondary Services and all other fees to

be charged to, or paid by, a Plan (and

by such Fund) to EACM or to unrelated

parties, including the nature and extent

of any differential between the rates of

the fees. In addition, the disclosure

statement specified the reasons why EAI

considered an investment in the Fund

was appropriate for a Plan.

On the basis of such information, the

Second Fiduciary authorized the

investment of Plan assets in the Fund

through an in-kind transfer of assets

received from SMEF. Such

authorization was given by the Second

Fiduciary to EAI in writing.

5. EAI represents that the in-kind

transfer transaction was conducted over

the weekend of December 29, 1995 in

accordance with Rule 17a–7 under the

’40 Act and the procedures established

by the Fund pursuant to Rule 17a–7 for

the valuation of such assets. EAI notes

that Rule 17a–7 provides an exemption

from section 17(a) of the ’40 Act, which

prohibits, among other things, principal

transactions between an investment

company and its investment adviser or

affiliates of the investment adviser.

Among the conditions of Rule 17a–

7 12 is the requirement that the

transaction be effected at the

‘‘independent current market price’’ for

the security involved. In this regard, the

‘‘current market price’’ for specific types

of SMEF assets involved in the in-kind

transfer was determined as follows:

(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) for December 29, 1995; or if

there were no reported transactions in

the Consolidated System that day, the

average of the highest current

independent bid and the lowest current

independent offer for such security

(reported pursuant to Rule 11Ac1–1

under the ’34 Act), as of the close of

business on December 29, 1995; 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 on December

29, 1995; or if there were no reported

transactions on such exchange that day,

the average of the highest current

independent bid and lowest current

independent offer on such exchange as

of the close of business on December 29,

1995; or

(c) If the security was not a reported

security and was quoted in the

NASDAQ system, then the average of

the highest current independent bid and

lowest current independent offer

reported on Level 1 of NASDAQ as of

the close of business on December 29,

1995 or

(d) For all other securities, the average

of the highest current independent bid

and lowest current independent offer as

of the close of business on December 29,

1995, determined on the basis of

reasonable inquiry.

6. As stated above, the in-kind

transfer transaction occurred over the

weekend of December 29, 1995, using

the market values as of the preceding

Friday. The value of SMEF was

determined by the custodian and

portfolio accountant for the Fund in

coordination with EAI. Securities listed

on the exchange were valued at their

closing prices on that Friday. Other

securities were valued based on the

average of current independent bid and

ask quotations as of that Friday obtained

from three independent brokers (or

under a method otherwise in

accordance with Rule 17a–7). Any fees

charged by independent brokers were

the responsibility of EAI. The

contribution of securities was

completed by the opening of business

on January 2, 1996, such that Plans

whose SMEF assets were contributed to

the Fund held shares of the Fund which

had the same aggregate value as their

units in SMEF as of the preceding

Friday. No sales commissions or other

fees, including 12b–1 Fees, were paid by

the Plans in connection with the

purchase of Fund shares through the inkind transfer of a Plan’s assets that were

invested in SMEF.

7. Following the in-kind transfer

transaction, EAI provided each affected

Plan with a written confirmation

statement on January 31, 1996. This

statement set forth (a) the number of

SMEF units held by the Plan

immediately before the conversion, the

related per unit value and the total

dollar amount of such SMEF units; and

(b) the number of shares of the Fund

that are held by the Plan following the

conversion, the related per share net

asset value and the total dollar amount

of such shares.

In addition, on January 31, 1996, EAI

provided each affected Plan with

written confirmation of (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.

Representations of the Second Fiduciary

for the Related Plans Regarding the InKind Transfer

8. As stated above, WTC was retained

by EAI as the Second Fiduciary to

oversee the in-kind transfer transaction

on behalf of the EAI Plan, the

Stockwood Plan and the Harding Plan.

In such capacity, WTC represented that

it understood and accepted the duties,

responsibilities and liabilities in acting

as a fiduciary with respect to the

Related Plans including those duties,

responsibilities and liabilities that are

imposed on fiduciaries under the Act.

WTC stated that it considered the

effect and the implications of the

transaction on the Related Plans as well

as other Plan clients of EAI which had

invested in SMEF. WTC noted that

although SMEF would continue to exist

after December 31, 1995, it would be

maintained for Plans that were not

participant-directed. Thus, WTC

explained that the in-kind transfer

transaction was being offered to certain

Plans invested in SMEF on terms that

were comparable to and no less

favorable than the terms that would

have been reached among unrelated

parties.

WTC represented that the in-kind

transfer transaction was in the best

interest of the Related Plans and their

participants and beneficiaries for the

following reasons: (a) In terms of the

investment policies and objectives

pursued, the Fund substantially

replicates SMEF and thus the impact of

the transaction on a Related Plan and its

participants would be de minimis; (b)

the Fund would probably continue to

experience relative investment

performance similar in nature to SMEF

given the continuity of investment

objectives and policies, management

oversight and portfolio management

personnel; (c) the in-kind transfer
18428 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

transaction would not adversely affect

the cash flows, liquidity or investment

diversification of a Related Plan; (d) the

benefits to be derived by the Related

Plans and their participants investing in

the Fund (e.g., broader distribution

permitted of the Fund to different types

of plans impacting positively on the

asset size of the Fund and resulting in

cost savings to shareholders) would

more than offset the impact of minimum

additional expenses that might be borne

by the Related Plans.

In opining on the appropriateness of

the in-kind transfer transaction, WTC

represented that it conducted an overall

review of the Related and their

respective Plan documents. WTC also

stated that it examined the total

investment portfolios for the Related

Plans to determine whether or not the

Related Plans were in compliance with

their investment objectives and policies.

Further, WTC stated that with respect to

the Related Plans, it examined their

overall liquidity requirements and

reviewed the concentration of their

assets that had been invested in SMEF

as well as the portion of SMEF that

comprised their assets. Finally, WTC

represented that it reviewed the

diversification provided by the

investment portfolios of the Related

Plans. Based upon its review and

analysis of the foregoing, WTC

represented that the in-kind transfer

transaction would not adversely affect

the total investment portfolios of the

Related Plans or compliance by the

Related Plans with their stated

investment objectives, policies, cash

flows, liquidity positions or

diversification requirements.

As the Second Fiduciary, WTC

represented that it was provided by EAI

with the confirmation statements

described in Representation 7. 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 receipt by the Related

Plans of shares of the Fund equal in

value to of each Related Plan’s pro rata

share of assets of SMEF on the

conversion date.

Ongoing Disclosures and Other

Exemptive Conditions

9. On an annual basis, EAI will

provide each affected Plan with a copy

of an updated prospectus for the Fund.

Upon request, the Plan will be provided

with a report or statement (which may

take the form of the most recent

statement of additional information, or

some other written statement)

containing a description of all fees paid

by the Fund to EACM.

In addition, as to each individual

Plan, the combined total of all fees

received by EAI and/or its affiliates for

the provision of services to the Plans,

and in connection with the provision of

services to the Fund will not be in

excess of ‘‘reasonable compensation’’

within the meaning of section 408(b)(2)

of the Act. Further, all dealings by or

between the Plans and the Fund will

remain on a basis which is at least as

favorable to the Plans as such dealings

are with other shareholders of the Fund.

10. In summary, EAI represents that

the in-kind transfer transaction

described herein satisfies the statutory

criteria for an exemption under section

408(a) of the Act because:

(a) A Second Fiduciary authorized in

writing, such in-kind transfer prior to

the transaction and only after such

Second Fiduciary received full written

disclosure of information concerning

the Fund.

(b) Each Plan received shares of the

Fund in connection with the in-kind

transfer of assets from SMEF to the

Fund which were equal in value to the

Plan’s allocable share of assets that had

been invested in SMEF 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 Fund which complied with Rule

17a–7 of the ’40 Act, as amended, and

the procedures established by the Fund

pursuant to Rule 17a–7 for the valuation

of such assets.

(c) Within 30 days following the

completion of the in-kind transfer

transaction, EAI provided the Second

Fiduciary of each affected Plan with

written confirmation containing (1) the

identity of the 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 the security

involved in the transaction; and (3) the

identity of the pricing service or market

maker consulted in determining the

value of such securities.

(d) Within 90 days following the inkind transfer, EAI mailed to the Second

Fiduciary of each Plan, written

confirmation containing (1) the number

of SMEF units held by the Plan

immediately before the transfer, the

related per unit value and the total

dollar amount of such SMEF units; and

(2) the number of shares in the Fund

that were held by the Plan following the

transfer, the related per share net asset

value and the total dollar amount of

such shares.

(e) As to each Plan, the combined

total of all fees received by EAI and/or

its affiliates for the provision of services

to the Plans, and in connection with the

provision of services to the Fund will

not be in excess of ‘‘reasonable

compensation’’ within the meaning of

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

(f) No sales commissions were paid by

a Plan in connection with the

acquisition of shares of the Fund.

(g) With respect to investments in a

Fund by the Plans, each Second

Fiduciary received full and detailed

written disclosure of information

concerning the Fund, including a

current prospectus and a statement

describing the fee structure, and such

Second Fiduciary authorized, in

writing, the investment of the Plan’s

assets in the Fund and the fees paid by

the Fund to the EACM.

(h) EAI will provide ongoing

disclosures to Second Fiduciaries of

Plans to verify the fees charged by the

EACM to the Fund.

(i) All dealings by or between the

Plans and the Fund have been and will

remain on a basis which is at least as

favorable to the Plans as such dealings

are with other shareholders of the Fund.

Notice to Interested Persons

Notice of the proposed exemption

will be given to Second Fiduciaries of

Plans that have investments in SMEF

and from whom approval was sought for

the in-kind transfer of Plan assets to the

Fund. Such notice will be provided to

interested persons by first class mail

within 14 days following the

publication of the notice of pendency in

the Federal Register. Such notice will

include a copy of the notice of proposed

exemption as published in the Federal

Register as well as a supplemental

statement, as required pursuant to 29

CFR 2570.43(b)(2), which shall inform

interested persons of their right to

comment on and/or to request a hearing.

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.)

Pension Plan of Roper Hospital, Inc.

(the Plan) Located in Charleston, South

Carolina

[Application No. D–10163]

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
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18429

13The Department notes that the decisions to

acquire and hold the Policy are governed by the

fiduciary responsibility requirements of Part 4,

Subtitle B, Title I of the Act. In this regard, the

Department is not herein proposing relief for any

violations of Part 4 which may have arisen as a

result of the acquisition and holding of the Policy

issued by NEL.

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 cash

sale (the Sale) by the Plan of Separate

Investment Account Group Annuity

Policy No. GA–4619 (the Policy)

maintained by New England Mutual

Life Insurance Company (NEL) to Roper

Health System, Inc. (the Hospital), the

Plan sponsor and a party in interest

with respect to the Plan, provided the

following conditions are satisfied: (a)

The Sale is a one-time transaction for

cash; (b) the Plan receives no less than

the greater of the fair market value of the

Policy at the time of the Sale, or

$494,130; and (c) the Plan does not pay

any commissions or other expenses in

connection with the transaction.

Summary of Facts and Representations

1. The Hospital is a non-profit

corporation with its principal office at

Charleston, South Carolina. The

Hospital sponsors the Plan, which is a

defined benefit plan which had 2,431

participants and assets of approximately

$22,936,604 as of December 31, 1994.

Wachovia Bank of South Carolina, N.A.

(the Bank) is the Plan’s trustee. The

Finance Committee of the Board of

Trustees of the Hospital (the Finance

Committee), however, has investment

discretion with respect to the Policy.

The Finance Committee consists of

officers of the Hospital.

2. In order to better serve the

retirement goals of its employees, the

Board of Trustees of the Hospital (the

Board) has determined to restructure its

retirement program. To that end, the

Board has approved the termination of

the Plan effective as of September 30,

1995. In place of the Plan, the Board has

approved the adoption of a tax-deferred

savings plan under section 403(b) of the

Code and an annuity plan under section

403(a) of the Code. Pursuant to the

termination agreement (the Agreement),

any assets remaining in the Plan after all

benefit liabilities have been satisfied in

accordance with the Act will be

allocated and distributed to Plan

participants in accordance with the

allocation formulas specified in the

Agreement. Accordingly, it is the

Hospital’s intent that the assets in the

Plan be liquidated and distributed or

applied for the benefit of participants

and beneficiaries of the Plan. The

applicant represents that pursuant to the

terms of the Agreement participants’

accrued benefits (although not surplus

assets) were distributed on or about

December 15, 1995. Distribution of the

surplus assets, which will include the

proceeds from the sale of the Policy to

the Hospital (if the exemption proposed

herein is granted), will not occur until

later in 1996.

3. Commencing in March of 1987 and

continuing until March of 1988, the

Plan’s prior trustees (the Prior Trustees),

who consisted of individuals who were

officers of the Hospital, invested a total

of $1,398,064 in the Policy maintained

by NEL. NEL maintains a separate

investment fund under the Policy

known as the Developmental Properties

Account (the DPA). The DPA is invested

in income-producing properties

throughout the United States. During

the early 1990’s, the DPA declined

significantly in value due to the

recession and general downturn in the

real estate market, both of which

adversely affected virtually all real

estate investment funds. The DPA

currently is ‘‘frozen’’, meaning that no

withdrawal requests are being honored

by NEL. In fact, withdrawal requests

have not been honored by NEL since

June 30, 1991. Since that date, the

Policy has declined in value by

approximately $909,316. The Hospital

first became aware that the DPA had

been frozen at the same time as other

investors, on or about November 15,

1991, through the 1991 Third Quarter

Report provided by NEL, and without

any opportunity to liquidate the Plan’s

investment. Accordingly, despite the

DPA’s decline in value, the Plan has

been forced to continue to hold the

Policy.13 As of December 31, 1995, the

fair market value of the Plan’s interest

in the DPA was $494,130. The fair

market value was determined by NEL by

multiplying the Plan’s percentage

ownership in the DPA by the aggregate

fair market value of the assets of the

DPA.

4. The applicant states that Mr. Fred

Hyder of NEL has represented that at

least one investor in the DPA sold its

interest in the DPA to an unrelated

buyer for one-third of its fair market

value as determined by NEL. The

investor was a retirement plan that had

been terminated by the sponsoring

employer. The trustee of the retirement

plan was forced to sell its interest in the

DPA to an unrelated buyer well below

its stated fair market value in order to

make distributions to participants upon

termination. Mr. Hyder also indicated

that in his opinion there is very little

activity in the secondary market due to

the inability of a DPA investor to sell its

interest in the DPA to an unrelated

buyer for its stated fair market value.

5. The Hospital has offered to

purchase the Plan’s interest in the DPA

for the greater of its current fair market

value as determined by NEL (without

any diminution in value as described in

rep. 4, above), or $494,130. Under

Section V of the Policy, the Plan cannot

sell its interest in the DPA without the

consent of NEL (which consent cannot

be unreasonably withheld). However,

NEL has agreed to the transfer of the

Plan’s interest in the DPA to the

Hospital, provided the exemption

proposed herein is granted. The

applicant represents that the Finance

Committee has determined that the sale

of the Policy to the Hospital is in the

best interests of the Plan and its

participants and beneficiaries because

the sale will allow the Bank to liquidate

the Plan’s investment in the DPA for the

investment’s current fair market value

and to distribute or apply the proceeds

from the sale to participants and

beneficiaries in accordance with the

Agreement. If the exemption proposed

herein is denied, there is no viable

purchaser for the DPA other than the

Hospital. In addition, the Finance

Committee represents that if the

exemption were denied, then the Plan

would be required to continue as a

wasting trust solely for the purpose of

holding the Policy until it can be

liquidated, which is unlikely to occur in

the near future.

6. The fair market value of the Policy

will be determined by the value

reported by NEL as of the end of the

quarter preceding the date of sale. There

will be no reduction in this value as

described in rep. 4, above. Copley Real

Estate Advisors (Copley), an indirect

subsidiary of NEL, acts as an asset

manager and advisor to NEL with

respect to the DPA. Copley selects

qualified appraisal firms to conduct

annual outside appraisals on the

properties which make up the DPA. At

quarterly dates between annual

appraisals, Copley’s asset management

group prepares internal valuations.

Copley represents that the internal

valuations are based on the work that is

completed by the outside appraiser and

the same basic valuation methods used

by the outside appraisers are used for

the internal valuation. The Hospital

represents that the valuations reported

by NEL provide a reliable indication of

the fair market value of the Policy and
18430 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

14The Department is expressing no opinion in

this proposed exemption regarding whether the

acquisition and holding of the CDs by the Plans

violated any of the fiduciary responsibility

provisions of Part 4 of Title I of the Act.

The Department notes that section 404(a) of the

Act requires, among other things, that a fiduciary

of a plan act prudently, solely in the interest of the

plan’s participants and beneficiaries, and for the

exclusive purpose of providing benefits to

participants and beneficiaries when making

investment decisions on behalf of a plan. Section

404(a) of the Act also states that a plan fiduciary

should diversify the investments of a plan so as to

minimize the risk of large losses, unless under the

circumstances it is clearly prudent not to do so.

In this regard, the Department is not providing

any opinion as to whether a particular category of

investments or investment strategy would be

considered prudent or in the best interests of a plan

as required by section 404 of the Act. The

determination of the prudence of a particular

investment or investment course of action must be

made by a plan fiduciary after appropriate

consideration to those facts and circumstances that,

the DPA. NEL and Copley are

independent of the Hospital and the

Bank.

7. In summary, the applicant

represents that the proposed transaction

satisfies the criteria contained in section

408(a) of the Act because: (a) The Sale

is a one-time transaction for cash, and

the Plan will pay no commissions or

other expenses in connection with the

Sale; (b) the Plan will receive cash for

the Policy in an amount not less than

the greater of the fair market value of the

Policy as of the date of the Sale, or

$494,130; (c) the fair market value of the

Policy will be established by NEL, a

party unrelated to the Plan and the

Hospital; and d) the Sale will remove

the Policy, which has been declining in

value and is illiquid, from the Plan.

FOR FURTHER INFORMATION CONTACT: Gary

H. Lefkowitz of the Department,

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

a toll-free number.)

First Virginia Banks, Inc., Located in

Falls Church, Virginia

[Application Nos. D–10175 thru D–10177]

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).

Section I—Transactions

The restrictions of sections 406(a),

406(b)(1) and 406(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 following transactions provided

that all of the conditions set forth in

Section II below are met:

(a) The cash sale on December 23,

1994 of certain variable rate certificates

of deposit (CDs) issued by Merrill Lynch

National Bank, Salt Lake City, Utah (the

Merrill Lynch CDs) by forty (40)

employee benefit plans, Keogh plans

and individual retirement accounts

(IRAs), for which First Knoxville Bank

in Knoxville, Tennessee (the Bank)

serves as a fiduciary, to First Virginia

Banks, Inc. (First Virginia), a party in

interest or disqualified person with

respect to such plans and IRAs;

(b) The cash sale on various dates

during 1995 of certain fixed rate CDs

issued by various unrelated financial

institutions (the Fixed Rate CDs) by

eighteen (18) employee benefit plans,

Keogh plans and IRAs, for which the

Bank serves as a fiduciary to First

Virginia, a party in interest or

disqualified person with respect to such

plans and IRAs; and

(c) The proposed cash sale of certain

additional fixed rate CDs issued by

various unrelated financial institutions

(the Additional Fixed Rate CDs) by

approximately twenty-one (21)

employee benefit plans, Keogh plans

and IRAs, for which the Bank serves as

a fiduciary, to First Virginia, a party in

interest or disqualified person with

respect to such plans and IRAs.

Section II—Conditions

(a) Each sale is a one-time transaction

for cash;

(b) Each plan or IRA (hereafter

referred to as ‘‘Plan’’) receives an

amount which is equal to the greater of

(i) the face amount of the CDs owned by

the Plan, plus accrued but unpaid

interest, at the time of sale, or (ii) the

fair market value of the CDs owned by

the Plan as determined by an

independent, qualified appraiser at the

time of the sale;

(c) The Plans do not pay any

commissions or other expenses with

respect to the sale of such CDs;

(d) The Bank, as trustee of the Plans,

determines that the sale of the CDs is in

the best interests of each Plan and its

participants and beneficiaries at the

time of the transaction;

(e) The Bank takes all appropriate

actions necessary to safeguard the

interests of the Plans and their

participants and beneficiaries in

connection with the transactions;

(f) Each Plan receives a reasonable

rate of interest on the CDs during the

period of time such CDs are held by the

Plan;

(g) The Bank or an affiliate maintains

for a period of six years the records

necessary to enable the persons

described below in paragraph (h) 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 or affiliate, the records are lost

or destroyed prior to the end of the sixyear period, and (2) no party in interest

other than the Bank or affiliate 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 (h) below; and

(h) (1) Except as provided below in

paragraph (h)(2) and notwithstanding

any provisions of section 504(a)(2) of

the Act, the records referred to in

paragraph (g) are unconditionally

available at their customary location for

examination during normal business

hours by—

(i) Any duly authorized employee or

representative of the Department or the

Internal Revenue Service,

(ii) Any fiduciary of the Client Plans

who has authority to acquire or dispose

of shares of the Funds owned by the

Client Plans, or any duly authorized

employee or representative of such

fiduciary, and

(iii) Any participant or beneficiary of

the Client Plans or duly authorized

employee or representative of such

participant or beneficiary;

(2) None of the persons described in

paragraph (h)(1)(ii) and (iii) shall be

authorized to examine trade secrets of

the Bank, or commercial or financial

information which is privileged or

confidential.

EFFECTIVE DATE: The proposed

exemption, if granted, will be effective

as of December 23, 1994, for the

transactions described in Section I(a)

above, and the various appropriate sale

dates in 1995 for the transactions

described above in Section I(b).

Summary of Facts and Representations

1. The Bank is a wholly-owned

subsidiary of First Virginia. The Bank,

formerly called the First National Bank

of Knoxville, was acquired by First

Virginia in June 1994. The Bank serves

as trustee, directed trustee, or custodian

of various small employee benefit plans,

Keogh plans and IRAs (collectively, the

Plans). The Bank, as trustee, has

investment discretion for the assets of

the Plans.

The Bank represents that following its

acquisition by First Virginia, a number

of problems surfaced upon review of the

investment portfolios of the Plans

regarding their acquisition and holding

of certain CDs, as discussed below.14
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18431

given the scope of such fiduciary’s investment

duties, the fiduciary knows or should know are

relevant to the particular investment or investment

course of action involved, including the plan’s

potential exposure to losses and the role the

investment or investment course of action plays in

that portion of the plan’s investment portfolio with

respect to which the fiduciary has investment

duties (see 29 CFR 2550.404a–1). The Department

also notes that in order to act prudently in making

such investment decisions, a plan fiduciary must

consider, among other factors, the availability, risks

and potential return of alternative investments for

the plan. Thus, a particular investment by a plan,

which is selected in preference to other alternative

investments, would generally not be prudent if such

investment involves a greater risk to the security of

a plan’s assets than comparable investments

offering a similar return or result.

15 In this regard, the applicant states that the sixmonth LIBOR rate was 3.375 percent on October 18,

1993, the date on which the Merrill Lynch CDs

were acquired, and 6.9375 percent on December 13,

1994, prior to the sale of such CDs to the Holding

Company discussed herein. The interest paid

originally on the Merrill Lynch CDs was 5.00

percent as of October 18, 1993, and 2.54 percent as

of December 13, 1994.

The Merrill Lynch CDs

2. On October 18, 1993, the Bank, in

its capacity as a fiduciary of certain

Plans, purchased the Merrill Lynch CDs

through the brokerage firm of Dunham

& Associates Investment Counsel, Inc.

(Dunham) of San Diego, California. The

Bank states that Dunham did not

provide any investment advice as a

fiduciary regarding the investments

made by the Bank in the Merrill Lynch

CDs for the Plans.

There were 40 Plans involved in the

purchase of the Merrill Lynch CDs by

the Bank. Of these 40 Plans,

approximately 32 Plans had only one

participant covered by the Plan. The

Plan with the largest number of

participants was the Collier

Development Company Profit Sharing

Plan (the Collier P/S Plan), which had

83 participants and beneficiaries. The

Collier P/S Plan had $101,149 in total

assets, of which $26,000 or

approximately 26 percent was invested

in the Merrill Lynch CDs. The Plan with

the largest amount of assets was the

Theodore Haase, M.D., IRA (the Haase

IRA) which had total assets of

$1,172,511, at the time of the

transactions. The Haase IRA had

$21,000 invested in the Merrill Lynch

CDs, which represented approximately

two (2) percent of its total assets. The

Plan with the largest investment in the

Merrill Lynch CDs was the Gordon S.

Hutchins IRA, which had such CDs with

a face amount of $99,000. This amount

represented approximately 64 percent of

such Plan’s total assets.

The percentage of a Plan’s total assets

represented by investments in the

Merrill Lynch CDs varied from as little

as one (1) percent [e.g. the Mulford

Enterprises Profit Sharing Plan] to as

much as 92 percent [e.g. the Audrey

Denton IRA]. However, most of the

Plans had less than 25 percent of their

total assets invested in the Merrill

Lynch CDs.

3. The Merrill Lynch CDs were issued

by Merrill Lynch National Bank in Salt

Lake City, Utah, with a total face value

of $1,995,000, and are scheduled to

mature on October 18, 1998. The Merrill

Lynch CDs owned by the Plans had a

total face value of $894,500. The Bank

states that the interest rate on the

Merrill Lynch CDs was fixed at 5.00

percent per annum for the first year.

However, the interest rate in the

subsequent years until maturity on

October 18, 1998, is a stated interest rate

offset by the current six-month London

Interbank Offered Rate (LIBOR) as

follows: (i) years two and three—8.50

percent per annum minus six-month

LIBOR; and (ii) years four and five—

10.50 percent minus six-month LIBOR.

4. The Bank represents that the

information provided by Dunham to the

Bank prior to the Bank’s purchase of the

Merrill Lynch CDs on behalf of the

Plans indicated that there was no early

withdrawal penalty. However, the Bank

states that when it requested to redeem

the Merrill Lynch CDs without a

withdrawal penalty, the request was

declined by Dunham, who indicated

that such CDs could not be redeemed

prior to maturity, with or without

penalty.

5. The Bank represents that the fair

market value of the Merrill Lynch CDs

was significantly below their face value

as of December 1994. The Bank states

that the significant decline in the fair

market value of the Merrill Lynch CDs

was attributable to two factors: (i) the

fact that the interest rate on the CDs

dropped to 2.54 percent (8.50 percent

minus LIBOR), effective for the sixmonth period beginning October 18,

1994; 15 and (ii) rising interest rates in

the marketplace for comparable fixed

income investments of the same

duration, as measured by various

interest rate indexes at the time.

Therefore, the Bank made a

determination that it would be in the

best interests of the Plans to sell the CDs

to the Holding Company to avoid the

investment losses which would result to

the Plans from any sale on the open

market.

6. Davenport & Company of Virginia,

Inc. (Davenport), an independent

qualified appraiser located in

Richmond, Virginia, appraised the

Merrill Lynch CDs as having a fair

market value of approximately $70.75

per $100 of face value, as of December

23, 1994. Davenport’s analysis described

the Merrill Lynch CDs as ‘‘inverse

floaters’’ paying below market interest

rates at the time of the transaction.

Davenport states that the Merrill Lynch

CDs are a ‘‘derivative type of security’’

which involves a complicated pricing

process to determine market value.

Davenport represents that dealers

trading such securities use data from the

interest rate swap market and various

interest rate forecasts to determine their

bid prices. In addition, Davenport notes

that since the Merrill Lynch CDs are

traded over-the-counter and are not

listed on an exchange, dealers have

different options as to how to value

such securities. Davenport concluded

that as a result of the then current

interest rates, as measured by LIBOR

and other indexes at the time of the

transaction, and market data concerning

interest rate forecasts, there were few

dealers or other buyers interested in

purchasing the Merrill Lynch CDs

without a significant discount on their

face value.

7. On December 23, 1994, the Holding

Company purchased the Merrill Lynch

CDs from the Plans for cash at their full

face value, an amount which was

significantly above the fair market value

of the CDs at that time as determined by

Davenport. In addition, the Holding

Company paid the Plans interest at the

originally stated rate of 5.00 percent per

annum through the date of purchase,

even though the Merrill Lynch CDs

began earning interest at an annual rate

of 2.54 percent on October 18, 1994. The

Plans did not pay any commissions or

other expenses with respect to the

transactions.

The Bank states that it engaged in the

transaction on behalf of the Plans for the

following reasons: (i) the purchase of

the Merrill Lynch CDs by the Holding

Company provided the Plans with full

access to the total face value of the CDs,

without any withdrawal penalty, and

avoided the investment loss which

would have occurred from a sale of the

CDs on the open market; (ii) as a result

of the transaction, the Plans had the

funds immediately available for either

reinvestment at the current higher

market interest rates or for distribution

to the Plan participants and

beneficiaries, as appropriate; (iii) the

interest rate of 5.00 percent per annum

paid on the CDs by the Holding

Company was significantly higher than

the effective interest rate of 2.54 percent

per annum being paid on the CDs at the

time of the transaction; and (iv) since

the Merrill Lynch CDs could not be

redeemed prior to maturity, such CDs

became effectively an illiquid
18432 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

investment which was unsuitable for

the Plans.

Certain Fixed Rate CDs

8. On various dates prior to June 1994,

the Bank, in its capacity as a fiduciary

of certain Plans, purchased the Fixed

Rate CDs through brokerage firms

unrelated to the Bank and its affiliates.

The Bank states that these brokerage

firms did not provide any investment

advice as a fiduciary regarding the

investments made by the Bank in the

Fixed Rate CDs for the Plans. There

were approximately forty-three (43)

different Fixed Rate CDs held by such

Plans as of December 1994.

There were 18 Plans involved in the

purchase of the Fixed Rate CDs by the

Bank. Of these 18 Plans, approximately

13 Plans had only one participant

covered by the Plan. The Plan with the

largest number of participants was the

Farragut Ditching Profit Sharing Plan

(the Farragut P/S Plan), which had

approximately 50 participants and

beneficiaries and total assets of

$694,803 at the time of the transactions.

The Farragut P/S Plan had $196,000

invested in the Fixed Rate CDs, which

represented approximately 28 percent of

its total assets. The Plan with the largest

amount of total assets was the Jayne C.

Tilley IRA (the Tilley IRA), which had

approximately $989,733 at the time of

the transactions. The Plan with the

largest investment in the Fixed Rate CDs

was also the Tilley IRA, which had such

CDs with a face amount of $209,000.

This amount represented approximately

21 percent of such Plan’s total assets at

the time of the transactions.

The percentage of a Plan’s total assets

represented by investments in the Fixed

Rate CDs varied from as little as one (1)

percent [e.g. the Dean Cox IRA] to as

much as 96 percent [e.g. the National

Fuel SEP]. However, most of the Plans

had less than 30 percent of their total

assets invested in the Fixed Rate CDs.

9. The Fixed Rate CDs were issued by

various financial institutions, all of

which were unrelated to the Bank and

its affiliates. These financial institutions

were: (a) First USA Bank, in

Wilmington, Delaware; (b) Bluebonnet

Savings Bank, FSB, in Dallas, Texas; (c)

State Bank of India, in New York, New

York; (d) Columbia First Bank, in

Arlington, Virginia; (e) Amerifed Bank,

FSB, in Joliet, Illinois; (f) Home Savings

of America, in Los Angeles, California;

(g) FNB Boston, in Boston,

Massachusetts; (h) Provident Bank, in

Cincinnati, Ohio; (i) Home Federal Bank

of Tennessee, FSB, in Knoxville,

Tennessee; (j) Investors Thrift and Loan,

in Monterey, California; (k) Greenwood

Trust Company, in New Castle,

Delaware; and (l) Merrill Lynch

National Bank, in Salt Lake City, Utah.

The Fixed Rate CDs held by the Plans

had a total face value of $1,199,150,

with maturity dates ranging from May

1995 to January 1999. The Bank states

that the interest rates on these CDs was

fixed in each case for the entire length

of the CDs. The interest rates paid on

the Fixed Rate CDs ranged from 4.80

percent per annum for the CD issued by

Amerifed Bank [with a par value of

$10,000 and maturity on August 18,

1995] to 6.25 percent per annum for the

CD issued by FNB Boston [with a par

value of $20,100 and maturity on

January 1, 1999]. However, subsequent

to the purchase of the Fixed Rate CDs

by the Plans, the Bank learned that these

CDs could not be redeemed prior to

maturity, with or without penalty.

10. The Bank represents that the fair

market value of each of the Fixed Rate

CDs was below its face value during

1995. The Bank states that the decline

in the fair market value of the Fixed

Rate CDs was attributable to rising

interest rates in the marketplace for

comparable fixed income investments of

the same duration, as measured by

various interest rate indexes at the time.

Therefore, the Bank made a

determination that it would be in the

best interests of the Plans to sell the

Fixed Rate CDs to the Holding Company

prior to their maturity to avoid any

investment losses which could result to

the Plans from a sale of such CDs on the

open market.

11. Davenport also appraised each of

the Fixed Rate CDs as having a fair

market value which was below its face

value at the time of the subject

transactions in 1995. These valuations

ranged from approximately $91.658 per

$100 of face value, as of March 14, 1995,

for the Fixed Rate CD issued by

Greenwood Trust [which pays 5.00

percent per annum and is due to mature

on September 28, 1998], to

approximately $99.216 per $100 face

value, as of April 19, 1995, for the Fixed

Rate CD issued First USA Bank [which

paid 6.15 percent per annum and

matured on May 29, 1995].

Davenport’s analysis was based on

information from brokerage firms and

banks that trade such CDs. Davenport

represents that the Fixed Rate CDs are

not as liquid as other fixed income

securities due to a number of factors

including par amount, lack of issuer

recognition, limited secondary market,

lack of knowledge of the issuers

financial strength and their non-rated

status. Davenport states that dealers that

trade such CDs usually demand yields

between 50–70 basis points above the

yield for comparable U.S. Treasury

securities to account for these factors,

despite the U.S. Government guarantee

for CDs with face amounts under

$100,000. Davenport’s analysis

estimated that bids for the Fixed Rate

CDs would require an average yield of

approximately 60 basis points above the

yield for comparable U.S. Treasury

securities, before deducting

approximately $7.50 per $1,000 face

amount as an average commission for an

open market transaction. Davenport’s

conclusions regarding the market value

of the Fixed Rate CDs supported the

Bank’s determinations to sell these CDs

to the Holding Company.

12. On various dates during 1995, the

Holding Company purchased the Fixed

Rate CDs from the Plans for cash prior

to maturity at their full face value, an

amount which was above the fair market

value of the CDs at that time as

determined by Davenport. The Bank

states that these transactions occurred

on the following dates: (i) 10 Fixed Rate

CDs were sold on March 14, 1995; (ii)

one Fixed Rate CD was sold on March

31, 1995; (iii) three Fixed Rate CDs were

sold on April 7, 1995; (iv) two Fixed

Rate CDs were sold on April 19, 1995;

(v) one Fixed Rate CD was sold on April

27, 1995; (vi) three Fixed Rate CDs were

sold on May 26, 1995; (vii) four Fixed

Rate CDs were sold on June 1, 1995;

(viii) three Fixed Rate CDs were sold on

June 2, 1995; (ix) one Fixed Rate CD was

sold on August 2, 1995; (x) five Fixed

Rate CDs were sold on August 7, 1995;

(xi) four Fixed Rate CDs were sold on

August 8, 1995; and (xii) six Fixed Rate

CDs were sold on August 11, 1995. In

each case, the Holding Company paid

the Plans any accrued but unpaid

interest at the stated fixed rate for the

CD through the date of purchase. The

Plans did not pay any commissions or

other expenses with respect to the

transactions.

The Bank states that it engaged in

these transactions on behalf of the Plans

for the following reasons: (i) The

purchase of the Fixed Rate CDs by the

Holding Company provided the Plans

with full access to the total face value

of the CDs, without any withdrawal

penalty, and avoided the investment

loss which would have occurred from a

sale of the CDs on the open market; (ii)

as a result of the transaction, the Plans

had the funds immediately available for

either reinvestment at the current higher

market interest rates or for distribution

to the Plan participants and

beneficiaries, as appropriate; and (iii)

since the Fixed Rate CDs could not be

redeemed prior to maturity, such CDs

became effectively illiquid investments

which were unsuitable for the Plans.
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18433

Additional Fixed Rate CDs

13. On various dates prior to June

1994, the Bank, in its capacity as a

fiduciary of certain Plans, purchased the

Additional Fixed Rate CDs through

brokerage firms unrelated to the Bank

and its affiliates. The Bank states that

these brokerage firms did not provide

the Bank with any investment advice as

a fiduciary regarding the investments in

the Additional Fixed Rate CDs made for

the Plans. There are approximately

sixteen (16) different Additional Fixed

Rate CDs held by such Plans.

There were 21 Plans involved in the

purchase of the Additional Fixed Rate

CDs by the Bank. Of these 21 Plans,

approximately 16 Plans currently have

only one participant covered by the

Plan. The Plan with the largest number

of participants is the Bandit Lites Profit

Sharing Plan (the Bandit Lites P/S Plan),

which has approximately 37

participants and beneficiaries. The

Bandit Lites P/S Plan has approximately

$240,935 in total assets, of which

$53,000 or approximately 21 percent of

such assets are invested in the

Additional Fixed Rate CDs. The Plan

with the largest amount of assets is the

Douglas G. Slater IRA (the Slater IRA),

which has approximately $2,454,803.

The Plan with the largest investment in

the Additional Fixed Rate CDs is also

the Slater IRA, which has such CDs with

a face amount of $383,000. This amount

represents approximately 15.5 percent

of such Plan’s total assets.

The percentage of a Plan’s total assets

represented by investments in the

Additional Fixed Rate CDs varies from

as little as two (2) percent [e.g. the

Donald Campbell SEP–IRA] to as much

as 87 percent [e.g. the William Myers

IRA]. However, most of the Plans have

less than 30 percent of their total assets

invested in the Additional Fixed Rate

CDs.

14. The Additional Fixed Rate CDs

were issued by various financial

institutions unrelated to the Bank and

its affiliates (see list in Paragraph 9

above). The Additional Fixed Rate CDs

held by the Plans have a total face value

of $875,150, with maturity dates ranging

from June 1996 until January 1999. The

Bank states that the interest rates on

these CDs are fixed in each case for the

entire length of the CDs. The interest

rates on the Additional Fixed Rate CDs

range from 5.00 percent per annum for

the CD issued by Bluebonnet Savings

Bank [with a par value of $10,000 and

maturity on June 14, 1996] to 5.50

percent per annum for the CD issued by

Provident Bank [with a par value of

$19,000 and maturity on December 10,

1997].

The Bank represents that at the time

the Additional Fixed Rate CDs were

purchased, the Bank believed that there

was no early withdrawal penalty.

However, the Bank states that it

subsequently learned that these CDs

cannot be redeemed prior to maturity,

with or without penalty.

15. The Bank proposes to sell the

Additional Fixed Rate CDs to the

Holding Company for cash prior to their

maturity at an amount equal to the

greater of either: (i) The face amount of

such CDs, plus accrued interest; or (ii)

the fair market value of such CDs, plus

accrued interest, as determined by an

independent, qualified appraiser at the

time of the transaction.

Davenport has provided an opinion as

to the market value of the Additional

Fixed Rate CDs, as of September 21,

1995. Davenport’s valuations for these

CDs as of such date ranged from

approximately $95.112 per $100 of face

value for the Additional Fixed Rate CD

issued by Greenwood Trust [which pays

5.00 percent per annum and is due to

mature on September 29, 1998], to

approximately $98.28 per $100 of face

value for the Additional Fixed Rate CD

issued by Bluebonnet Savings Bank

[which pays 5.00 percent per annum

and is due to mature on June 14, 1996].

The Bank states that it wants to

engage in the proposed transactions on

behalf of the Plans for the following

reasons: (i) The purchase of the

Additional Fixed Rate CDs by the

Holding Company would provide the

Plans with full access to the total face

value of the CDs, without any

withdrawal penalty, and would avoid

the possibility of investment losses that

may occur in a sale of the CDs on the

open market; (ii) as a result of the

transaction, the Plans will have the

funds immediately available for either

reinvestment at any higher market

interest rates currently available at the

time of the proposed transaction or for

distribution to the Plan participants and

beneficiaries, as appropriate; and (iii)

since the Additional Fixed Rate CDs

cannot be redeemed prior to maturity,

such CDs are effectively illiquid

investments which are unsuitable for

the Plans.

Therefore, the Bank believes that it

would be in the best interests of the

Plans to sell certain of the Additional

Fixed Rate CDs to the Holding Company

prior to their maturity. The Bank states

that the Plans will not pay any

commissions or other expenses with

respect to the sale.

16. In summary, the Bank represents

that the subject transactions satisfy the

statutory criteria of section 408(a) of the

Act because: (a) Each sale has been and

will be a one-time transaction for cash;

(b) each Plan has received or will

receive an amount which is equal to the

greater of (i) the face amount of the CDs

owned by the Plan, plus accrued but

unpaid interest, at the time of sale, or

(ii) the fair market value of the CDs

owned by the Plan as determined by an

independent, qualified appraiser at the

time of the sale; (c) the Plans have not

paid and will not pay any commissions

or other expenses with respect to the

sales of the CDs; (d) the Bank, as trustee

of the Plans, has determined and will

determine that each sale of the CDs was

or will be in the best interests of the

Plan and its participants and

beneficiaries at the time of the

transaction; (e) the Bank has taken and

will take all appropriate actions

necessary to safeguard the interests of

the Plans and their participants and

beneficiaries in connection with the

transactions; and (f) each Plan has

received and will receive a reasonable

rate of interest on the CDs during the

period of time such CDs were or are

held by the Plan.

Notice to Interested Persons

The applicant states that notice of the

proposed exemption shall be made by

first class mail to the appropriate Plan

fiduciaries within fifteen days following

the publication of the proposed

exemption in the Federal Register. This

notice shall include a copy of the notice

of proposed exemption 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. Comments and

requests for a public hearing are due

within forty-five days following the

publication of the proposed exemption

in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr.

E.F. Williams of the Department,

telephone (202) 219–8194. (This is not

a toll-free number.)

First Security Group Life Insurance

Plan (the Plan) Located in Salt Lake

City, Utah

[Application No. L–10178]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

and in accordance with the procedures

set forth in 29 CFR Part 2570, Subpart

B (55 FR 32836, 32847, August 10,

1990). If the exemption is granted, the

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

the Act shall not apply to the

reinsurance of risks and the receipt of
18434 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

premiums therefrom by First Security

Life Insurance Company of Arizona

(FSLIA) from the insurance contracts

sold by Minnesota Mutual Life

Insurance Company (MM) or any

successor insurance company to MM

which is unrelated to First Security

Corporation (FSC), to provide life

insurance benefits to participants in the

Plan, provided the following conditions

are met:

(a) FSLIA—

(1) Is a party in interest with respect

to the Plan by reason of a stock or

partnership affiliation with FSC that is

described in section 3(14) (E) or (G) of

the Act,

(2) Is licensed to sell insurance or

conduct reinsurance operations in at

least one of the United States or in the

District of Columbia,

(3) Has obtained a Certificate of

Authority from the Insurance

Commissioner of its domiciliary state

which has neither been revoked nor

suspended, and

(4)(A) Has undergone an examination

by an independent certified public

accountant for its last completed taxable

year immediately prior to the taxable

year of the reinsurance transaction; or

(B) Has undergone a financial

examination (within the meaning of the

law of its current domiciliary State,

Arizona) by the Insurance

Commissioner of the State of Arizona

within 5 years prior to the end of the

year preceding the year in which the

reinsurance transaction occurred.

(b) The Plan pays no more than

adequate consideration for the

insurance contracts;

(c) No commissions are paid with

respect to the direct sale of such

contracts or the reinsurance thereof; and

(d) For each taxable year of FSLIA, the

gross premiums and annuity

considerations received in that taxable

year by FSLIA for life and health

insurance or annuity contracts for all

employee benefit plans (and their

employers) with respect to which FSLIA

is a party in interest by reason of a

relationship to such employer described

in section 3(14) (E) or (G) of the Act does

not exceed 50% of the gross premiums

and annuity considerations received for

all lines of insurance (whether direct

insurance or reinsurance) in that taxable

year by FSLIA. For purposes of this

condition (d):

(1) the term ‘‘gross premiums and

annuity considerations received’’ means

as to the numerator the total of

premiums and annuity considerations

received, both for the subject

reinsurance transactions as well as for

any direct sale or other reinsurance of

life insurance, health insurance or

annuity contracts to such plans (and

their employers) by FSLIA. This total is

to be reduced (in both the numerator

and the denominator of the fraction) by

experience refunds paid or credited in

that taxable year by FSLIA.

(2) all premium and annuity

considerations written by FSLIA for

plans which it alone maintains are to be

excluded from both the numerator and

the denominator of the fraction.

EFFECTIVE DATE: If the proposed

exemption is granted, the exemption

will be effective August 1, 1993.

Preamble

On August 7, 1979, the Department

published a class exemption [Prohibited

Transaction Exemption 79–41 (PTE 79–

41), 44 FR 46365] which permits

insurance companies that have

substantial stock or partnership

affiliations with employers establishing

or maintaining employee benefit plans

to make direct sales of life insurance,

health insurance or annuity contracts

which fund such plans if certain

conditions are satisfied.

In PTE 79–41, the Department stated

its views that if a plan purchases an

insurance contract from a company that

is unrelated to the employer pursuant to

an arrangement or understanding,

written or oral, under which it is

expected that the unrelated company

will subsequently reinsure all or part of

the risk related to such insurance with

an insurance company which is a party

in interest with respect to the plan, the

purchase of the insurance contract

would be a prohibited transaction.

The Department further stated that as

of the date of publication of PTE 79–41,

it had received several applications for

exemption under which a plan or its

employer would contract with an

unrelated company for insurance, and

the unrelated company would, pursuant

to an arrangement or understanding,

reinsure part or all of the risk with (and

cede part or all of the premiums to) an

insurance company affiliated with the

employer maintaining the plan. The

Department felt that it would not be

appropriate to cover the various types of

reinsurance transactions for which it

had received applications within the

scope of the class exemption, but would

instead consider such applications on

the merits of each individual case.

Summary of Facts and Representations

1. FSC is incorporated under the laws

of the State of Delaware and is a

regional bank holding company with

banking subsidiaries in six western

states. In addition, it has ten other

subsidiaries, including a leasing

company, a mortgage company, a life

insurance company (FSLIA), an

insurance agency company, a discount

securities brokerage company, two

financial services companies, and two

companies providing technical and

logistical services to other FSC

subsidiaries.

2. FSLIA is a corporation organized

under the laws of Arizona with its

principal administrative offices in Salt

Lake City, Utah. FSLIA was originally

organized in Texas in August, 1954 and

operated as a life insurance company

domiciled in that State until 1991. On

December 20, 1991, FSLIA moved its

corporate domicile from Texas to

Arizona. FSLIA has always been a

wholly owned subsidiary of FSC and is

currently licensed to underwrite life

insurance business in Arizona. FSLIA is

primarily engaged in the businesses of:

(i) Fully underwriting credit life and

disability insurance indirectly to the

general public through an unrelated

insurance underwriter; and (ii)

reinsurance of credit life and disability

policies sold by other insurance

companies.

3. The Plan is sponsored by FSC and

most of its subsidiaries. The Plan is

composed of two parts, the First

Security Basic Group Term Life

Insurance Plan, and the First Security

Add-on Group Life Insurance Plan

(which provides both optional add-on

employee coverage and optional

dependent coverage. It is a welfare

benefit plan providing life insurance on

the lives of all employees who are

regularly scheduled to work 25 hours

per week, as well as add-on life

insurance on the lives of such

employees and life insurance on the

lives of the dependents of such

employees who voluntarily elect to have

and pay for the coverage. The Basic

Term Life Insurance Plan had 7,044

participants as of September 30, 1995,

and the Add-on Group Life Insurance

Plan had 3,333 participants with

coverage on their own lives and 2,698

participants with dependent coverage as

of that date. Premiums for basic

coverage are paid for by the employers,

while premiums for add-on and

dependent insurance are wholly paid

for by the employees through payroll

deduction. The premiums are

transferred twice monthly to a VEBA,

from which they are remitted monthly

to the direct insurer.

4. The life insurance is currently

underwritten by MM, an unaffiliated

insurance carrier. The life insurance

benefits under the Plan are provided by

MM and reinsured on a 50% basis by

FSLIA, i.e., FSLIA receives 50% of the

premiums paid and pays 50% of the

claims under the MM policy. The
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18435

16The applicants represent that any successor to

MM would be a legal reserve life insurance

company with assets of not less than $500,000,000,

and thus be of such a size as to afford similar

protection and responsibility.

17For purposes of this proposed exemption,

reference to provisions of Title I of the Act, unless

otherwise specified, refer also to the corresponding

provisions of the Code.

reinsurance contract between FSLIA

and MM was entered into effective

August 1, 1993, and was actually

implemented in stages between that

date and December 31, 1993. The

applicants have requested that this

proposed exemption apply to any

successor company to MM that is also

unrelated to FSC should FSC decide to

insure this life insurance coverage with

another carrier under the same kind of

arrangement.

5. The applicants represent that the

subject transaction has not and will not

in any way affect the cost to the

insureds of the group life insurance

contracts, and the Plan has paid and

will pay no more than adequate

consideration for the insurance. Also,

Plan participants are afforded insurance

protection from MM, one of the largest

and most experienced group insurers in

the United States, at competitive rates

arrived at through arm’s-length

negotiations. MM is rated A++ by the

A.W. Best Company, whose insurance

ratings are widely used in financial and

regulatory circles. MM has assets in

excess of $8.5 billion and reserves set

aside for group life and accident and

health policies of nearly $346 million.

MM will continue to have the ultimate

responsibility in the event of loss to pay

insurance benefits to the employee’s

beneficiary.16 The applicants represent

that FSLIA is a sound, viable company

which does a substantial amount of

business outside its affiliated group of

companies. FSLIA is substantially

dependent upon insurance customers

that are unrelated to itself and its

affiliates for premium revenue.

6. The applicants represent that the

subject reinsurance transaction has met

and will continue to meet all of the

conditions of PTE 79–41 covering direct

insurance transactions:

(a) FSLIA is a party in interest with

respect to the Plan (within the meaning

of section 3(14)(G) of the Act) by reason

of stock affiliation with FSC, which

maintains the Plan.

(b) FSLIA is licensed to do business

in Arizona;

(c) FSLIA has been audited by the

independent certified public accounting

firm of Deloitte & Touche for each of its

fiscal years since 1992 and has therefore

undergone such an examination for each

completed taxable year of the

reinsurance transaction.

(d) FSLIA has received Certificates of

Authority from its respective

domiciliary states (first Texas, then

Arizona) which have been audited or

reviewed annually since its organization

and which have neither been revoked

nor suspended.

(e) The Plan has paid and will pay no

more than adequate consideration for

the insurance. The subject transaction

has not and will not in any way affect

the cost to the insureds of the group life

insurance transaction.

(f) No commissions have been or will

be paid with respect to the direct

insurance or the reinsurance agreements

between MM (or any successor thereto)

and FSC and FSLIA.

(g) For each taxable year of FSLIA, the

‘‘gross premiums and annuity

considerations received’’ in that taxable

year for group life and health insurance

(both direct insurance and reinsurance)

for all employee benefit plans (and their

employers) with respect to which FSLIA

is a party in interest by reason of a

relationship to such employer described

in section 3(14)(E) or (G) of the Act have

not exceeded and will not exceed 50%

of the ‘‘gross premiums and annuity

considerations received’’ by FSLIA from

all lines of insurance in that taxable

year. Most of the premium income of

FSLIA comes from reinsurance, but

some is credit life insurance written on

a direct basis. FSLIA is principally in

the business of reinsurance. The

applicants represent that the premiums

for the Plan insurance have never

exceeded 18.8% of FSLIA’s total

premiums. In 1995, the premium

income of FSLIA came from the

following sources in the following

amounts:

(1) MM reinsurance on the subject

Plan group policy: $559,209.

(2) Reinsurance of credit life

insurance sold to individual customers

of FSC group—

(A) American Bankers Credit

reinsurance: $1,463,747

(B) Central States of Omaha Visa

Credit reinsurance: $807,049

(C) Balboa Credit reinsurance on

commercial loans: $154,000.

Thus, more than 81% of FSLIA’s

premiums for 1995 were derived from

insurance (or reinsurance thereon) sold

to entities other than FSC and its

affiliated group.

7. In summary, the applicants

represent that the subject transaction

has met and will continue to meet the

criteria of section 408(a) of the Act

because: a) Plan participants and

beneficiaries are afforded insurance

protection by MM, one of the largest and

most experienced group insurers in the

United States, at competitive market

rates arrived at through arm’s-length

negotiations; b) FSLIA is a sound, viable

insurance company which does a

substantial amount of public business

outside its affiliated group of

companies; and c) each of the

protections provided to the Plan and its

participants and beneficiaries by PTE

79–41 has been and will continue to be

met under the subject reinsurance

transaction.

FOR FURTHER INFORMATION CONTACT: Gary

H. Lefkowitz of the Department,

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

a toll-free number.)

Chicago Trust Company (Chicago Trust)

Located in Chicago, IL

[Application No. D–10222]

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).17

Section I. Exemption for the In-Kind

Transfer of Assets

If the exemption is granted, the

restrictions of section 406(a) and section

406(b) of the Act and the sanctions

resulting from the application of section

4975 of the Code by reason of section

4975(c)(1) (A) through (F) shall not

apply, effective September 21, 1995, to

the in-kind transfer to any diversified

open-end investment company (the

Fund or Funds) registered under the

Investment Company Act of 1940 (the

’40 Act) to which Chicago Trust or any

of its affiliates (collectively, Chicago

Trust) serves as investment adviser and/

or may provide other services, of the

assets of various employee benefit plans

(the Client Plans), including plans

established or maintained by Chicago

Trust (the In-House Plans; collectively,

the Plans) that are either held in certain

collective investment funds (the CIF or

CIFs) maintained by Chicago Trust as

trustee, investment manager, in

exchange for shares of such Funds,

provided that the following conditions

are met:

(a) A fiduciary (the Second Fiduciary)

who is acting on behalf of each affected

In-House Plan or Client Plan and who

is independent of and unrelated to

Chicago Trust, as defined in paragraph

(h) of Section III below, receives

advance written notice of the in-kind

transfer of assets of the CIFs in exchange
18436 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

for shares of the Funds and the

disclosures described in paragraph (f) of

Section II below.

(b) On the basis of the information

described in paragraph (f) of Section II

below, the Second Fiduciary authorizes

in writing the in-kind transfer of assets

of an In- House Plan or a Client Plan in

exchange for shares of the Funds, the

investment of such assets in

corresponding portfolios of the Funds,

and, in the case of a Client Plan, the fees

received by Chicago Trust pursuant to

its investment advisory agreement with

the Funds. Such authorization by the

Second Fiduciary is to be consistent

with the responsibilities, obligations

and duties imposed on fiduciaries by

Part 4 of Title I of the Act.

(c) No sales commissions or

redemption fees are paid by an In-House

Plan or a Client Plan in connection with

the in-kind transfers of assets of the CIFs

in exchange for shares of the Funds.

(d) All or a pro rata portion of the

assets of an In-House Plan or a Client

Plan held in the CIFs are transferred inkind 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.

(e) The CIFs receive shares of the

Funds that have a total net asset value

equal in value to the assets of the CIFs

exchanged for such shares on the date

of transfer.

(f) The current value of the assets of

the CIFs to be transferred in-kind in

exchange for shares is determined in a

single valuation performed in the same

manner and at the close of business on

the same day, using independent

sources in accordance with the

procedures set forth in Rule 17a–7(b)

(Rule 17a–7) under the ’40 Act, as

amended from time to time or any

successor rule, regulation, or similar

pronouncement and the procedures

established 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 brokerdealers or pricing services independent

of Chicago Trust.

(g) Not later than 30 days after

completion of each in-kind transfer of

assets of the CIFs in exchange for shares

of the Funds, Chicago Trust sends by

regular mail to the Second Fiduciary,

who is acting on behalf of each affected

Plan and who is independent of and

unrelated to Chicago Trust, as defined

in paragraph (h) of Section III below, a

written confirmation that contains the

following information:

(1) The identity of each of the assets

that was valued for purposes of the

transaction in accordance with Rule

17a–7(b)(4) under the ’40 Act;

(2) The price of each such assets for

purposes of the transaction; and

(3) The identity of each pricing

service or market maker consulted in

determining the value of such assets.

(h) Not later than 90 days after

completion of each in-kind transfer of

assets of the CIFs in exchange for shares

of the Funds, Chicago Trust sends by

regular mail to the Second Fiduciary,

who is acting on behalf of each affected

In-House Plan or Client Plan and who

is independent of and unrelated to

Chicago Trust, as defined in paragraph

(h) of Section III below, a written

confirmation that contains the following

information:

(1) The number of CIF units held by

each affected Plan immediately before

the in-kind transfer (and the related per

unit value and the aggregate dollar value

of the units transferred); and

(2) The number of shares in the Funds

that are held by each affected Plan

following the conversion (and the

related per share net asset value and the

aggregate dollar value of the shares

received).

(i) The conditions set forth in

paragraphs (c), (d), (e), (p) and (q) of

Section II below as they would relate to

all Plans are satisfied.

Section II. Exemption for the Receipt of

Fees From Funds

If the exemption is granted, the

restrictions of section 406(a) and section

406(b) of the Act and the sanctions

resulting from the application of section

4975 of the Code, by reason of section

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

shall not apply, effective September 21,

1995, to (1) the receipt of fees by

Chicago Trust from the Funds for

investment advisory services to the

Funds; and (2) the receipt or retention

of fees by Chicago Trust from the Funds

for acting as custodian or shareholder

servicing agent to the Funds, as well as

any other services provided to the

Funds which are not investment

advisory services (i.e., the Secondary

Services), in connection with the

investment of shares in the Funds by the

Client Plans for which Chicago Trust

acts as a fiduciary, provided that—

(a) No sales commissions are paid by

the Client Plans in connection with

purchases or sales of shares of the

Funds and no redemption fees are paid

in connection with the redemption of

such 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 (e) 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) Chicago Trust, any of its affiliates

or their officers or directors do not

purchase from or sell to any of the

Client Plans shares of any of the Funds.

(d) For each Client Plan, the

combined total of all fees received by

Chicago Trust for the provision of

services to such Plan, and in connection

with the provision of services to any of

the Funds in which the Client Plans

may invest, is not in excess of

‘‘reasonable compensation’’ within the

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

(e) Chicago Trust does not receive any

fees payable, pursuant to Rule 12b-1

(the 12b-1 Fees) under the ’40 Act in

connection with the transactions

involving the Funds.

(f) A Second Fiduciary who is acting

on behalf of a Client Plan and who is

independent of and unrelated to

Chicago Trust, as defined in paragraph

(h) of Section III below, receives in

advance of the investment by a Client

Plan in any of the Funds a full and

detailed written disclosure of

information concerning such Fund

including, but not limited to—

(1) A current prospectus for each

portfolio of each of the Funds in which

such Client Plan is considering

investing;

(2) A statement describing the fees for

investment advisory or other similar

services, any fees for Secondary

Services, as defined in paragraph (i) of

Section III below, and all other fees to

be charged to or paid by the Client Plan

and by such Funds to Chicago Trust,

including the nature and extent of any

differential between the rates of such

fees;

(3) The reasons why Chicago Trust

may consider such investment to be

appropriate for the Client Plan;

(4) A statement describing whether

there are any limitations applicable to

Chicago Trust with respect to which

assets of a Client Plan may be invested

in the Funds, and, if so, the nature of

such limitations;

(5) A copy of the proposed exemption

and/or a copy of the final exemption, if
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18437

granted, upon the request of the Second

Fiduciary; and

(6) The last date as of which consent

to an in-kind transfer may be given by

the Second Fiduciary, along with the

disclosure that if consent is not given by

that date, the Second Fiduciary will be

deemed to have withheld consent to an

in-kind transfer.

(g) On the basis of the information

described in paragraph (f) of this

Section II, the Second Fiduciary

authorizes in writing—

(1) The investment of assets of the

Client Plan in shares of the Fund, in

connection with the transaction set forth

in Section II;

(2) The Funds in which the assets of

the Client Plan may be invested; and

(3) The fees received by Chicago Trust

in connection with investment advisory

services and Secondary Services

provided to the Funds; such

authorization by the Second Fiduciary

to be consistent with the responsibilities

obligations, and duties imposed on

fiduciaries by Part 4 of Title I of the Act.

(h) The authorization, described in

paragraph (g) of this Section II, is

terminable at will by the Second

Fiduciary of a Client Plan, without

penalty to such Client Plan. Such

termination will be effected by Chicago

Trust selling the shares of the Funds

held by the affected Client Plan within

one business day following receipt by

Chicago Trust, either by mail, hand

delivery, facsimile, or other available

means at the option of the Second

Fiduciary, of written notice of

termination (the Termination Form), as

defined in paragraph (i) of Section III

below; provided that if, due to

circumstances beyond the control of

Chicago Trust, the sale cannot be

executed within one business day,

Chicago Trust shall have one additional

business day to complete such sale.

(i) The Client Plans do not pay any

Plan-level investment advisory fees to

Chicago Trust with respect to any of the

assets of such Client Plans which are

invested in shares of the Funds. This

condition does not preclude the

payment of investment advisory fees by

the Funds to Chicago Trust under the

terms of an investment advisory

agreement adopted in accordance with

section 15 of the ’40 Act or other

agreement between Chicago Trust and

the Funds or the retention by Chicago

Trust of fees for Secondary Services

paid to Chicago Trust by the Funds.

(j) In the event of an increase in the

rate of any fees paid by the Funds to

Chicago Trust regarding investment

advisory services that Chicago Trust

provides to the Funds over an existing

rate for such services that had been

authorized by a Second Fiduciary of a

Client Plan, in accordance with

paragraph (g) of this Section II, Chicago

Trust will, at least 30 days in advance

of the implementation of such increase,

provide a written notice (which may

take the form of a proxy statement,

letter, or similar communication that is

separate from the prospectus of the

Fund and which explains the nature

and amount of the increase in fees) to

the Second Fiduciary of each Client

Plan invested in a Fund which is

increasing such fees. Such notice shall

be accompanied by the Termination

Form, as defined in paragraph (j) of

Section III below;

(k) In the event of an (1) addition of

a Secondary Service, as defined in

paragraph (h) of Section III below,

provided by Chicago Trust to the Funds

for which a fee is charged or (2) an

increase in the rate of any fee paid by

the Funds to Chicago Trust for any

Secondary Service that results either

from an increase in the rate of such fee

or from the decrease in the number or

kind of services performed by Chicago

Trust for such fee over an existing rate

for such Secondary Service which had

been authorized by the Secondary

Fiduciary in accordance with paragraph

(g) of this Section II, Chicago Trust will,

at least 30 days in advance of the

implementation of such Secondary

Service or fee increase, provide a

written notice (which may take the form

of a proxy statement, letter, or similar

communication that is separate from the

prospectus of the Funds and which

explains the nature and amount of the

additional Secondary Service for which

a fee is charged or the nature and

amount of the increase in fees) to the

Second Fiduciary of each of the Client

Plans invested in a Fund which is

adding a service or increasing fees. Such

notice shall be accompanied by the

Termination Form, as defined in

paragraph (j) of Section III below.

(l) The Second Fiduciary is supplied

with a Termination Form at the times

specified in paragraphs (j) and (k) of this

Section II, which expressly provides an

election to terminate the authorization,

described above in paragraph (g) 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 Chicago Trust 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

Chicago Trust from the Second

Fiduciary of the Termination Form or

any written notice of termination;

provided that if, due to circumstances

beyond the control of Chicago Trust, the

sale of shares of such Client Plan cannot

be executed within one business day,

Chicago Trust shall have one additional

business day to complete such sale; and

(2) Failure by the Second Fiduciary to

return the Termination Form on behalf

of the Client 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

(g) of this Section II, of Chicago Trust 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

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

this paragraph, sooner than six months

after such Termination Form is supplied

pursuant to paragraphs (j) and (k) of this

Section II, except to the extent required

by said paragraphs (j) and (k) of this

Section II to disclose an additional

Secondary Service for which a fee is

charged or an increase in fees;

(n)(1) With respect to each of the

Funds in which a Client Plan invests,

Chicago Trust will provide the Second

Fiduciary of such Plan—

(A) At least annually with a copy of

an updated prospectus of such Fund;

(B) A report or statement (which may

take the form of the most recent

financial report, the current statement of

additional information, or some other

written statement) which contains a

description of all fees paid by the Fund

to Chicago Trust within 15 days of such

document’s availability; and

(2) With respect to each of the Funds

in which a Client Plan invests, in the

event such Fund places brokerage

transactions with Chicago Trust or any

adviser or sub-adviser to a Fund or any

of their affiliates (collectively, Related

Party Brokerage), Chicago Trust will

provide the Second Fiduciary of such

Client Plan at least annually with a

statement specifying—

(A) The total, expressed in dollars,

attributable to each Fund’s investment

portfolio which represent Related Party

Brokerage;

(B) The total, expressed in dollars, of

brokerage commissions attributable to

each Fund’s investment portfolio other

than Related Party Brokerage;
18438 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

(C) The average brokerage

commissions per share, expressed as

cents per share, paid for Related Party

Brokerage by each Fund; and

(D) The average brokerage

commissions per share, expressed as

cents per share, paid by each Fund for

brokerage other than Related Party

Brokerage.

(o) All dealings between the Client

Plans and any of the Funds are on a

basis no less favorable to such Client

Plans than dealings between the Funds

and other shareholders holding the

same class of shares as the Client Plans.

(p) Chicago Trust maintains for a

period of 6 years the records necessary

to enable the persons, as described in

paragraph (q) of Section II below, to

determine whether the conditions of

this proposed 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

Chicago Trust, the records are lost or

destroyed prior to the end of the 6 year

period; and

(2) No party in interest, other than

Chicago Trust, 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.

(q)(1) Except as provided in paragraph

(q)(2) of this Section II and

notwithstanding any provisions of

subsection (a)(2) and (b) of section 504

of the Act, the records referred to in

paragraph (p) of Section II above are

unconditionally available at their

customary location for examination

during normal business hours by—

(A) Any duly authorized employee or

representative of the Department, the

Internal Revenue Service (the Service)

or the Securities and Exchange

Commission (the SEC);

(B) Any fiduciary of each of the Client

Plans who has authority to acquire or

dispose of shares of any of the Funds

owned by such Client Plan, or any duly

authorized employee or representative

of such fiduciary; and

(C) Any participant or beneficiary of

the Plans or duly authorized employee

or representative of such participant or

beneficiary.

(2) None of the persons described in

paragraph (q)(1)(B) and (q)(1)(C) of

Section II shall be authorized to

examine trade secrets of Chicago Trust,

or commercial or financial information

which is privileged or confidential.

Section III. Definitions

For purposes of this proposed

exemption,

(a) The term ‘‘Chicago Trust’’ means

Chicago Trust Company and any

affiliate of Chicago Trust, as defined in

paragraph (b) of this Section III.

(b) An ‘‘affiliate’’ of a person includes:

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with the person;

(2) Any officer, director, employee,

relative, or partner in any such person;

and

(3) Any corporation or partnership of

which such person is an officer,

director, partner, or employee.

(c) The term ‘‘control’’ means the

power to exercise a controlling

influence over the management or

policies of a person other than an

individual;

(d) The terms ‘‘Fund or Funds’’ mean

any diversified open-end investment

company or companies registered under

the ’40 Act for which Chicago Trust

serves as investment adviser and may

also provide custodial or other services

such as Secondary Services as approved

by such Funds.

(e) 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 charged to

each portfolio, by the number of

outstanding shares.

(f) The term ‘‘Plan’’ means any

‘‘employee benefit pension plan’’ within

the meaning of section 3(2) of the Act

or any ‘‘plan’’ within the meaning of

section 4975(e)(1) of the Code. The term

‘‘Plan’’ includes any plan maintained by

an entity other than Chicago Trust

(referred to collectively herein as the

‘‘Client Plans’’) and any of the following

Plans sponsored or maintained by

Chicago Trust (referred to collectively as

the ‘‘In-House Plans’’): the Chicago

Trust Pension Plan, the Chicago Trust

Savings and Profit Sharing Plan, the

Celite Employees’ Thrift Plan, the Celite

Hourly Retirement Savings 401(k) Plan,

the Celite Employees’ Retirement Plan

and the Heads & Threads Savings and

Profit Sharing Plan.

(g) The term ‘‘relative’’ means a

‘‘relative’’ as that term is defined in

section 3(15) of the Act (or a ‘‘member

of the family’’ as that term is defined in

section 4975(e)(6) of the Code), or a

brother, a sister, or a spouse of a brother

or a sister.

(h) The term ‘‘Second Fiduciary’’

means a fiduciary of a plan who is

independent of and unrelated to

Chicago Trust. For purposes of this

exemption, the Second Fiduciary will

not be deemed to be independent of and

unrelated to Chicago Trust if—

(1) Such Second Fiduciary directly or

indirectly controls is controlled by or is

under common control with Chicago

Trust;

(2) Such Second Fiduciary, or any

officer, director, partner, employee or

relative of such Second Fiduciary is an

officer, director, partner or employee of

Chicago Trust (or is a relative of such

persons); and

(3) Such Second Fiduciary directly or

indirectly receives any compensation or

other consideration in connection with

any transaction described in this

exemption; provided, however, that

nothing shall prevent a Second

Fiduciary’s receipt of its customary fees

from a Plan or the Plan’s sponsoring

employer for serving as a fiduciary to

such Plan.

If an officer, director, partner, or

employee of Chicago Trust (or a relative

of such persons), is a director of such

Second Fiduciary, and if he or she

abstains from participation in the choice

of the Plan’s investment manager/

adviser, the approval of any purchase or

sale by the Plan of shares of the Funds,

and the approval of any change of fees

charged to or paid by the Plan, in

connection with any of the transactions

described in Sections I and II above,

then paragraph (h)(2) of Section III

above, shall not apply.

(i) The term ‘‘Secondary Service’’

means a service, other than an

investment advisory or similar service,

which is provided by Chicago Trust to

the Funds, including but not limited to

custodial, accounting, brokerage,

administrative, or any other service.

(j) The term ‘‘Termination Form’’

means the form supplied to the Second

Fiduciary of a Client Plan, at the times

specified in paragraphs (j), (k), and (m)

of Section II above, which expressly

provides an election to the Second

Fiduciary to terminate on behalf of the

Plans the authorization, described in

paragraph (g) of Section II. Such

Termination Form is to be used at will

by the Second Fiduciary to terminate

such authorization without penalty to

the Client Plan and to notify Chicago

Trust in writing to effect such

termination not later than one business

day following receipt by Chicago Trust

of written notice of such request for

termination; provided that if, due to

circumstances beyond the control of

Chicago Trust, the sale cannot be

executed within one business day,
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18439

18Although the Client Plans may also include

participant-directed plans subject to the provisions

of section 404(c) of the Act, the Department is not

providing, nor is the applicant requesting,

exemptive relief for such Client Plans to the extent

such transactions are covered under section 404(c)

of the Act.

Chicago Trust shall have one additional

business day to complete such sale.

EFFECTIVE DATE: If granted, this proposed

exemption will be effective as of

September 21, 1995.

Summary of Facts and Representations

Description of the Parties

1. The parties or entities involved in

the subject transactions are described as

follows:

(a) Chicago Trust, a trust company

chartered under the laws of the State of

Illinois, maintains its principal office at

171 North Clark Street, Chicago, Illinois.

Chicago Trust is a wholly owned

subsidiary of the Allegheny Corporation

(Allegheny) whose principal place of

business is at Park Avenue Plaza, New

York, NY. As of December 31, 1995,

Chicago Trust had approximately $6

billion in consolidated assets and it

engages in two principal lines of

business, directly or through

subsidiaries. In this regard, Chicago

Trust is the largest real estate title

insurer in the world. In addition,

Chicago Trust provides trustee,

investment management and related

services, primarily to high net worth

individuals, families, tax-qualified

pension and profit sharing plans

(including plans subject to provisions of

the Act), individual retirement accounts

and insurance companies. As of

December 31, 1995, Chicago Trust

managed approximately $1.3 billion of

client assets.

(b) The Client Plans consist of 351

separate employee benefit plan clients

of Chicago Trust.18 Of those Client

Plans, 239 are employee pension benefit

plans as defined in section 3(2) of the

Act or Plans covering only partners or

proprietors and their spouses, as

described in 29 CFR 2510.3–3 (b) and

(c). The Client Plans also consist of 112

individual retirement accounts With

respect to the Client Plans, Chicago

Trust may serve as trustee, either with

or without investment discretion, or as

an ‘‘investment manager’’ within the

meaning of section 3(38) of the Act.

Chicago Trust may also provide ‘‘Planlevel’’ administrative services to the

Client Plans that include maintaining

custody of Plan assets, maintaining Plan

records, preparing periodic reports of

Plan assets and participant accounts,

effecting participant investment

directions, processing participant loans

and accounting for contributions,

payment of benefits and other receipts

and distributions. Chicago Trust does

not have any ownership in or common

ownership with any broker-dealer.

Chicago Trust is compensated for its

Plan-level investment management

services according to a percentage of

assets under management formula. Its

fees for Plan-level administrative

services are separately negotiated with

each Client Plan for which such services

are performed.

(c) The In-House Plans consist of

various plans that are sponsored by

Chicago Trust and its affiliates. In this

regard, Chicago Trust is the sponsoring

employer of the Chicago Trust Company

Pension Plan and the Chicago Trust

Company Savings and Profit Sharing

Plan (collectively, the Chicago Trust

Plans). Celite Corporation, a third-tier

subsidiary of Allegheny, is the

sponsoring employer of the Celite

Employees Thrift Plan, the Celite

Hourly Retirement Savings 401(k) Plan,

the Celite Hourly Retirement Plan and

the Celite Employees Retirement Plan

(collectively, the Celite Plans). Heads

and Threads, a division of Allegheny, is

the sponsoring employer of the Heads

and Threads Profit Sharing and Savings

Plan (the Heads and Threads Plan). Each

of these plans is an ‘‘employee pension

benefit plan within the meaning of

section 3(2) of the Act. Collectively, the

Chicago Trust Plans, the Celite Plans

and the Heads and Threads Plan are

referred to herein as the ‘‘In-House

Plans.’’ The following table shows the

participant breakdowns and asset totals

for the In-House Plans as of December

31, 1995.

Plans No. participants Total assets

Chicago Trust:

Pension .............. 10,880 $86,639,464

Savings and

Profit Sharing 6,938 222,865,196

Celite:

Employees Thrift 204 10,702,672

Hourly Ret. Savings ................ 257 2,385,675

Hourly Retirement ............... 326 7,747,333

Employees Retirement .......... 275 10,308,572

Heads & Threads:

Profit Sharing

and Savings ... 196 11,800,983

Chicago Trust is trustee for each InHouse Plan and also performs, at the

Plan-level, related services for each InHouse Plan. These services include

maintaining custody of plan assets,

maintaining plan records, preparing

periodic reports of plan assets and

participant accounts, effecting

participant investment directions,

processing participant loans and

accounting for contributions, payments

of benefits and other receipts and

distributions. Chicago Trust’s

compensation from the In-House Plans

for the performance of these Plan-level

services is limited to the reimbursement

of direct expenses.

(d) The CIFs, which are maintained

pursuant to several declarations of trust,

are the primary investment vehicles

used by Chicago Trust in its investment

management of plan assets of the InHouse Plans and the Client Plans. The

Chicago Trust Company Investment

Trust for Employee Benefit Plans (the

Investment Trust), which was created by

a Declaration of Trust dated January 17,

1968 and restated several times, most

recently as of January 31, 1994, is

organized as a group trust within the

meaning of Revenue Ruling 81–100,

1981–1 CB 326. The Investment Trust

formerly included the assets of the

Balanced Fund, the Core Equity Fund

and the Fixed Income Fund, three CIFs

which were terminated on September

21, 1995. The Investment Trust

presently holds the assets of the Capital

Appreciation Fund, the Growth Fund,

the Index Fund, the International Equity

Fund and the US Government Fund.

Chicago Trust also utilizes its Safety

of Principal Fund in the management of

employee benefit plan assets. The Safety

of Principal Fund is a vehicle which is

permitted to invest in stated return

contracts, certificates of deposit,

institutional money market funds and

certain other obligations. It is

maintained pursuant to a declaration of

trust dated April 24, 1985, titled the

‘‘Chicago Trust Stated Principal Value

Investment Trust for Employee Benefit

Plans,’’ and is organized as a ‘‘group

trust’’ within the meaning of Revenue

Ruling 81–100, 1981–1 CB 326.

Until it was terminated on September

21, 1995, Chicago Trust utilized its

Short Term Investment Fund in the

management of employee benefit plan

assets. The Short Term Investment Fund

was a money-market vehicle which was

maintained pursuant to a declaration of

trust dated July 22, 1981, titled the

‘‘Chicago Trust Company Short Term

Investment Fund for Employee Benefit

Plans’’ which established the Short

Term Investment Fund as a ‘‘group

trust’’ within the meaning of Revenue

Ruling 81–100, 1981–1 CB 326.

Under section 3.02 of the respective

Declarations of Trust which established

the Investment Trust, the Safety of

Principal Fund and the Short Term

Investment Fund, Chicago Trust has had

exclusive management and control of

the assets of the CIFs. Chicago Trust has
18440 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

19Chicago Trust is not requesting an exemption

for investments in the Funds by the In-House Plans.

Chicago Trust represents that the In-House 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, openend 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 InHouse Plans would be covered by PTE 77–3.

20Chicago Trust is not requesting exemptive relief

for the provision of sweep services to Client Plans.

Chicago Trust represents that since both the CIFs

and the Funds employ daily valuations, there is no

need for sweep services.

21For example, CIFs acquired through mergers

with or acquisitions of other Banks.

charged no fee for its investment

advisory services to these CIFs, but it

has received reimbursement for its

expenses. No CIF has imposed a

minimum investment or maximum limit

on investments in it by an In-House

Plan or a Client Plan.

(e) The Funds constitute a Delaware

business trust organized on September

10, 1993 and registered as an open-end,

management investment company

under the provisions of the ’40 Act. The

Funds are managed by a Board of

Trustees, a majority of whose members

are persons independent of Chicago

Trust. At present, the Funds offer seven

separate, diversified series of shares of

mutual fund portfolios. They are the

Chicago Trust Growth & Income Fund,

the Chicago Trust Intermediate Fixed

Income Fund, the Chicago Trust

Intermediate Municipal Bond Fund, the

Chicago Trust Money Market Fund, the

Montag & Caldwell Growth Fund, the

Montag & Caldwell Balanced Fund and

the Chicago Trust Talon Fund.

Each Fund comprising the Funds is

subject to a separate advisory agreement

and pays an investment advisory fee to

its respective investment adviser.

Chicago Trust is the investment adviser

to the Chicago Trust Growth & Income

Fund, the Chicago Trust Intermediate

Fixed Income Fund, the Chicago Trust

Intermediate Municipal Bond Fund and

the Chicago Trust Money Market Fund

and it receives investment advisory fees,

respectively, of 0.70 percent, 0.55

percent, 0.60 percent and 0.40 percent

of average daily net assets. Montag &

Caldwell, a registered investment

adviser which is a wholly-owned

subsidiary of Chicago Trust, is the

investment adviser to the Montag &

Caldwell Growth Fund and the Montag

& Caldwell Balanced Fund. For services

rendered, Montag & Caldwell receives

investment advisory fees of 0.80 percent

and 0.75 percent of average daily net

assets from the Growth Fund and

Balanced Fund.

In addition, Chicago Trust is the

investment adviser to the Chicago Trust

Talon Fund and it receives an

investment advisory fee of 0.80 percent

of average daily net assets from this

Fund. Pursuant to a sub-advisory

agreement, Chicago Trust pays, out of its

investment advisory fee, a subadvisory

fee to Talon Asset Management, Inc.

(Talon), an unrelated investment

adviser, to manage this Fund, subject to

Chicago Trust’s supervision. Talon’s

subadvisory fee ranges from 0.40

percent to 0.75 percent of daily net

assets.

The Funds maintain a written

‘‘distribution and services plan’’

pursuant to Rule 12b–1 of the ’40 Act.

Under the plan of distribution, each

Fund (other than the Chicago Trust

Money Market Fund) can charge a fee of

0.25 percent of average daily net assets.

This fee is paid by the Chicago Trust

Funds to parties other than Chicago

Trust or its affiliates to finance activities

that will result in the marketing or

distribution of shares of the Funds.

The minimum investment for an InHouse Plan or a Client Plan in a Fund

is $1,000 for the Chicago Trust Money

Market Fund and $500 for each other

Fund. No Fund imposes a maximum

limit on investments in it by a Client

Plan or an In-House Plan.

(f) Cole Taylor Bank of Chicago,

Illinois (Cole Taylor) has been retained

by Chicago Trust to serve as the Second

Fiduciary for the In-House Plans

currently investing in the Funds. Cole

Taylor, which was established in 1929,

is independent of and unrelated to

Chicago Trust and each of its affiliates.

As of December 31, 1995, Cole Taylor

exercised discretionary investment

authority over approximately

$362,601,000 of fiduciary assets,

including approximately $171,511,000

of assets of employee benefit plans

covered by the Act and non-qualified

employee benefit plans. As of December

31, 1995, Cole Taylor also served as

directed trustee, agent or custodian with

respect to approximately $238,131,900

of assets of employee benefit plans

covered by the Act and non-qualified

employee benefit plans.

Description of the Transactions

2. Chicago Trust requests retroactive

exemptive relief with respect to the inkind transfer of all or a pro rata portion

of an In-House Plan’s or a Client Plan’s

assets from the terminating CIFs

identified above to the Funds, in

exchange for shares of the Funds. In

addition, Chicago Trust requests

retroactive 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, investment

manager, or custodian, in shares of the

Funds in instances where Chicago Trust

is an investment adviser, custodian, and

shareholder servicing agent for the

Funds.19 The exemptive relief provided

for the receipt of fees would cover the

Client Plans only, specifically those

Plans for which Chicago Trust exercises

investment discretion as well as Client

Plans where investment decisions are

made a Second Fiduciary.20 If granted,

the exemption would be effective as of

September 21, 1995.

In-Kind Transfers to the Funds by InHouse Plans and Client Plans

3. Although Chicago Trust has

maintained CIFs in which In-House

Plans and Client Plans have invested as

investment options in accordance with

requirements under Federal or state

banking laws that apply to collective

investment trusts, it decided to

terminate certain of its CIFs and offer to

the Plans participating in such CIFs

appropriate interests in certain Funds as

alternative investments. Chicago Trust

believes that the interests of the Plans

invested in the CIFs would be better

served by investment in shares of the

Funds. According to Chicago Trust, by

investing in the Funds, a Plan would be

afforded daily valuations reported in

newspapers of general circulation and

increased liquidity.

To avoid the potentially large

brokerage expenses that would

otherwise be incurred, Chicago Trust

proposes that from time-to-time, the

assets of its remaining CIFs (or similar

future CIFs 21) be transferred in-kind to

corresponding portfolios of the Funds in

exchange for shares of such Funds. No

brokerage commissions or other fees or

expenses (other than customary transfer

charges paid to parties other than

Chicago Trust or its affiliates) would be

charged to the CIFs in connection with

the in-kind transfers of assets into the

Funds and the acquisition of shares of

the Funds by the CIFs. In addition, no

12b–1 Fees would be paid to Chicago

Trust or its affiliates in connection with

such transactions.

4. On September 21, 1995, Chicago

Trust made in-kind transfers of assets of

the In-House Plans and the Client Plans

that had been held in the Balanced

Fund, the Core Equity Fund, the Fixed

Income Fund and the Short-Term

Investment Fund, in exchange for shares

of the Funds. The affected CIFs had the

same investment characteristics as their
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18441

22At the Plan account level, the conversion was

reported in this manner—Assume a Client Plan

held 1,000 units of the Core Equity Fund. On April

1, the Client Plan account showed a disposition of

the 1,000 units valued at $6.50 with proceeds of

$6,500. On the same date, the account showed a

purchase of 684.211 shares at $9.50 per share of the

Chicago Trust Growth & Income Mutual Fund for

a total cost of $6,500 the same amount as the

disposition of the Core Equity Fund.

23The securities subject to valuation under Rule

17(a)–7(b)(4) include all securities other than

‘‘reported securities,’’ as the term is defined in Rule

11Aa3–1 under the Securities Exchange Act of

1934, or those quoted on the NASDAQ system or

for which the principal market is an exchange.

corresponding Fund portfolios. The

shares of such Funds were equal in

value to the CIF assets exchanged. All

in-kind transfers were effected as of a

single valuation date. Following the inkind transfers, each CIF was terminated

in accordance with the provisions of the

applicable Declarations of Trust and

law. Any remaining assets in the CIFs

from which the in-kind transfers were

made were converted into cash. No inkind transfers were made from the

Capital Appreciation Fund, the Growth

Fund, the International Equity Fund, the

Safety of Principal Fund or the U.S.

Government Fund. As stated above,

these CIFs were to be continued.

Fund shares received by the

terminated CIF were distributed to the

accounts of the In-House Plans and the

Client Plans, in proportion to such

Plans’ investment in the CIFs, so that

each In-House Plan or Client Plan

would be credited with Fund shares that

were equal in value to its pro rata share

of the CIFs assets which were

transferred. A Plan not electing to

participate in the Funds received a cash

payment representing a pro rata portion

of the assets of the terminating CIF

before the final liquidation took place.

A single lot of each in-kind security

on the records of the CIF was

established. The cost-basis of each inkind security was the market value on

the conversion date. The trade date of

each in-kind transaction was the actual

date the security was received by the

custodian bank. The same custodian

bank would hold the assets of the Funds

and the CIFs. The in-kind securities

were valued using the same pricing

vendor and methodologies as the Fund

and in accordance with the valuation

procedures described in Rule 17a–7(b)

under the ’40 Act, as amended from

time to time or any successor rule,

regulation, or similar pronouncement.

In this regard, Chicago Trust represents

that the ‘‘current market price’’ for

specific types of CIF securities involved

in the transaction was determined as

follows:

(a) If the security was a ‘‘reported

security’’ as the term is defined in Rule

11Aa3–1 under 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

current independent bid and the lowest

current independent offer for such

security (reported pursuant to Rule

11Ac1–1 under the ’34 Act), as of the

close of business on the CIF valuation

date.

(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 current independent bid and

lowest current independent offer on

such exchange as of the close of

business on the CIF valuation date.

(c) If the security was not a reported

security and was quoted in the

NASDAQ system, then the average of

the highest current independent bid and

lowest current independent offer

reported on Level 1 of NASDAQ as of

the close of business on the CIF

valuation date.

(d) For all other securities, the average

of the highest current independent bid

and lowest current independent offer as

of the close of business, determined on

the basis of reasonable inquiry. (For

securities in this category, Chicago Trust

represents that it obtained quotations

from at least three sources that were

either broker-dealers or pricing services

independent of and unrelated to

Chicago Trust and, where more than one

valid quotation was available, used the

average of the quotations to value the

securities, in conformance with

interpretations by the SEC and practice

under Rule 17a–7.)

The same vendor performing fund

accounting for the CIFs performed fund

accounting for the Funds. The number

of Fund shares to be issued was

computed by dividing the total

transferred fund market value by the net

asset value of the Fund at the close of

business on the conversion date. The

number of shares of the Funds issued

was allocated to the holders of the

predecessor CIFs in the same proportion

as the holdings in the CIFs.22

No in-kind transfer was made except

in accordance with pre-established

objective procedures which were

approved by the Board of Directors of

the Funds which provided that such inkind transfers would: (a) Consist solely

of assets which were consistent with the

investment objectives, policies and

restrictions of the transferee Fund; (b)

satisfy the applicable requirements of

the ’40 Act and the Code; and (c) consist

of assets which had a readily

ascertainable market value (determined

as of the close of business on the

effective date of such in-kind transfer by

reference to independent sources in

accordance with the valuation

procedures described in Rule 17a–7, are

liquid and are not subject to restrictions

on resale). Non-conforming assets were

sold on the open market through an

unaffiliated brokerage firm and the

proceeds of such sale were transferred

in cash.

In addition, no in-kind transfer was

made unless an In-House Plan or a

Client Plan was represented by a Second

Fiduciary who was independent of and

unrelated to Chicago Trust. Such

Second Fiduciary was required to give

written approval of the in-kind transfer

in advance following such fiduciary’s

receipt of written notice of the in-kind

transfer transaction and disclosure of

the following information: (a) A current

prospectus of the Funds; (b) a

description of the fees, including

investment advisory fees and all other

fees to be charged to or paid by the Plan

and by the Funds to Chicago Trust,

including the nature and extent of any

differential between the rates of such

fees; (c) the reasons why Chicago Trust

considered the in-kind transfer to be

appropriate for the In-House Plan or the

Client Plan; (d) a description of any

limitations applicable to the in-kind

transfer of assets from the CIFs to the

Funds; and (e) the last date as of which

consent to an in-kind transfer could be

given by the Second Fiduciary, along

with the disclosure that if consent was

not given by that date, the Second

Fiduciary would be deemed to have

withheld consent to an in-kind transfer

with respect to an In-House Plan or a

Client Plan. Any approval by a Second

Fiduciary was terminable at will by the

Second Fiduciary, without penalty to an

In-House Plan or a Client Plan invested

in shares of any of the Funds.

Following the in-kind transfers,

Chicago Trust sent the Second Fiduciary

of the In-House Plans as well as Second

Fiduciaries of the Client Plans, written

confirmations of the transactions. In this

regard, not later than 30 days after each

in-kind transfer, Chicago Trust sent a

Second Fiduciary written confirmation

of the identity of assets that were valued

for purposes of the in-kind transfer in

accordance with Rule 17a–7(b)(4), the

price determined for such assets and the

identity of each pricing services or

market maker consulted in determining

their value.23 In addition, no later than
18442 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

24 It should be noted that with respect to future

in-kind transfers, Chicago Trust will provide the

Second Fiduciary with copies of the subject

proposed exemption and grant notice upon such

fiduciary’s request.

90 days after an in-kind transfer,

Chicago Trust sent each Second

Fiduciary written confirmation of (a) the

number of CIF units held by an InHouse Plan or a Client Plan before the

in-kind transfer (and the related per unit

value and the aggregate dollar value of

the units transferred); and (b) the

number of Fund shares received by the

Plan as a result of the in-kind transfer

(and the related per share net asset

value and the aggregate dollar value of

the shares received).

In accordance with the conditions

under Section I of this proposed

exemption, similar procedures will

occur upon any future in-kind

exchanges between CIFs maintained by

Chicago Trust and the Funds.24

Representations of the Second Fiduciary

for the In-House Plans Regarding the InKind Transfers

5. As stated above, Chicago Trust

retained Cole Taylor as the Second

Fiduciary to oversee the initial in-kind

transfers of CIF assets to the Funds as

such transactions would affect the InHouse Plans. In such capacity, Cole

Taylor represented that it had

considerable experience serving in a

fiduciary capacity under the provisions

of the Act and otherwise.

Cole Taylor stated that it received the

following documents and information

from Chicago Trust: (a) A copy of the

exemption application; (b) written

disclosure of information concerning

the Funds; (c) a current prospectus for

each portfolio of the Funds; (d) a

statement describing the fees to be

charged to or paid by the In-House Plans

and by the Funds to Chicago Trust or to

unrelated parties; (e) a disclosure

statement explaining why Chicago Trust

believed the investment in the Funds by

the In-House Plans would be

appropriate; (f) a description of any

limitations regarding which In-House

Plan assets could be invested in shares

of the Funds and, if so, the nature of

such limitations; and (g) copies of plan

and trust documents for the In-House

Plans, written investment guidelines

applicable thereto and written

descriptions of total investment

portfolios for the In-House Plans.

Based on the foregoing documents

and information, Cole Taylor

represented that it understood and

accepted the duties, responsibilities and

liabilities in acting as a fiduciary for the

In-House Plans, including those duties,

responsibilities and liabilities that

would be imposed on fiduciaries under

the Act. In addition, Cole Taylor

represented that the terms of the inkind transfer transactions would be fair

to the participants of the In-House Plans

and would be comparable to and no less

favorable than the terms that would

have been reached among unrelated

parties.

Cole Taylor represented that the inkind transfer transactions were in the

best interest of the In-House Plans and

their participants and beneficiaries for

the following reasons: (a) The impact of

the in-kind transfers on the In-House

Plans should be 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 In-House Plans;

and (d) the benefits to be derived by the

In-House 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 (e.g., transfer agency fees and

fees for shareholder services) that might

be borne at the Fund-level by the InHouse Plans.

In forming an opinion on the

appropriateness of the in-kind transfers,

Cole Taylor represented that it

conducted an overall review of the InHouse Plans, including the In-House

Plan documents. Cole Taylor stated that

it also examined the total investment

portfolios of the In-House Plans to

ascertain whether or not the In-House

Plans were in compliance with their

investment objectives and policies.

Further, Cole Taylor asserted that it

examined the liquidity requirements of

the In-House Plans and reviewed the

concentration of the assets of the InHouse Plans that were invested in the

CIFs as well the portion of the CIFs

comprising the assets of the In-House

Plans. Finally, Cole Taylor explained

that it reviewed the diversification

provided by the investment portfolios of

the In-House Plans. Based on its review

and analysis of the foregoing, Cole

Taylor represented that the in-kind

transfer transactions would not

adversely affect the total investment

portfolios of the In-House Plans,

compliance by such Plans with their

stated investment objectives and

policies, or such Plans’ cash flows,

liquidity or diversification

requirements.

As Second Fiduciary, Cole Taylor

represented that Chicago Trust would

provide it with any documents it

considered necessary to perform its

duties as Second Fiduciary. In this

regard, Chicago Trust provided Cole

Taylor with advance written notice of

the in-kind transfers and written

confirmation statements as described in

Representation 4. Upon receipt of such

statements, Cole Taylor confirmed

whether or not the in-kind transfer

transactions had resulted in the receipt

by the In-House Plans of shares in the

Funds that were equal in value to such

Plans’ pro rata share of assets of the

CIFs on the conversion date.

Receipt of Fees by Chicago Trust

6. Prior to the initial in-kind transfer

transactions, any investment in the

Funds by Chicago Trust for an In-House

Plan or a Client Plan was made in

accordance with PTE 77–3 or PTE 77–

4, respectively. In pertinent part, PTE

77–3 would permit 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

were met. Under certain conditions,

PTE 77–4 would permit Chicago Trust

to receive fees from the Funds under

either of two circumstances: (a) Where

a Client Plan did not pay any

investment management, investment

advisory, or similar fees with respect to

the assets of such Plan invested in

shares of a Fund for the entire period of

such investment; or (b) where a Client

Plan paid investment management,

investment advisory, or similar fees to

Chicago Trust based on the total assets

of such Client Plan from which a credit

had been subtracted representing such

Plan’s pro rata share of such investment

advisory fees paid to Chicago Trust by

the Fund. As such, there were two

levels of fees involved under PTE 77–

4—those fees which Chicago Trust

charged to the Client Plans for serving

as trustee with investment discretion or

as investment manager (i.e., the Planlevel fees); and those fees Chicago Trust

charged to the Funds (i.e., the Fundlevel fees) for serving as investment

advisor, custodian, or service provider.

Plan-level fees for similar services
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18443

25The rates paid by each of the portfolios of the

Funds for services rendered differed depending on

the fee schedule for each portfolio and on the daily

net assets in each portfolio. For example, for

investment advisory services provided to the

Chicago Trust Money Market Fund, Chicago Trust

would be entitled to receive an annual fee of 0.40

percent based on that Fund’s average daily net

assets. For investment advisory services provided to

the Chicago Trust Intermediate Municipal Bond

Fund, Chicago Trust would be entitled to receive

an annual fee of 0.60 percent based upon such

Fund’s average daily net assets.

26The Department expresses no opinion herein

on the applicability of PTE 77–3 with respect to

ongoing investments by the In-House Plans in

shares of the Funds or to the receipt of fees from

the Funds by Chicago Trust.

27Chicago Trust represents that it is relying upon

section 408(b)(2) with respect to its receipt of fees

for such administrative services. The Department

expresses no opinion herein on whether the

provision of such services will satisfy section

408(b)(2) of the Act.

28The 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 Second Fiduciaries

of the Client Plans investing in the Funds that they

have an ongoing duty under section 404 of the Act

to monitor the services provided to such 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. These 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.

29With respect to In-House Plans, Chicago Trust

represents that it intends to rely on PTE 77–3.

However, the Department expresses no opinion

herein as to the applicability of PTE 77–3 to

Chicago Trust’s receipt of fees for Secondary

Services.

30The Department notes that an 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 Chicago Trust would be required in order

for Chicago Trust to receive such fee at a later time.

Thus, for example, no further disclosure would be

necessary if Chicago Trust 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

Chicago Trust providing notice of the fee increase

and a Termination Form.

provided by Chicago Trust ranged from

0.40 percent to 0.95 percent.

With respect to PTE 77–4, Chicago

Trust subtracted a credit from the Planlevel investment management fee

representing the Client Plan’s pro rata

share of the investment advisory fee

paid by the Funds to Chicago Trust and,

if applicable, Montag and Caldwell

(including that portion of the

investment advisory fee that Chicago

Trust paid to Talon.) 25

Since September 21, 1995, Chicago

Trust has no longer charged a Plan-level

investment management fee with

respect to the assets of a Client Plan that

have been invested in shares of the

Funds. Rather, Chicago Trust or Montag

& Caldwell, as applicable, are receiving

the investment advisory fee payable

under the respective investment

advisory agreements with the Funds,

instead of the Plan-level investment

management fee. Talon is receiving an

investment advisory fee from Chicago

Trust pursuant to the terms of its subadvisory agreement. For In-House Plans,

Chicago Trust represents that it intends

to continue relying upon PTE 77–3 with

respect to the receipt of Fund-level

investment advisory fees by it for assets

of In-House Plans that are invested in

shares of the Funds.26

Chicago Trust is charging In-House

Plans and Client Plans for Plan-level

recordkeeping, administrative,

accounting and custodial services which

do not involve investment management,

such as custody of plan assets,

maintaining plan records, preparing

periodic reports of plan assets and

participant accounts, effecting

participant investment directions,

processing participant loans and

accounting for contributions, payments

of benefits and other receipts and

distributions. Chicago Trust’s fees for

such Plan-level services will continue to

be negotiated with each Client Plan and

its fees for such services for In-House

Plans will continue to be limited to the

reimbursement of direct expenses

properly and actually incurred in the

performance of the services.27

At present, all services other than

investment advisory services are

provided to the Funds or their

distributor by unrelated parties.

However, Chicago Trust represents that

the Funds may, in the future, wish to

contract with it or an affiliate to provide

administrative, custodial, transfer,

accounting or similar services (i.e.,

Secondary Services) to the Funds or

their distributor.28

At the same time that it gives advance

written notice and seeks approval of an

in-kind transfer from a Second

Fiduciary, Chicago Trust will also give

the Second Fiduciary notice that it is

seeking approval to provide Secondary

Services to the Funds, either directly or

by subcontracting with third parties.

Such notice will describe the fees for

Secondary Services (whether provided

by Chicago Trust directly or through

third parties) for which it is seeking

approval from the Second Fiduciary and

disclose that, while Chicago Trust is not

presently providing Secondary Services

to the Funds, it may do so in the future

and intends to rely on the approval of

the Second Fiduciary for its provision of

Secondary Services.29

Chicago Trust will receive investment

advisory fees or fees for Secondary

Services from the Funds under the

following conditions: (a) no sales

commissions will be paid by the Client

Plans in connection with purchases or

sales of shares of the Funds and no

redemption fees will be paid in

connection with the sale of such shares

by the Client Plans to the Funds; (b) the

price paid or received by the Client

Plans for shares in the Funds will be the

net asset value per share 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) Chicago Trust

and its officers or directors will not

purchase from or sell to any of the

Client Plans shares of any of the Funds;

(d) for each Client Plan, the combined

total of all fees received by Chicago

Trust for the provision of Plan-level

services to the Client Plans, and in

connection with the provision of

investment advisory services or

Secondary Services to any of the Funds

in which the Client Plans may invest,

will not be in excess of ‘‘reasonable

compensation’’ within the meaning of

section 408(b)(2) of the Act; (e) Chicago

Trust will not receive any fees or

commissions in connection with the

purchase, holding or sale of shares of

the Funds by a Client Plan; and (f) the

receipt of investment advisory fees and

fees for Secondary Services, and any

changes in such fees is, with respect to

any Client Plan, approved by the

Second Fiduciary of the Client Plan

pursuant to the procedures described

herein.

Authorization Requirements for Client

Plans

7. As described in Representation 6,

Chicago Trust intends to seek the

approval of the Second Fiduciary of

each Client Plan to receive fees for

providing Secondary Services, directly

or by subcontracting with a third party.

Chicago Trust will then rely on that

approval for its receipt of fees for

Secondary Services from the Funds.30

To the extent that the fees for

investment advisory services or

Secondary Services exceed the rates

approved by the Second Fiduciary of a

Client Plan or an additional Secondary

Service for which a fee is charged

causes an increase in the fees paid to

Chicago Trust over the rates approved

by the Second Fiduciary of a Client
18444 Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices

Plan, Chicago Trust will use the

‘‘Termination Form’’ approach. In this

regard, in the event of an increase in the

rate of any fees paid by the Funds to

Chicago Trust for investment advisory

services that Chicago Trust provides to

the Funds over an existing rate for such

services that had been authorized by a

Second Fiduciary of a Client Plan,

Chicago Trust will, at least 30 days in

advance of the implementation of such

increase, provide a written notice

(which may take the form of a proxy

statement, letter, or similar

communication that is separate from the

prospectus of the Funds and which

explains the nature and amount of the

increase in fees) to the Second Fiduciary

of each Client Plan invested in a Fund

which is increasing such fees. Such

notice will be accompanied by the

Termination Form.

In addition, in the event of an (a)

addition of a Secondary Service

provided by Chicago Trust to the Funds

for which a fee is charged or (b) an

increase in the rate of any fee paid by

the Funds to Chicago Trust for any

Secondary Service that results either

from an increase in the rate of such fee

or from the decrease in the number or

kind of services performed by Chicago

Trust for such fee over an existing rate

for such Secondary Service, which had

been authorized by the Secondary

Fiduciary, Chicago Trust will, at least 30

days in advance of the implementation

of such Secondary Service or fee

increase, provide a written notice

(which may take the form of a proxy

statement, letter, or similar

communication that is separate from the

prospectus of the Funds and which

explains the nature and amount of the

additional Secondary Service for which

a fee is charged or the nature and

amount of the increase in fees) to the

Second Fiduciary of each of the Client

Plans invested in a Fund which is

adding a service or increasing fees. Such

notice will also be accompanied by the

Termination Form.

The instructions to the Termination

Form 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

previously given by the Second

Fiduciary and 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 for

Secondary Services or investment

advisory services. Termination of the

authorization by a Client Plan to invest

in the Funds will be effected by Chicago

Trust 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

Chicago Trust of the Termination Form

or any other written notice of

termination. If, due to circumstances

beyond the control of Chicago Trust the

sale cannot be executed within one

business day, Chicago Trust will have

one additional day to complete such

sale.

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 Chicago Trust 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 connection with an increase in fees

for investment advisory services, the

addition of a Secondary Service for

which a fee is charged or an increase in

any fees paid by the Funds to Chicago

Trust, the 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 an increase

in the fees for Secondary Services or

investment advisory services that are

paid to Chicago Trust, which would

cause Chicago Trust’s aggregate fees to

exceed the rates approved by the

Second Fiduciary.

Ongoing Disclosures to Client Plans

8. In addition to the disclosures

provided to the Second Fiduciary of a

Client Plan prior to investment in the

Funds, Chicago Trust represents that it

will provide the Second Fiduciary, at

least annually, with a copy of an

updated prospectus for the Funds. In

addition, Chicago Trust will provide the

Second Fiduciary with a report or

statement (which may take the form of

the most recent financial report, the

current statement of additional

information or some other written

statement) which contains a description

of all fees paid by the Funds to Chicago

Trust within 15 days of such

document’s availabillity.

Although Chicago Trust does not

presently execute securities brokerage

transactions for the investment

portfolios of the Funds, in the event that

it or an adviser or a sub-adviser to the

Funds (including their affiliates) does

perform brokerage services, it will

provide, at least annually, to the Second

Fiduciary in which a Client Plan

invests, a written disclosure indicating:

(a) The total, expressed in dollars,

brokerage commissions attributable to

each Fund’s investment portfolio which

represent Related Party Brokerage; (b)

the total, expressed in dollars, of

brokerage commissions attributable to

each Fund’s investment portfolio other

than Related Party Brokerage; (c) the

average brokerage commissions per

share, expressed as cents per share, paid

by each Fund for Related Party

Brokerage; and (d) the average brokerage

commissions per share, expressed as

cents per share, paid by each Fund for

brokerage other than Related Party

Brokerage.

9. In summary, it is represented that

the proposed transactions have satisfied

or will satisfy the statutory criteria for

an exemption under section 408(a) of

the Act because:

(a) With respect to the in-kind transfer

of the assets of an In-House Plan or a

Client Plan invested in a CIF in

exchange for shares of a Fund, a Second

Fiduciary has authorized or will

authorize in writing, such in-kind

transfer prior to the transaction only

after receiving full written disclosure of

information concerning the Fund.

(b) Each In-House Plan or Client Plan

has received 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.

(c) Chicago Trust has sent or will send

by regular mail to each affected InHouse 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.

(d) Chicago Trust has sent or will

send by regular mail, no later than 90

days after completion of each transfer, a
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 / Notices 18445

written confirmation that contains the

following information: (1) the number of

CIF units held by an In-House Plan or

a Client Plan immediately before the

transfer, the related per unit value and

the total dollar amount of such CIF

units; and (2) the number of shares in

the Funds that are held by the Plan

following the conversion, the related per

share net asset value and the total dollar

amount of such shares.

(e) The price that has been or will be

paid or received by an In-House 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 will be paid or

received by any other investor at that

time.

(f) No sales commissions or

redemption fees have been or will be

paid by an In-House Plan or a Client

Plan in connection with the purchase of

shares of the Funds.

(g) For each Client Plan, the combined

total of all fees received by Chicago

Trust for the provision of Plan-level

services, and in connection with the

provision of investment advisory

services or Secondary Services to any of

the Funds in which Client Plans may

invest, will not be in excess of

‘‘reasonable compensation’’ within the

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

(h) Chicago Trust has not received

and will not receive any 12b–1 Fees in

connection with the transactions.

(i) Any authorizations made by a

Client Plan regarding investments in the

Funds and the fees paid to Chicago

Trust (including increases in the

contractual rates of fees for Secondary

Services that are retained by the Chicago

Trust) have been and will be terminable

at will by the Client Plan, without

penalty to the Client Plan and have been

and will be effected within one business

day following receipt by Chicago Trust,

from the Second Fiduciary, of the

Termination Form or any other written

notice of termination, unless

circumstances beyond the control of

Chicago Trust delay execution for no

more than one additional business day.

(j) The Second Fiduciary has received

and 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 paid by the Funds to

Chicago Trust regarding investment

advisory services, fees for Secondary

Services or an additional Secondary

Service for which a fee is charged which

exceed the rates authorized for Chicago

Trust by the Second Fiduciary.

(k) All dealings by or between the

Client Plans, the Funds and Chicago

Trust have been and will be on a basis

which is at least as favorable to the

Client Plans as such dealings are with

other shareholders holding the same

class of shares of the Funds.

Notice to Interested Persons

Notice of the proposed exemption

will be given to interested persons who

had investments in the terminated CIFs

and from whom approval is being

sought for the in-kind transfers of Plan

assets from such CIFs in exchange for

shares of the Funds. In this regard,

interested persons will include Cole

Taylor, the Second Fiduciary of the InHouse Plans; active participants in the

In-House 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 In-House 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 as

well as a supplemental statement, as

required, pursuant to 29 CFR

2570.43(b)(2), which shall inform

interested persons of their right to

comment on and/or to request a hearing.

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 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

accurately describe all material terms of

the transaction which is the subject of

the exemption. In the case of continuing

exemption transactions, if any of the

material facts or representations

described in the application change

after the exemption is granted, the

exemption will cease to apply as of the

date of such change. In the event of any

such change, application for a new

exemption may be made to the

Department.

Signed at Washington, DC, this 19th day of

April, 1996.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

U.S. Department of Labor.

[FR Doc. 96–10071 Filed 4–24–96; 8:45 am]

BILLING CODE 4510–29–P

NATIONAL INSTITUTE FOR LITERACY

Agency Information Collection

Activities

ACTION: Notice.

SUMMARY: In compliance with the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.), this notice announces an

Information Collection Request (ICR) by

the NIFL. The ICR describes the nature

of the information collection and its

expected cost and burden.

DATES: Comments must be submitted on

or before June 24, 1996.

FOR FURTHER INFORMATION: Sondra Stein

at (202) 632–1508 or e-mail:

sstein@nifl.gov