Proposed Exemptions and Application Nos. Gastroenterology and
Oncology Associates, P.A. Profit Sharing Plan and Trust
[10/26/2007]
Volume 72, Number 207
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions and Application Nos. Gastroenterology and
Oncology Associates, P.A. Profit Sharing Plan and Trust (the Plan), D-
11141; Wellington Management Company, LLP (Wellington Management), D-
11343; GE Asset Management Incorporated, D-11389; Middleburg Trust
Company (Middleburg), D-11405; and Citigroup, Inc. (Citigroup), D-11417
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The
[[Page 60890]]
applications for exemption and the comments received will be available
for public inspection in the Public Documents Room of the Employee
Benefits Security Administration, U.S. Department of Labor, Room N-
1513, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Gastroenterology and Oncology Associates, P.A. Profit Sharing Plan and
Trust (the Plan) Located in St. Petersburg, FL
[Application No. D-11141]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, will not apply to the proposed sale of certain shares of common
stock (the Stock) issued by Alden Enterprises, Inc. (Alden), an
unrelated party, by the individually directed account in the Plan (the
Account) of Jayaprakash K. Kamath, M.D. (Dr. Kamath), to Geetha J.
Kamath, M.D., (Mrs. Kamath), Dr. Kamath's spouse and a party in
interest with respect to the Plan.
This proposed exemption is subject to the following conditions:
(a) The sale of the Stock by the Account to Mrs. Kamath is a one-
time transaction for cash.
(b) The Stock is sold to Mrs. Kamath for a price that reflects the
fair market value of the Stock, as determined by a qualified,
independent appraiser (the Appraiser).
(c) The closing of the sale (the Closing Date) occurs at a time
that is mutually agreed upon by Mrs. Kamath and the Plan trustees (the
Trustees) within 30 days of the Department's approval of the final
exemption.
(d) As of the Closing Date, the Appraiser reviews the assumptions
previously made in determining the appraised value of the Stock to see
whether there has been a 3% or more increase (Material Increase) in the
fair market value of the Stock between December 31, 2006 (the Appraisal
Date) and the Closing Date.
(e) If the Appraiser determines that there has been no Material
Increase in the fair market value of the Stock on the Closing Date, the
Appraiser issues a letter to the parties to the sale to such effect and
the sale price of the Stock remains at the value determined on the
Appraisal Date.
(f) If the Appraiser determines that there has been a Material
Increase in the fair market value of the Stock, he advises the parties
to the transaction, in writing, as to the increased value as of the
Closing Date. Then, the sale price for the Stock is revised to reflect
the increased value and the amount of such increase is paid to the
Trustees by Mrs. Kamath following the receipt of the updated appraisal
report from the Appraiser setting forth the increased value of the
Stock.
(g) The sale proceeds from the transaction are credited to Dr.
Kamath's Account simultaneously with the transfer of the Stock's title
to Mrs. Kamath.
(h) The Account is not responsible for paying any fees,
commissions, or other costs or expenses associated with the sale of the
Stock.
(i) The terms and conditions of the Stock sale remain at least as
favorable to the Account as the terms and conditions obtainable under
similar circumstances negotiated at arm's length with an unrelated
party.
Summary of Facts and Representations
1. Dr. Kamath is a gastroenterologist and oncologist and a 50%
owner of Gastroenterology and Oncology Associates, P.A. (the Employer),
the sponsor of the Plan. The Employer is a Florida corporation, which
is located in St. Petersburg, Florida. The Employer is also owned 50%
by Mrs. Kamath.
2. The Plan is a profit-sharing plan that was established by the
Employer and provides for participant-directed investments. Dr. and
Mrs. Kamath are the Plan Trustees. In addition, Dr. Kamath serves as
the Plan Administrator. As of December 31, 2006, which is the most
recent date Plan information is available, the Plan had 42
participants, one of whom included Dr. Kamath. Also as of December 31,
2006, the Plan had net assets available for benefits totaling
$3,312,699. Of those assets, approximately $2,058,927 was held in Dr.
Kamath's Account in the Plan.
3. Among the assets allocated to Dr. Kamath's Account are 42.84
shares of common stock, which constitute 14% of the issued and
outstanding shares of Alden, a closely-held Florida corporation.
Alden's primary business is the ownership and operation of a resort
hotel on Florida's Gulf Coast. The property underlying the Stock
consists of a 4.84 acre tract of land improved with 10 buildings that
comprise the 142-unit beachfront hotel known as the ``Alden Beach
Resort.'' The property is located at 5900 Gulf Boulevard, in the city
of St. Pete Beach, Pinellas County, Florida.
None of the other shareholders of Alden are related to the Kamaths
or the Employer. In addition, neither the Kamaths nor members of their
family are officers or directors of Alden.
4. The Account acquired the Stock from Margaret Bradford, a
retired, former Alden employee and an unrelated party, on September 15,
1983, for a cash purchase price of $150,000. The purchase price paid by
the Account for the Stock was negotiated by the Trustees and Ms.
Bradford. During its ownership of the Stock, the Account received
$706,860 in dividends from 1983 until 2006. In addition, the Alden
Beach Resort was refinanced in 1990, and the proceeds were distributed
to the shareholders. The Account received $433,860 from the
refinancing. The Account incurred no expenses or administrative costs
in connection with its ownership of the Stock. As a result of the
acquisition and holding of the Stock, the Account has experienced a
[[Page 60891]]
net gain of $990,720 [($706,860 + $433,860) - $150,000].
5. An administrative exemption is requested from the Department to
allow Dr. Kamath's Account to sell the Stock to Mrs. Kamath. Following
the sale, Mrs. Kamath proposes to transfer the Stock to a revocable
trust for estate planning purposes. The sale price for the Stock will
be based upon its independently appraised fair market value. The
consideration for the Stock will be paid by Mrs. Kamath in cash. The
Account will pay no fees or commissions in connection with the
transaction.
6. The value of the Stock on December 31, 2006 was $899,640,
according to a January 2, 2007 appraisal report that was prepared by
Mr. James W. Brockardt, CBA, a qualified, independent appraiser. The
Appraiser, who is the President of Brockardt Consulting Group, LLC, an
independent appraisal firm located in Pennington, New Jersey, has
worked in the area of securities valuation since 1975. The Appraiser
represents that he is completely independent of the parties involved in
the transaction and has no present or prospective interest in the
Stock.
The Appraiser initially valued the Stock under both the Cost
Approach and the Income Approach to valuation. Then, he determined a
``freely traded value'' based upon weighting 75% to the Cost Approach,
and 25% to the Income Approach. This value was next discounted by 35%
for lack of marketability. As a result of the calculation, the
Appraiser determined that the Stock had an aggregate fair market value,
on a minority interest basis, of $6,428,398, or a per share value, on a
minority interest basis, of $21,000. Thus, the 42.84 shares of Stock
held by Dr. Kamath's Account have a total fair market value of
$899,640. In addition, the Stock represents approximately 25.74% of the
Account's assets.
7. The proposed transaction is contingent upon the Department's
issuance of a final exemption, on or before December 31, 2007,
authorizing such transaction in accordance with an Agreement for Sale
of Stock (the Stock Sale Agreement), to be entered into between Mrs.
Kamath and the Trustees. In this regard, the Stock Sale Agreement
provides that if the Department grants a final exemption approving the
transaction, the closing of the transaction will occur within 30 days
of such approval.
As of the Closing Date, the Appraiser will review the assumptions
he previously made in determining the appraised value of the Stock to
see whether there has been a 3% or more increase (i.e., a Material
Increase) in the fair market value of the Stock between the Appraisal
Date (i.e., December 31, 2006) and the Closing Date. If the Appraiser
determines that there has been no Material Increase in the fair market
value of the Stock on the Closing Date, he will issue a letter to Mrs.
Kamath and the Trustees informing them that the sale price of the Stock
will be the value determined on the Appraisal Date. On the other hand,
if the Appraiser determines that there has been a Material Increase in
the fair market value of the Stock, he will advise the parties to the
transaction, in writing, as to the increased value as of the Closing
Date. Then, the sale price for the Stock will be revised to reflect the
increased value and the amount of such increase will be paid by Mrs.
Kamath to the Trustees following the receipt of the updated appraisal
report from the Appraiser. Mrs. Kamath will pay the Trustees for the
Stock either in cash or by wire transfer.
If the Department does not grant a final exemption authorizing the
proposed transaction by December 31, 2007, the transaction will be
automatically rescinded and it will become null and void.
8. The Trustees represent that the transaction is in the best
interest of the Account because the sale ensures that the Account will
have greater liquidity and diversification since its assets will be
invested in either marketable securities or assets that are traded on
an established market. This will enable Dr. Kamath's interest to be
rolled over to his individual retirement account upon his retirement.
Also, given the lack of operating or financial control of a minority
shareholder, such as the Account, the Trustees state that it would be
difficult, if not impossible, to sell the Stock. Further, the Trustees
explain that the transaction will enable Alden to make a Subchapter S
corporation election.
9. It is represented that the transaction is protective of the
Account because the fair market value of the property underlying the
Stock will be updated on the Closing Date by the Appraiser. Further,
the Account has not been required, nor will it be required, to pay any
fees, commissions or other expenses or costs in connection with the
subject transaction.
10. In summary, it is represented that the proposed transaction
will satisfy the statutory requirements for an exemption under section
408(a) of the Act because:
(a) The sale of the Stock by the Account to Mrs. Kamath will be a
one-time transaction for cash.
(b) The Stock will be sold to Mrs. Kamath for a price that reflects
the fair market value of the Stock, as determined by the Appraiser on
the Closing Date.
(c) The Closing Date of the transaction will occur at a time that
is mutually agreed upon by Mrs. Kamath and the Trustees within 30 days
of the Department's approval of the final exemption.
(d) The Appraiser will determine whether there has been a Material
Increase in the fair market value of the Stock between the Appraisal
Date and the Closing Date, and if so, he will make appropriate
adjustments to the sale price in an updated appraisal report.
(e) Dr. Kamath's Account will not be responsible for paying any
fees, commissions, or other costs or expenses associated with the sale
of the Stock.
(f) The terms and conditions of the Stock sale will remain at least
as favorable to the Account as the terms and conditions obtainable
under similar circumstances negotiated at arm's length with an
unrelated party.
Notice to Interested Persons
Because Dr. Kamath is the only participant in the Plan, it has been
determined that there is no need to distribute the notice of proposed
exemption to interested persons. Accordingly, comments and requests for
a public hearing are due within thirty (30) days after 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) 693-8556. (This is not a toll-free number.)
Wellington Management Company, LLP (Wellington Management) and Its
Subsidiaries (together, Wellington) Located in Boston, MA
[Application No. D-11343]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) 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).\1\
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\1\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) and (D) of the Act and the sanctions
[[Page 60892]]
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) and (D) of the Code, shall not apply (1)
retroactively, from January 1, 2001 through December 31, 2003, and (2)
prospectively, from the date the notice granting the final exemption is
published in the Federal Register, to--
(A) The acquisition, from an offshore corporation (the Offshore
Corporation) of certain non-voting equity securities (Shares), which
represent interests in the economic value of the Offshore Corporation
by an ERISA-covered client plan (the Client Plan), where the Offshore
Corporation is a party in interest with respect to the Client Plan, due
to the ownership of all of the voting equity shares (Manager Shares) of
the Offshore Corporation by Wellington Global Administrator, Ltd.
(Wellington Global Administrator), a subsidiary of Wellington
Management, which is (or may become) a fiduciary and a service provider
with respect to the Client Plan; and
(B) The redemption of the Client Plan's Shares by the Offshore
Corporation either in cash or in kind.
Section II. Conditions
This proposed exemption is conditioned upon adherence to the
material facts and representations described herein and upon
satisfaction of the following conditions, which apply both
retroactively and prospectively, unless otherwise excepted:
(a) All decisions to acquire or redeem Shares have been made or are
made on behalf of the Client Plan by an authorized fiduciary, which is
independent of Wellington and the applicable Offshore Corporation.
(b) At the time of acquisition of Shares from an Offshore
Corporation, each Client Plan either had or has assets at least equal
to $100 million.
(1) In the case of a master trust that holds assets of multiple
related Client Plans maintained by a single employer or a controlled
group of employers, as defined in section 407(d)(7) of the Act, this
requirement is satisfied if the master trust has aggregate assets at
least equal to $100 million (assuming the fiduciary responsible for
making the investment decision is the Client Plan sponsor or an
affiliate of the Client Plan sponsor).
(2) In the case of a pooled fund (e.g., a group trust) whose assets
are ``plan assets'' subject to the Act, this requirement is satisfied
as long as either (i) the pooled fund has at least $100 million in
aggregate assets and the fiduciary making the investment decision is
unrelated to Wellington and manages at least $200 million in assets
(exclusive of the aggregate assets invested in the Offshore
Corporations); or (ii) at least 50 percent of the units of beneficial
interest in the pooled fund are held by Client Plans, each of which has
total net assets of at least $100 million.
(c) Wellington has not provided and does not provide investment
advice (within the meaning of 29 CFR 2510.3-21(c)), nor is it a
fiduciary with respect to any Client Plan's investment in an Offshore
Fund.
(d) All acquisitions and redemptions of Shares by a Client Plan
have been made or are made for fair market value, determined as
follows:
(1) Equity securities have been valued or are valued at their last
sale price or official closing price on the market on which such
securities primarily trade using sources independent of Wellington and
the issuer. If no sales occurred on such day, equity securities are
valued at the last reported independent ``bid'' price or, if sold
short, at the last reported independent ``asked'' price.
(2) Fixed income securities have been valued or are valued on
either the basis of ``firm quotes'' obtained at the time of the
acquisition or redemption of Shares from U.S.-registered or foreign
broker-dealers, which are registered and subject to the laws of their
respective jurisdiction, which quotes reflect the share volume involved
in the transaction, or on the basis of prices provided by independent
pricing services that determine valuations based on market transactions
for comparable securities and various relationships between such
securities that are generally recognized by institutional traders.
(3) Options have been valued or are valued at the mean between the
current independent ``bid'' price and the current independent ``asked''
price or, where such prices are not available are valued at their fair
value in accordance with Fair Value Pricing Practices by Wellington
Management's pricing committee, which utilizes a set of defined rules
and an independent review process.
(4) If current market quotations are not readily available for any
investments, such investments have been valued or will be valued at
their fair value by Wellington Management's pricing committee in
accordance with Fair Value Pricing Practices.
(e) A Client Plan's Shares have been redeemed or may be redeemed,
in whole or in part, without the payment of any redemption fee or other
penalty, on a pre-specified, periodic (not longer than semi-annual)
basis, upon no more than 45 days' advance notice, except for a one-year
lock-up period imposed on new investors.
(f) Redemptions of Shares in an Offshore Corporation by a Client
Plan have been made or are made in cash unless:
(1) A Client Plan consents to such in kind redemption; or
(2) Wellington requires that such redemption be made in kind on a
pro rata basis to protect the best interests of the Offshore Fund and
the remaining investors, including other Client Plan investors.
(g) In advance of the initial investment by a Client Plan in an
Offshore Corporation's Shares, the independent fiduciary of a Client
Plan has received or receives--
(1) A copy of the proposed exemption and the final exemption. (This
disclosure provision applies to the prospective exemptive relief
described herein.)
(2) An offering memorandum describing the relevant Offshore
Fund(s), as well as the relevant investment objectives, fees and
expenses and redemption and valuation procedures; and
(3) All reasonably available relevant information as such
independent fiduciary may request.
(h) On an ongoing basis, Wellington has provided or provides a
Client Plan with the following information:
(1) Unaudited performance reports at the end of each month;
(2) Audited annual financial statements and access to a protected
internet site; and
(3) Client services group assistance for any investor inquiries.
(i) No commission or sales charge has been assessed or is assessed
against the Client Plan in connection with its acquisition of an
Offshore Corporation's Shares.
(j) Not more than 10% of the assets of the Client Plan has been
invested or is invested, in the aggregate, in Shares of all Offshore
Corporations (determined at the time of any acquisition of such Shares)
and not more than 5% of the assets of the Client Plan has been
indirectly invested or is invested, in the aggregate, in any one
offshore fund (the Offshore Fund), a separate collective investment
vehicle underlying an Offshore Corporation, (also determined at the
time of any acquisition of an interest in such Offshore Fund by such
Client Plan).
(k) For prospective transactions only, each Offshore Corporation,
each Offshore Fund, Wellington Management Investment, Inc. (Wellington
[[Page 60893]]
Management Investment), Wellington Global Holdings, Ltd. (Wellington
Global Holdings), Wellington Hedge Management, LLC (Wellington Hedge
Management), and Wellington Global Administrator--
(1) Has agreed to submit to the jurisdiction of the federal and
state courts located in the Commonwealth of Massachusetts;
(2) Has agreed to appoint an agent for service of process in the
United States, which may be an affiliate (the Process Agent);
(3) Has consented to service of process on the Process Agent; and
(4) Has agreed that any enforcement by a Plan of its rights
pursuant to this exemption will, at the option of the Plan, occur
exclusively in the United States courts.
(l) For prospective transactions only, Wellington maintains in the
United States for a period of six years from the date of the covered
transactions, such records as are necessary to enable the persons
described in paragraph (m) of this Section II to determine whether the
conditions of this exemption were met, except that:
(1) If the records necessary to enable the persons described in
paragraph (m) to determine whether the conditions of the exemption have
been met are lost or destroyed, due to circumstances beyond the control
of Wellington, then no prohibited transaction will be considered to
have occurred solely on the basis of the unavailability of those
records; and
(2) No party in interest other than Wellington 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 have not been maintained or are not available for examination
as required by paragraph (m) below.
(m)(1) Except as provided in paragraph (m)(2) of this Section II
and notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to above in paragraph (l)
of this Section II are unconditionally available for examination during
normal business hours at their customary location to the following
persons or an authorized representative thereof:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(ii) Any fiduciary of a Client Plan; or
(iii) Any participant or beneficiary of a Client Plan or any duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described above in paragraphs (ii) and
(iii) of this paragraph (m)(1)(ii) and (iii) of this Section II shall
be authorized to examine trade secrets of Wellington, or any commercial
or financial information, which is privileged or confidential.
Section III. Definitions
(a) The term ``Wellington'' means Wellington Management Company,
LLP and its subsidiaries.
(b) An ``affiliate'' of Wellington means--
(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 term ``Offshore Corporation'' means --
(1) WMIB;
(2) Any future expansion of WMIB that includes an additional class
of securities or an additional Offshore Fund that is organized as a
Bermuda limited partnership, which corresponds to the new WMIB class
that is established by Wellington pursuant to the WMIB structure, and
conforms to the same conditions, rules and regulations described in
this exemption;
(3) Archipelago; or
(4) Any future ``fund of funds'' investment vehicle that is formed
by Wellington under Bermuda law and is set up in substantially the same
manner as Archipelago, with the same management structure, and conforms
to the same conditions, rules and regulations described in this
exemption.
(e) The term ``Offshore Fund'' means a collective investment
vehicle that is organized as a Bermuda limited partnership, which
corresponds to each class of WMIB securities. Each Offshore Fund
invests primarily in publicly-traded securities, although up to 15% of
each Offshore Fund may be invested in securities that are not readily
marketable.
(f) The term ``U.S. broker-dealer'' means a broker-dealer
registered in the United States under the Securities Exchange Act of
1934 (the 1934 Act) or exempted from registration under section
15(a)(1) of the 1934 Act as a dealer in exempted government securities
(as defined in section 3(a)(12) of the 1934 Act).
(g) The term ``foreign broker-dealer'' means a broker that has, as
of the last day of its most recent fiscal year, equity capital that is
the equivalent of not less than $200 million and is registered and
regulated, under the relevant securities laws of a governmental entity
of a country other than the United States, where such regulation and
oversight by the governmental entities is comparable to regulatory
regimes within the United States.
(h) ``Manager Shares'' refer to the equity securities of an
Offshore Corporation that have voting rights and control the election
of the Board of Directors of an Offshore Corporation. Manager Shares do
not participate in the economic performance of the Offshore Corporation
and are owned 100% by Wellington Global Administrator.
(i) ``Shares'' refer to the equity securities of an Offshore
Corporation that do not have voting rights. Such shares represent
substantially all of the economic value of the Offshore Corporation and
are or will be directly linked either (i) by class to a corresponding
Offshore Fund (in the case of WMIB) or (ii) to a mix of various WMIB
classes (in the case of Archipelago or any other fund of funds entity).
Effective Date: If granted, this proposed exemption will be
effective retroactively for the transactions involving Wellington and
two Client Plans that occurred from January 1, 2001 until December 31,
2003. For prospective transactions involving Wellington and a Client
Plan, this proposed exemption will be effective on the date the notice
granting the final exemption is published in the Federal Register.
Summary of Facts and Representations
1. Wellington, or the applicant (the Applicant), is a Massachusetts
limited liability partnership that is a federally registered investment
adviser and a financial services organization. Wellington manages the
assets of many individual and institutional clients. As of September
30, 2006, Wellington had over $544 billion in assets under management,
including the assets of many ERISA-covered employee benefit plans.
2. Wellington currently sponsors two offshore, open-end limited
liability investment companies (i.e., the Offshore Corporations)--
Wellington Management Investors (Bermuda), Ltd. (WMIB) and Archipelago
Holdings, Ltd. (Archipelago). Each Offshore Corporation was formed
under the laws
[[Page 60894]]
of Bermuda. WMIB, which is a conduit vehicle and does not have an
investment manager, is structured in a manner that is similar to a
``series fund.'' It presently has outstanding nine classes of equity
interests, each of which is linked to a separate collective investment
vehicle that is organized as a Bermuda limited partnership (i.e., the
Offshore Funds). There is a separate Bermuda limited partnership that
corresponds to each class of WMIB securities.\2\ All amounts
distributed to WMIB by a particular Offshore Fund are distributed to
the holders of the corresponding class of WMIB securities. Each
Offshore Fund invests primarily in publicly-traded securities, although
up to 15% of such fund may be invested in securities that are not
readily marketable.
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\2\ WMIB actually has 11 classes of equity interests. However,
two of these classes relate to funds that have different
characteristics than those described herein, and such classes are
not intended to be covered by this exemption. Therefore, the
existence of these two classes (and the corresponding Offshore
Funds) should be disregarded in this proposed exemption except for
the fact that interests in these two classes are held by
Archipelago.
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Wellington Management Investment, a Delaware corporation, which is
wholly owned by Wellington Management, does not have any contractual
relationship with, or provide any services to, the Offshore
Corporations or the Offshore Funds. Wellington Management Investment
holds a 0.025% interest in Wellington Global Holdings, a 0.1% interest
in Wellington Global Administrator and a 0.1% interest in Wellington
Hedge Management. The remaining interests in each such entity are
directly held by Wellington Management, so that all three entities are
nearly 100% owned by Wellington Management.
Wellington Global Holdings serves as the investment general partner
of each WMIB Offshore Fund and, in such capacity, has hired Wellington
Management as the investment sub-adviser of each WMIB Offshore Fund.
Wellington Global Holdings also serves as the investment manager of
Archipelago. Wellington Global Administrator serves as the
administrative general partner of each WMIB Offshore Fund and also as
the administrative manager of Archipelago. Wellington Hedge Management
serves as the general partner of the Wellington-sponsored domestic
``onshore'' hedge funds, but has no responsibility or relationship with
respect to the Offshore Corporations or the Offshore Funds.
In the future, WMIB may be expanded by Wellington to include
additional classes of equity interests and additional Offshore Funds,
corresponding in each case to the new WMIB class of equity interest.
The future classes of equity interests and Offshore Funds will be
established pursuant to the WMIB structure.
3. Archipelago is a ``fund of funds'' in that all of its assets are
invested in a mix of the WMIB classes and, as a result, indirectly in a
mix of the Offshore Funds and other funds associated with those
particular classes \3\. Archipelago operates as a conduit vehicle as
well (in that the investments made by Archipelago (i.e., the WMIB asset
classes) are, in most instances, pre-specified as are the specific
percentages to be invested in each such class). Wellington Global
Holdings serves as investment manager to Archipelago and has limited
discretionary authority in that capacity.\4\
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\3\ Archipelago initially invested in six WMIB classes. Over
time, however, two of these original six WMIB classes have been
closed to new investment by Archipelago and two different WMIB
classes have been substituted for new investments. Although new
investments into Archipelago are allocated among six WMIB classes,
Archipelago's assets are still invested in eight WMIB classes. Two
of these eight WMIB classes, including one to which new Archipelago
investments are allocated, correspond with underlying Bermuda
limited partnerships that are not ``Offshore Funds,'' as defined in
this proposed exemption, due to the fact that each such limited
partnership permits investment in illiquid private placements that
are not readily marketable to exceed 15% and has certain
restrictions on redemptions. Because these two WMIB classes are not
Offshore Funds, as defined in this proposed exemption, no plans will
be permitted to invest in these WMIB classes.
\4\ For example, Wellington Global Holdings oversees annual
rebalancings of the underlying WMIB classes held by Archipelago. In
addition, Wellington Global Holdings may determine to direct
Archipelago investments in different percentages among the six
current WMIB classes or to different WMIB classes. However, in
either event, notice of the proposed change would be given to all
affected investors in advance of such change.
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4. The Applicant explains that a Client Plan may choose to invest
in Archipelago, rather than directly in the various classes of WMIB
shares, because the amount it is investing may be too small to enable
it to achieve the degree of diversification it desires among the
various Offshore Funds. In particular, the WMIB classes typically
require a minimum investment of $1-$3 million per class. For a
relatively small investment (Archipelago's minimum investment is
approximately $1 million), Archipelago represents an opportunity for
greater diversification according to the Applicant.\5\ On an annual
basis, Archipelago automatically rebalances its investments in the
underlying WMIB classes to maintain the pre-specified target
allocations.
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\5\ The minimum investment can be waived by Wellington.
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Wellington represents that it may in the future establish
additional Offshore Corporations that are substantially similar to
Archipelago. However, these future ``fund of funds'' investment
vehicles will invest in a different mix of WMIB classes than
Archipelago.
5. The Applicant explains that within the universe of hedge funds,
WMIB and Archipelago are not considered highly leveraged, nor will any
future Offshore Corporations be highly leveraged. The Applicant states
that many other hedge funds are more highly leveraged than WMIB and
Archipelago. The Applicant bases this opinion on the SEC's Staff
Report, ``Implications of the Growth of Hedge Funds'' (September 2003),
which noted that, if a leverage ratio is defined as the ratio of total
absolute dollars invested to total dollars of equity, a leverage ratio
of greater than 2 to 1 is considered ``high'' while a ratio of less
than or equal to 2 to 1 is considered ``low.'' When applying this
criterion to the Offshore Funds, the Applicant states that
historically, in most instances, total leverage exposure of each
Offshore Fund has been substantially less than 2 to 1, and is
consistent with the SEC's view that the leverage ratio is low.
Further, each Offshore Corporation margins its long securities only
through its prime broker, which is subject to the terms of Regulation T
issued by the Board of Governors of the Federal Reserve System pursuant
to the Securities Exchange Act of 1934. The Offshore Corporations are
limited to 100% leverage with respect to long securities,\6\ they may
short sell
[[Page 60895]]
securities, and may engage in derivative transactions. The derivative
transactions are tracked daily and are not a significant source of
leverage.
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\6\ The Applicant states that the reference to ``100% leverage''
with respect to its long securities is not inconsistent with its
representation that the Offshore Funds are not highly leveraged. For
one thing, the Applicant represents that this statement relates only
to the limit imposed by Regulation T on an investor's ability to
invest on margin (i.e., with funds borrowed from the relevant
broker). The Applicant states that in fact, the Offshore Funds do
not come close to approaching this limit. The Applicant further
states that Regulation T would permit a maximum long exposure
percentage of 200% (i.e. 100% leverage), whereas the long exposure
number for the WMIB and Archipelago class funds never exceeds 150%.
In addition, the Applicant states that ``100% leverage'' with
respect to its long securities'' means that the Offshore Fund could
utilize $100 of its own capital to purchase long securities and an
additional $100 of borrowed funds to purchase long securities
yielding a total long security position of $200 of which 50% would
be attributable to debt and 50% would be attributable to the
investment of its own equity. This would be analogous to an
investment in real estate in which a property is bought for $200
with a mortgage of $100 with the remaining $100 being derived from
the investor's own capital.
Moreover, the Applicant explains that since a Plan is likely to
invest a small percentage of its assets in any particular Offshore
Fund it may well be completely prudent and appropriate for some plan
assets to be invested in an Offshore Fund that is more highly
leveraged and therefore more risky, when such investment is viewed
in the context of the Plan's overall portfolio and the other
relevant facts and circumstances applicable to the particular plan
that would affect its appetite for risk. The Applicant believes
these are factors that must be taken into account by the independent
Plan fiduciary prior to investing in a particular Offshore Fund.
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Moreover, the Applicant states that the Offshore Corporations are
designed to provide absolute returns rather than to outperform a
designated market.\7\ Therefore, the Offshore Corporations do not
utilize tracking errors as risk management tools.
---------------------------------------------------------------------------
\7\ Absolute return strategies are designed to move
independently of the underlying markets and have lower correlations
to the broader markets. During falling markets, the performance of a
fund should stay independent from that of broader market movements,
thus providing protection from those downward movements. In rising
markets, funds employing absolute return strategies lag behind more
traditional long-only investments. See ``Implications of the Growth
of Hedge Funds,'' at 111.
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6. Each Offshore Corporation has (or will have) two broad classes
of equity securities--Manager Shares and Shares. Manager Shares are
voting shares and hence control the election of the Board of Directors
of an Offshore Corporation, but do not participate in the economic
performance of the Offshore Corporation. Manager Shares are owned 100%
by Wellington Global Administrator. Shares are non-voting but represent
substantially all of the economic value of the Offshore Corporation and
are or will be directly linked either (a) by class to a corresponding
Offshore Fund (in the case of WMIB) or (b) to a mix of various WMIB
classes (in the case of Archipelago or any other fund of funds entity).
Shares are presently owned by numerous investors, primarily unrelated
non-U.S. individuals and institutions and unrelated U.S. non-taxable
investors, but not by any Client Plans.
In order to comply with National Association of Securities Dealers
(NASD) rules (the ``new issues rules'') relating to the allocation of
certain initial public offerings (IPOs), each Offshore Corporation
offers three sub-classes of Shares: A Shares, which participate fully
in initial public offering (IPO) allocations; C Shares, which
participate only to a limited extent (i.e., only to the extent
permitted by the applicable NASD rules) in IPO allocations; and E
Shares, which do not participate to any extent in IPO allocations. In
all other respects, these three sub-classes are identical. These NASD
rules only impact investors that are professional money managers or
broker-dealers as well as certain of their respective affiliates and
related persons. All other investors would be required to invest in A
Shares.\8\
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\8\ WMIB also offers S Shares with respect to classes that
invest in underlying funds that are not intended to be covered by
this exemption, except to the extent of Archipelago's interest
therein.
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Client Plans that are not ``restricted'' (as defined in NASD Rule
2790 \9\) would acquire Class A shares. Client Plans that are
restricted would acquire Class C shares. Only Client Plans that are
sponsored solely by a broker-dealer would be deemed to be
``restricted.''
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\9\ On October 24, 2003, the SEC approved new Rule 2790
(Restrictions on the purchase and sale of IPOs of equity
securities), which replaces the Free-Riding and Withholding
Interpretation (IM-2110-1). Rule 2790 prohibits a NASD member from
selling a ``new issue'' to any account in which a ``restricted
person'' has a beneficial interest. The term ``restricted person''
includes most associated persons of a member, most owners and
affiliates of a broker-dealer, and certain other classes of persons.
The Rule requires that a member, before selling a new issue to any
account, meet certain ``preconditions for sale,'' which require the
member to obtain a representation from the beneficial owner of the
account that the account is eligible to purchase new issues in
accordance with the Rule. The Rule also contains a series of general
exemptions.
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In addition, each Share sub-class is further divided into a
different series in order to account for different loss carryforwards
associated with specific Shares held by investors depending upon their
holding periods with respect to such Shares. According to the
Applicant, the separate accounting and the resultant separate series
are needed in order to reflect the correct incentive allocation amounts
with respect to each investor. In this regard, the incentive allocation
payable to Wellington Global Holdings, as the investment general
partner, at the Offshore Fund level incorporates a ``high-water mark''
\10\ concept. Application of that concept requires that investments
made at different times be accounted for separately. The various series
provide a mechanism for such separate accounting.
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\10\ The Applicant states that Wellington Global Holdings is
entitled to an incentive allocation equal to a specified percentage
(typically 20 percent) of the net profits during each fiscal year.
However, the Applicant notes that if there is a loss in any fiscal
year, then no incentive allocation will be made with respect to
subsequent net profits allocable to shareholders who incurred the
loss until the cumulative net loss has been fully offset by
subsequent net profits allocable to such shareholders. The Applicant
states that although this structure is often referred to as a high-
water mark, it may be easier to understand as a loss carryforward.
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7. Each Offshore Corporation is exempt from registration under the
Investment Company Act of 1940 (the 1940 Act) by reason of Section
3(c)(7) of the 1940 Act (i.e., all U.S. investors in the Offshore
Corporation must be ``qualified purchasers''). In addition, the assets
of each Offshore Corporation are not currently, and are not expected to
be, ``plan assets'' subject to the Act because the aggregate interests
of each class of equity securities issued by the Offshore Corporation
that are held by ``benefit plan investors'' are currently, and are
expected to be, less than 25% of the aggregate outstanding interests of
such class (determined in accordance with the plan assets
regulation).\11\
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\11\ The Applicant states that its current intention is to keep
investments by Client Plans, or ``benefit plan investors'' (as
defined by section 3(42) of the Act), in each class of the Offshore
Corporations' Shares below 25% and thereby avoid plan asset status.
The Applicant represents that it monitors the level of investment by
Client Plans each time there is any cash flow to make sure that the
Offshore Corporations remain below the 25% threshold in each class.
To the extent necessary, the Applicant explains that it may
mandatorily redeem a Client Plan's Shares if necessary to remain
below 25%. However, in the event benefit plan investors are allowed
to exceed the 25% threshold and the underlying assets of the
affected Offshore Corporations become plan assets, the Applicant
states that it would comply with the applicable fiduciary
obligations under the Act during any period that the assets being
managed by Wellington include any plan assets. Under such
circumstances, the Applicant states that it would provide advance
notice to all investors in the affected entity and would not allow
the 25% threshold to be exceeded until all such investors had an
opportunity to redeem their Shares should they desire not to
continue to invest in a plan assets vehicle.
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8. As an investment adviser registered under the Investment
Advisers Act of 1940, Wellington Management is subject to the
jurisdiction of the SEC. In this respect, the Applicant states that
Wellington Management is subject to regulatory review and oversight by
the SEC, which review encompasses all of Wellington Management's client
relationships, including its relationships with the Offshore
Corporations and the Offshore Funds. The sub-advisory agreement
pursuant to which Wellington Management manages the assets of each
Offshore Fund provides that such agreement is subject to the laws of
Massachusetts (to the extent not preempted by applicable U.S. federal
law). As a resident of Massachusetts, Wellington Management is subject
to the jurisdiction of the state and federal courts in Massachusetts.
Moreover, each Offshore Corporation, each Offshore Fund, Wellington
Global Holdings and Wellington Global Administrator, will consent to
the jurisdiction of such courts, and will appoint Wellington Management
as its agent for service of process.
9. Wellington's compensation is paid exclusively at the Offshore
Fund-level. Thus, Wellington will receive no duplicate fees from a
Client Plan. In this
[[Page 60896]]
regard, each Offshore Fund pays Wellington an aggregate annual
management fee equal to one percent of the Offshore Fund's net assets.
The management fee is paid quarterly in arrears and is calculated based
on the value of the net assets of the Offshore Fund at the end of the
quarter. Also, as discussed in Representation 6 and the footnote
reference with respect thereto, each Offshore Fund allocates 20 percent
of its net profits to Wellington Global Holdings on an annual basis or
upon a full redemption by a Client Plan. There are no additional
management fees incurred at the Offshore Corporation level.\12\
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\12\ Although the Applicant reserves the right to change its fee
in the future, it states that in all cases, any such change would be
fully disclosed to investors in advance. Any existing investors
would then have an opportunity to withdraw from the affected
Offshore Fund before the fee change became effective without
penalty.
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Wellington believes its compensation with respect to these entities
is reasonable, within the meaning of section 408(b)(2) of the Act and
the regulations promulgated thereunder, and consistent with (and in
many cases lower than) the levels of compensation charged by other
managers of comparable entities. In addition, Wellington states that
the reasonableness of its compensation is further evidenced by the fact
that substantially all of the investors in these entities are
independent of Wellington and all investors have made their decisions
to invest in such entities after full disclosure of the level of
compensation to be charged.
10. The Applicant believes that certain of its clients may desire
to invest in one or more Offshore Corporations. In particular, U.S.
tax-exempt investors, including Client Plans, frequently invest in
offshore funds structured as corporations (for U.S. tax purposes) in
order to minimize the amount of unrelated business taxable income they
incur as a result of certain investment strategies and activities. In
effect, the Applicant states that the introduction of the Offshore
Corporation shields the Client Plan from any unrelated business taxable
income, thereby enhancing the after-tax investment return of the Client
Plan. Because an investment in an Offshore Corporation would allow
Client Plans to invest in these investment strategies and activities on
the most tax efficient basis, the Applicant believes that it is in the
best interest of Client Plans and their participants and beneficiaries,
and also consistent with the requirements of section 408(a) of the Act,
for the Department to grant an administrative exemption for the past
and future acquisition and redemption of an Offshore Corporation's non-
voting Shares by a Client Plan.
11. Accordingly, the Applicant requests an administrative exemption
from the Department that would permit a Client Plan to acquire Shares
from an Offshore Corporation. The exemption would also allow the Client
Plan to redeem Shares from an Offshore Corporation, either in cash or
in kind. An administrative exemption is required because Wellington
Management is (or may become) a party in interest with respect to a
Client Plan, as a fiduciary and a service provider under section
3(14)(A) and (B) of the Act. Wellington Management would also be
considered a party in interest with respect to a Client Plan under
section 3(14)(H) of Act because it owns directly 10% or more of
Wellington Global Administrator, a service provider to a Client Plan.
In this respect, Wellington Management owns more than 99% of the common
stock of Wellington Global Administrator and indirectly, more than 99%
of Manager Shares.
In addition, Wellington Global Administrator is a party in interest
with respect to a Client Plan under section 3(14)(H) of the Act
inasmuch as it is a 10% or more shareholder of an Offshore Corporation
due to its ownership of 100% of Manager Shares.
Further, an Offshore Corporation would be considered a party in
interest with respect to a Client Plan because under section 3(14)(G)
of the Act, it is a corporation in which 50% of the combined voting
power of all stock entitled to vote is owned directly by Wellington
Global Administrator, a service provider, and indirectly by Wellington
Management, a fiduciary and a service provider.
Therefore in the absence of an administrative exemption, the
acquisition or redemption by a Client Plan of Shares from an Offshore
Corporation would constitute a prohibited purchase and sale transaction
between the Client Plan and a party in interest in violation of section
406(a)(1)(A) and (D) of the Act.
Because all decisions with respect to a Client Plan's acquisition
or redemption of Shares would be (or have been made) by independent
fiduciaries of Client Plans which are unrelated to Wellington, no
exemption from section 406(b) of the Act is being requested by the
Applicant.
If granted, the exemption would provide retroactive relief,
effective from January 1, 2001 until December 31, 2003 for transactions
involving two Client Plans that formerly invested in the Offshore
Corporations. The exemption would also provide prospective relief that
would be effective on the date the grant notice is published in the
Federal Register for future investments by Client Plans in the Offshore
Corporations.
The Applicant is aware that the prospective transactions described
herein may be covered by the statutory exemption for service providers
under section 408(b)(17) of the Act. Section 408(b)(17) of the Act
requires that, in connection with transactions entered into pursuant to
this statutory exemption, that a plan receive no less nor pay no more
than ``adequate consideration.'' For purposes of the statutory
exemption, the term ``adequate consideration'' means,
In the case of a security for which there is a generally
recognized market--
[cir] The price of the security prevailing on a national securities
exchange which is registered under section 6 of the Securities Exchange
Act of 1934, taking into account factors such as the size of the
transaction and marketability of the security, or
[cir] If the security is not traded on a national securities
exchange, a price not less favorable to the plan than the offering
price for the security established by the current bid and asked prices
quoted by persons independent of the issuer and of the party in
interest, taking into account factors such as the size of the
transaction and marketability of the security, and
In the case of an asset other than a security for which
there is a generally recognized market, the fair market value of the
asset as determined in good faith by a fiduciary or fiduciaries in
accordance with regulations prescribed by the Secretary of Labor.
The Applicant is concerned about the requirement in section
408(b)(17) that the plan ``receives no less, nor pays no more, than
adequate consideration.'' In this context, the Applicant explains that
this provision means fair market value as determined in good faith by
the relevant plan fiduciary in accordance with regulations prescribed
by the Department. In the absence of such regulations, the Applicant
states that the determination of what constitutes adequate
consideration is unclear, particularly if the underlying assets of an
Offshore Fund are invested in securities and other investments that are
not publicly-traded. But for this concern, the Applicant states that
the statutory relief provided under section 408(b)(17) of the Act would
be adequate for prospective transactions.
12. The Applicant requests retroactive exemptive relief with
respect to the
[[Page 60897]]
investment by two Client Plans in an Offshore Corporation.
Specifically, the NCR Pension Plan (the NCR Plan) and the Lahey Clinic
Pension Plan (the Lahey Plan) inadvertently acquired interests in an
Offshore Corporation in January 1, 2001 and July 1, 2003, respectively.
The NCR Plan invested $27,200,000 in the WMIB Offshore Corporation on
January 1, 2001 in order to acquire Class A Shares. Based upon an
available Form 5500, the NCR Plan had total assets of approximately $3
billion on December 31, 2000. Therefore, the NCR Plan's investment in
WMIB represented approximately 1% of that Client Plan's assets. In
addition, WMIB made no interim distributions to the NCR Plan during the
Client Plan's ownership of Shares. On December 31, 2003, the NCR Plan
redeemed its interest in WMIB partially in cash and partially in kind.
As the redemption amount, the NCR Plan received $31,052,990.
The Lahey Plan invested $6 million in Archipelago on July 1, 2003
to acquire Class A Shares. Based upon an available Form 5500, the Lahey
Plan had total assets of approximately $150 million as of September 30,
2003. Thus, the Lahey Plan's investment in Archipelago represented
approximately 4% of that Client Plan's assets. During its ownership of
the Class A Shares, Archipelago made no interim distributions to the
Lahey Plan. On December 31, 2003, the Lahey Plan redeemed its interest
in Archipelago in cash. The Lahey Plan received $6,712,168.
It is represented that Wellington did not provide investment advice
(within the meaning of 29 CFR 2510.3-21(c)), nor was it a fiduciary,
with respect to either the Lahey Plan's or the NCR Plan's investments
in the Class A Shares. Rather, in each case, the decision to acquire
Class A Shares was made by an authorized fiduciary of the Client Plan
who was independent of Wellington. Neither the independent fiduciary of
the Client Plan nor Wellington had any knowledge that such acquisition
would give rise to a prohibited transaction under section 406(a) of the
Act. This was because the parties were not aware that Wellington
Management's 95% indirect ownership of Manager Shares in WMIB and
Archipelago resulted in either Offshore Corporation becoming a party in
interest with respect to the applicable Client Plan. When the
prohibited transaction concern was identified, the Applicant states
that each Client Plan redeemed its interest in the Offshore Corporation
in December 2003, within a reasonable period of time after such
discovery. In the case of the Lahey Plan, the redemption was made
entirely in cash, while the NCR Plan requested, and was given, a
redemption that was partially in cash and partially in kind. The NCR
Plan was permitted to receive an in-kind redemption in part because it
intended to reinvest its redemption proceeds in a parallel domestic
fund, also managed by Wellington.\13\ In view of this intent, the
Applicant believes that it was more efficient and cost effective (i.e.,
by avoiding transaction costs) to effect a partial redemption in kind.
Neither Client Plan incurred a loss as a result of its investment in
the Offshore Corporation.
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\13\ The Applicant states that the redemption proceeds received
by the NCR Plan were invested in Quisset Partners, L.P. (the
Domestic Fund), a private investment fund organized as a Delaware
limited partnership that is sponsored and managed by Wellington in a
substantially similar manner to the Offshore Fund from which the NCR
Plan was redeemed. The Applicant further states that the decision to
invest in the Domestic Fund was made by an independent fiduciary of
the NCR Plan without any fiduciary involvement by Wellington or any
of its affiliates. The Applicant confirms that the assets of the
Domestic Fund are not plan assets subject to the Act due to the fact
that the holdings of equity interests in the Domestic Fund are such
that ownership by benefit plan investors is not significant within
the meaning of section 3(42) of the Act. Nevertheless, the
Department is not proposing, nor is the Applicant requesting,
exemptive relief with respect to the NCR Plan's investment in the
Domestic Fund.
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During their investment in the Offshore Corporations, both the
Lahey Plan and the NCR Plan were provided with the opportunity to
access, among other things, monthly unaudited performance reports and
audited annual financial statements. Both the Lahey Plan and the NCR
Plan were also able to access this information online or through paper
mailings that were initially given to the sponsor of the NCR Plan. In
addition, during the entire duration of their respective investments,
both Client Plans had telephone access to the Wellington's Hedge Fund
Group for assistance with any questions they may have had.
Neither the NCR Plan nor the Lahey Plan paid any sales or
redemption fees or commissions in connection with their subscription
and redemption of Class A Shares. Like all other investors, the Client
Plans did indirectly bear the management fee and incentive allocation
borne by the underlying partnerships to which their respective Class A
Shares related.
13. With respect to the determination of fair market value for
purposes of the redemption transactions relating to the NCR Plan and
the Lahey Plan, the Applicant states that to the extent that any of the
assets of an Offshore Fund consisted of publicly-traded securities or
other assets for which independent market prices were available, the
public market prices or independent pricing sources were utilized. The
Applicant further states that to the extent that any of the assets of
an Offshore Fund were not capable of being valued in this manner,
Wellington Management's pricing committee, which is comprised of senior
Wellington investment professionals, determined the fair value of such
assets pursuant to its Fair Value Pricing Practices.\14\ Wellington
contemplates that not more than 5% of the securities held by an
Offshore Fund which are not readily marketable will be subject to its
Fair Value Pricing Practices.
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\14\ The Applicant states that a fair value pricing
determination is intended to provide, on a best-efforts basis, the
price at which the security could reasonably be expected to be sold
in an arm's length transaction. The Applicant notes that a fair
value determination does not contemplate the price at which the
entire position would be sold; each situation is appraised
individually and only a small percentage (typically in the range
from 0-5%) of its holdings will be subject to fair value pricing at
any one time. The Applicant considers the following factors in
determining whether fair valuation is required: (a) Prices are
unavailable on an exchange or market; (b) prices are unavailable
from brokers/market makers; (c) a determination that prices from
vendor/broker sources are stale or incorrect; (d) a private
placement investment; (e) notice of default or the initiation of
bankruptcy proceedings; (f) a determination that an investment has
become worthless; (g) certain corporate reorganizations; (h) a
``significant event'' has occurred with respect to a security or
market.
In making its fair value pricing determination, the Applicant
represents that it utilizes a set of defined decision rules, which
involve varying degrees of objectivity, an independent review
process, and a continuing review of securities in fair value status.
The valuation process is operated in a consistent manner over time
as well as among investor accounts.
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14. Given that (a) there was no awareness of the technical
prohibited transaction concern involved, (b) the investment decision
was made by an independent fiduciary on the same terms as all other
investors in the Offshore Corporation after receipt of an offering
memorandum describing the details of the investment, (c) each of these
two Client Plans had, at the time of investment, aggregate assets in
excess of $100 million, (d) each Client Plan redeemed its entire
interest in the Offshore Corporation within a reasonable period of time
after the prohibited transaction concern was discovered, and (e)
neither Client Plan incurred a loss on account of its investment in the
Offshore Corporation, the Applicant believes that a retroactive
exemption covering the acquisition and redemption of interests in the
Offshore Corporations by these two Client Plans is appropriate. For
these Client Plans, the exemption would be effective
[[Page 60898]]
between January 1, 2001 and December 31, 2003.
15. The Applicant represents that the following safeguards for the
prospective exemption will be in place:
All decisions to acquire or redeem Shares will be made or
are made on behalf of the Client Plan by an independent fiduciary.
The Client Plan, either individually or through a pooled
investment vehicle such as a master trust or a pooled fund, will have
assets at least equal to $100 million. For example: (a) In the case of
a master trust that holds assets of multiple related Client Plans
maintained by a single employer or a controlled group of employers, as
defined by section 407(d)(7) of the Act, this requirement will be
satisfied if the master trust has aggregate assets at least equal to
$100 million (assuming the fiduciary responsible for making the
investment decision is the Client Plan sponsor or an affiliate of the
Client Plan sponsor); or (b) in the case of a pooled fund (e.g., a
group trust) whose assets are ``plan assets'' subject to the Act, this
requirement will be satisfied as long as either (1) the pooled fund has
at least $100 million in aggregate assets and the fiduciary making the
investment decision is unrelated to Wellington and manages at least
$200 million in assets (exclusive of the aggregate assets invested in
the Offshore Corporations); or (2) at least 50 percent of the units of
beneficial interest in the pooled fund are held by Client Plans, each
of which has total net assets of at least $100 million.
Wellington will not provide investment advice (within the
meaning of 29 CFR 2510.3-21(c)), nor is it a fiduciary with respect to
any Client Plan investment in an Offshore Fund.
All acquisitions and redemptions of Shares by a Client
Plan will be for fair market value, determined as follows: (a) equity
securities will be valued at their last sale price or official closing
price on the market on which such securities primarily trade using
sources independent of Wellington and the issuer. If no sales occurred
on such day, equity securities are valued at the last reported
independent ``bid'' price or, if sold short, at the last reported
independent ``asked'' price; (b) fixed income securities will be valued
either on the basis of ``firm quotes'' obtained at the time of the
acquisition or redemption of Shares from U.S.-registered or foreign
broker-dealers, which are registered and subject to the laws of their
respective jurisdiction, which quotes reflect the share volume involved
in the transaction, or on the basis of prices provided by independent
pricing services that determine valuations based on market transactions
for comparable securities and various relationships between such
securities that are generally recognized by institutional traders; (c)
options will be valued at the mean between the current independent
``bid'' price and the current independent ``asked'' price or, where
such prices are not available are valued at their fair value in
accordance with Fair Value Pricing Practices by Wellington Management's
pricing committee, which utilizes a set of defined rules and an
independent review process; or (d) if current market quotations are not
readily available for any investments, such investments will be valued
at their fair value by Wellington Management's pricing committee, in
accordance with Fair Value Pricing Practices.
A Client Plan's Shares will be redeemed, in whole or in
part, without the payment of any redemption fee or other penalty, on a
pre-specified, periodic (not longer than semi-annual) basis, upon no
more than 45 days' advance notice, except for a one-year lock-up period
imposed on new investors. (If the Applicant extends the lock-up period
to existing investors, such investors would receive advance notice and
have an opportunity to withdraw from the affected Offshore Fund without
penalty before the change become effective.)
Redemptions of Shares in an Offshore Corporation by a
Client Plan will be made in cash unless: (a) A Client Plan consents to
such in kind redemption; or (b) Wellington requires that such
redemption be made in kind on a pro rata basis to protect the best
interests of the Offshore Fund and the remaining investors, including
other Client Plan investors. (Each Offshore Corporation may redeem
Shares in kind if deemed by the Board of Directors to be in the best
interests of the Offshore Corporation. There is no threshold over which
redemptions are automatically funded in kind, nor is there any minimum
amount of redemption below which the redemption cannot be made in
kind.)
In advance of the initial investment by a Client Plan in
an Offshore Corporation's Shares, the relevant independent fiduciary
will receive: (a) A copy of the proposed and final exemption for
prospective relief described herein; (b) an offering memorandum
describing the relevant Offshore Fund(s), as well as the relevant
investment objectives, fees and expenses and redemption and valuation
procedures; and (c) all reasonably available relevant information as
such independent fiduciary may request.
On an ongoing basis, Wellington will provide a Client Plan
with the following information: (a) Unaudited performance reports at
the end of each month; (b) audited annual financial statements and
access to a protected internet site; and (c) client services group
assistance for any investor inquiries.
No commission or sales charge will be assessed against the
Client Plan in connection with its acquisition of an Offshore
Corporation's Shares.
Not more than 10% of the assets of the Client Plan will be
invested, in the aggregate, in non-voting Shares of all Offshore
Corporations (determined at the time of any acquisition of the Shares)
and not more than 5% of the assets of the Client Plan will be invested,
in the aggregate, in any one Offshore Fund (determined at the time of
any acquisition of an interest in such Offshore Fund by such Client
Plan).
Each Offshore Corporation, each Offshore Fund, Wellington
Management Investment, Wellington Global Holdings, Wellington Hedge
Management, and Wellington Global Administrator will consent to the
jurisdiction of the federal and state courts located in the
Commonwealth of Massachusetts and has appointed Wellington Management
as its agent for service of process.
Wellington will maintain in the United States for a period
of six years from the date of the covered transactions, such records as
are necessary to enable any duly authorized employee or representative
of the Department or the Service, any fiduciary of a Client Plan, or
any participant or beneficiary of a Client Plan to determine whether
the conditions of this exemption have been or are met.
16. In summary, the Applicant represents that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) All decisions to acquire or redeem such Shares have been or
will be made on behalf of the Client Plan by an authorized fiduciary
who is independent of Wellington and the applicable Offshore
Corporation;
(b) At the time of acquisition of Shares from an Offshore
Corporation, each Client Plan has had or will have assets at least
equal to $100 million either individually or through a pooled
arrangement.
(c) Wellington has not provided or will not provide investment
advice (within the meaning of 29 CFR 2510.3-21(c)), nor is it a
fiduciary with respect
[[Page 60899]]
to any Client Plan's investment in an Offshore Fund.
(d) A Client Plan's Shares have been redeemed or will be redeemed,
in whole or in part, without the payment of any redemption fee or other
penalty, on a pre-specified, periodic (not longer than semi-annual)
basis, upon no more than 45 days' advance notice, except for a one-year
lock-up period imposed on new investors.
(e) All acquisitions and redemptions of Shares by a Client Plan
have been made or will be made for fair market value or have been
valued or will be valued by Wellington Management's pricing committee,
which utilizes a set of defined rules and an independent review
process, all in accordance with Fair Value Pricing Practices.
(f) Redemptions of interests in an Offshore Corporation by a Client
Plan have been made or will be made in kind or cash unless: (1) A
Client Plan consents to such in kind redemption; or (2) Wellington
requires that such redemption be made in kind to protect the best
interests of the Offshore Fund and the remaining investors, including
other Client Plan investors.
(g) In advance of the initial investment by a Client Plan in an
Offshore Corporation's Shares, the relevant independent fiduciary has
received or will receive: (1) A copy of the proposed exemption and the
final exemption (This disclosure provision applies to the prospective
exemptive relief described herein.); (2) an offering memorandum
describing the relevant Offshore Fund(s), as well as the relevant
investment objectives, fees and expenses and redemption and valuation
procedures; and (3) all reasonably available relevant information as
such independent fiduciary may request.
(h) On an ongoing basis, Wellington has provided or will provide
the independent fiduciary of a Client Plan with the following
information: (1) Unaudited performance reports at the end of each
month; (2) audited annual financial statements and access to a
protected internet site; and (3) client services group assistance for
any investor inquiries.
(i) No commission or sales charge has been assessed or will be
assessed against the Client Plan in connection with its acquisition of
an Offshore Corporation's Shares.
(j) Not more than 10% of the assets of the Client Plan has been
invested or will be invested, in the aggregate, in non-voting Shares of
all Offshore Corporations (determined at the time of any acquisition of
such Shares) and not more than 5% of the assets of the Client Plan has
been indirectly invested or will be invested, in the aggregate, in any
one Offshore Fund (determined at the time of any acquisition of an
interest in such Offshore Fund by such Client Plan).
(k) For prospective transactions only, each Offshore Corporation,
each Offshore Fund, Wellington Management Investment, Wellington Global
Holdings, Wellington Hedge Management, and Wellington Global
Administrator will consent to the jurisdiction of the federal and state
courts located in the Commonwealth of Massachusetts and has appointed
Wellington Management as its agent for service of process.
(l) For prospective transactions only, Wellington will maintain in
the United States for a period of six years from the date of the
covered transactions, such records as are necessary to enable such
persons as any duly authorized employee or representative of the
Department or the Service, any fiduciary of a Client Plan, or any
participant or beneficiary of a Client Plan, to determine whether the
conditions of this exemption will be met.
17. The Department notes that the general standards of fiduciary
conduct under the Act would apply to the transactions permitted herein,
and that the satisfaction of the conditions of this exemption should
not be viewed as an endorsement, by the Department, of investments in
the Offshore Corporations by Wellington's Client Plans. Therefore, the
Department believes that it would be helpful to provide general
information regarding its views on the responsibilities of an
independent fiduciary of a Client Plan in connection with such plan's
investment in an Offshore Corporation.
As noted in the Department's Interpretive Bulletin, 29 CFR 2509.94-
3(d) (59 FR 66736, December 28, 1994), apart from consideration of the
prohibited transaction provisions, a Client Plan's independent
fiduciary must determine that such plan's investment in an Offshore
Corporation is consistent with the general standards of fiduciary
conduct under section 404 of the Act. In this regard, section
404(a)(1)(A) and (B) of the Act requires that fiduciaries discharge
their duties to a plan solely in the interests of the participants and
beneficiaries, for the exclusive purpose of providing benefits to
participants and beneficiaries and defraying reasonable administrative
expenses, and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. In addition, section
404(a)(1)(C) of the Act requires that fiduciaries diversify plan
investments so as to minimize the risk of large losses, unless under
the circumstances it is clearly prudent not to do so.
Accordingly, the independent fiduciary of a Client Plan must act
``prudently,'' ``solely in the interest'' of the Client Plan's
participants and beneficiaries, and with a view to the need to
diversify such plan assets when deciding whether to invest plan assets
in Shares of an Offshore Corporation. If such investment is not
``prudent,'' or not ``solely in the interest'' of the participants and
beneficiaries of the plan or would result in an improper lack of
diversification of plan assets, the responsible fiduciary or
fiduciaries of the plan would be liable for any losses resulting from
such a breach of fiduciary responsibility.
The Department further emphasizes that it expects the independent
fiduciary to fully understand the benefits and risks associated with
the Client Plan's investment in an Offshore Corporation, following
disclosure to such fiduciary of all relevant information, including the
fees that are paid to Wellington. Further, such plan fiduciary must be
capable, either directly or indirectly through the use of hired
professional experts, of monitoring the investment, including any
changes in the performance of the investment. Thus, in considering a
Client Plan's investment in an Offshore Corporation, an independent
fiduciary should take into account its ability to provide adequate
oversight of the particular investment.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone number (202) 693-8556. (This is not a toll-free number.)
GE Asset Management Incorporated Located in Stamford, Connecticut
[Application No. D-11389]
Proposed Exemption
Section I--Exemption for In-Kind Redemption of Assets
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and 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 proposed exemption is
granted, the restrictions in sections 406(a)(1)(A) through (D) and
406(b)(1) and (b)(2) of the Act, and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
[[Page 60900]]
4975(c)(1)(A) through (E) of the Code, shall not apply,\15\ effective
March 1, 2006, to certain in-kind redemptions (the Redemption(s)), by
plans sponsored by the General Electric Company (GE) or an affiliate
(the Plan(s)), of shares (the Shares) of certain proprietary mutual
funds for which GE Asset Management Incorporated (GEAM) provides
investment advisory and other services (the Mutual Fund(s)), provided
that the following conditions are satisfied:
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\15\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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(A) The Plan pays no sales commissions, redemption fees, or other
similar fees in connection with the Redemption (other than customary
transfer charges paid to parties other than GEAM and any affiliates
thereof (GEAM Affiliates));
(B) The assets transferred to the Plan pursuant to the Redemption
consist entirely of cash and Transferable Securities, as such term is
defined in Section II, below;
(C) With certain exceptions described below, the Plan receives in
any Redemption its pro rata portion of the securities that, when added
to the cash received, is equal in value to the number of Shares
redeemed, as determined in a single valuation performed in the same
manner and as of 4 p.m. (local time for the New York Stock Exchange) on
the same day, in accordance with Rule 2a-4 under the Investment Company
Act of 1940, as amended (the 1940 Act), and the then-existing
procedures established by the Board of Trustees of the Mutual Fund
(using sources independent of GEAM and GEAM Affiliates).
Notwithstanding the foregoing, Transferable Securities that are odd lot
securities, fractional shares, and accruals on such securities may be
distributed in cash;
(D) Neither GEAM, nor any affiliate thereof, receives any direct or
indirect compensation, or any fees, including any fees payable pursuant
to Rule 12b-1 under the 1940 Act, in connection with any Redemption of
the Shares;
(E) Prior to a Redemption, GEAM provides in writing to an
independent fiduciary, as such term is defined in Section II
(Independent Fiduciary), a full and detailed written disclosure of
information regarding the Redemption;
(F) Prior to a Redemption, the Independent Fiduciary provides
written authorization for such Redemption to GEAM, such authorization
being terminable at any time prior to the date of Redemption without
penalty to the Plan;
(G) Before authorizing a Redemption, based on the disclosures
provided by GEAM to the Independent Fiduciary, the Independent
Fiduciary determines that the terms of the Redemption are fair to the
Plan, and comparable to, and no less favorable than, terms obtainable
at arm's length between unaffiliated parties, and that the Redemption
is in the best interests of the Plan and its participants and
beneficiaries;
(H) Not later than thirty (30) business days after the completion
of a Redemption, the Mutual Fund will provide to the Independent
Fiduciary a written confirmation regarding such Redemption containing:
(i) The total number of Shares of the Mutual Fund and the
percentage held by the Plan immediately before the Redemption (and the
related per Share net asset value and the total dollar value of the
Shares held);
(ii) The identity (and related aggregate dollar value) of each
security provided to the Plan pursuant to the Redemption, including
each security valued in accordance with Rule 2a-4 under the 1940 Act
and the then-existing procedures established by the Board of Trustees
of the Mutual Fund (using sources independent of GEAM and GEAM
Affiliates);
(iii) The current market price of each security received by the
Plan pursuant to the Redemption; and
(iv) The identity of each pricing service or market-maker consulted
in determining the value of such securities;
(I) The value of the securities received by the Plan for each
redeemed Share, when added to the cash received, equals the net asset
value of such Share at the time of the transaction, and such value
equals the value that would have been received by any other investor
for shares of the same class of the Mutual Fund at that time;
(J) Subsequent to a Redemption, within 180 days of the date of such
Redemption, the Independent Fiduciary performs a post-transaction
review that will include, among other things, testing a sampling of
material aspects of the Redemption deemed in its judgment to be
representative, including pricing;
(K) Each of the Plan's dealings with the Mutual Funds, the
investment advisers to the Mutual Funds, the principal underwriter for
the Mutual Funds, or any affiliated person thereof, are on a basis no
less favorable to the Plan than dealings between the Mutual Funds and
other shareholders holding shares of the same class as the Shares;
(L) GEAM will maintain, or cause to be maintained, for a period of
six years from the date of any covered transaction such records as are
necessary to enable the persons described in paragraph (M) below to
determine whether the conditions of this exemption, if granted, have
been met, except that (i) this recordkeeping condition shall not be
violated if, due to circumstances beyond the control of GEAM, the
records are lost or destroyed prior to the end of the six year period,
(ii) no party in interest with respect to the Plan other than GEAM
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 such records are not maintained or are not
available for examination as required by paragraph (M) below;
(M)(1) Except as provided in subparagraph (2) of this paragraph
(M), and notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (L) above are
unconditionally available at their customary locations for examination
during normal business hours by (i) any duly authorized employee or
representative of the Department of Labor, the Internal Revenue
Service, or the Securities and Exchange Commission (SEC), (ii) any
fiduciary of the Plan or any duly authorized representative of such
fiduciary, (iii) any participant, beneficiary, or union employee
covered by the Plan or duly authorized representative of such
participant, beneficiary, or union employee, (iv) any employer whose
employees are covered by Plan and any employee organization whose
members are covered by such Plan.
(2) None of the persons described in paragraphs (M)(1)(ii), (iii)
and (iv) shall be authorized to examine trade secrets of GEAM or the
Mutual Funds, or commercial or financial information that is privileged
or confidential; and
(3) Should GEAM or the Mutual Funds refuse to disclose information
on the basis that such information is exempt from disclosure pursuant
to paragraph (2) above, GEAM shall, by the close of the thirtieth
(30th) day following the request, provide a written notice advising
that person of the reasons for the refusal and that the Department may
request such information.
Section II--Definitions
(A) The term ``affiliate'' means:
(1) Any person (including a corporation or partnership) directly or
indirectly through one or more intermediaries, controlling, controlled
by, or under common control with the person;
[[Page 60901]]
(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.
(B) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(C) 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 the Mutual Fund's
prospectus and statement of additional information, and other assets
belonging to the Mutual Fund, less the liabilities charged to each such
Mutual Fund, by the number of outstanding shares.
(D) The term ``Independent Fiduciary'' means a fiduciary who is:
(i) Independent of and unrelated to GEAM and its affiliates, and (ii)
appointed to act on behalf of the Plan with respect to the in-kind
transfer of assets from one or more Mutual Funds to, or for the benefit
of, the Plan. For purposes of this proposed exemption, a fiduciary will
not be deemed to be independent of and unrelated to GEAM if: (i) Such
fiduciary directly or indirectly controls, is controlled by, or is
under common control with GEAM, (ii) such fiduciary directly or
indirectly receives any compensation or other consideration in
connection with any transaction described in this proposed exemption
(except that an independent fiduciary may receive compensation from
GEAM in connection with the transactions contemplated herein if the
amount or payment of such compensation is not contingent upon or in any
way affected by the independent fiduciary's ultimate decision), and
(iii) an amount equal to more than two percent (2%) of such fiduciary's
gross income, for federal income tax purposes, in its prior tax year,
will be paid to such fiduciary by GEAM and its affiliates in such
fiduciary's current tax year.
(E) The term ``Transferable Securities'' means securities that are
traded on public securities markets or for which quoted bid and asked
prices are available from persons independent of GEAM and would not
include the following types of securities or assets: (a) Securities
that would have to be registered under the Securities Act of 1933, as
amended; (b) securities issued by entities in countries that restrict
the holdings of securities by non-nationals, including investment
vehicles such as the Mutual Funds, or otherwise limit the ability to
transfer the security other than through a local securities exchange
transaction; and (c) certain portfolio assets (such as forward currency
contracts, futures and option contracts, swap transactions, and
repurchase agreements) that, although they may be liquid and
marketable, involve the assumption of contractual obligations, require
special trading facilities, or may be traded only with the counterparty
to the transactions in order to effect a change in beneficial
ownership.
(F) The term ``relative'' means a ``relative'' as such term is
defined in section 3(15) of the Act (or a ``member of the family,'' as
such term is defined in section 4975(e)(6) of the Code), or a brother,
sister, or a spouse of a brother or a sister.
Summary of Facts and Representations
1. GE Asset Management Incorporated (i.e., GEAM) is a direct,
wholly-owned subsidiary of the General Electric Company (i.e., GE).
GEAM serves as investment adviser to the GE Funds, an open-end
management investment company registered under the 1940 Act that
consists of a number of series (the Retail Funds). The Retail Funds
generally offer four classes of shares: A, B, C, and Y. Class Y shares
are held by various institutional investors. Investors in Class Y
shares of the Retail Funds do not pay sales commissions or redemption
fees in connection with the purchase or redemption of such shares, nor
do they pay any 12b-1 or similar fees with respect to the distribution
of such shares. Individual account plans maintained by GE and its
affiliates (i.e., the Plans), subject to the Act and the Code, were, in
the past, invested in Class Y shares of certain Retail Funds.\16\ The
Retail Funds in which the Plans have in the past invested include the
following: The International Equity Fund, U.S. Equity Fund, Strategic
Investment Fund, Small-Cap Value Equity Fund, Premier Growth Equity
Fund, Value Equity Fund, and Fixed Income Fund.
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\16\ The applicant represents that the Plans were invested in
the Retail Funds pursuant to the terms and conditions of Prohibited
Transaction Exemption (PTE) 77-3. PTE 77-3 (42 Fed. Reg. 18734,
April 8, 1977) is a class exemption that permits, under certain
conditions, 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. Thus, the applicant is
not requesting exemptive relief with respect to the Plan's past
investment in the Retail Funds. The Department expresses no opinion
herein as to whether the terms and conditions of PTE 77-3 were
satisfied.
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2. GEAM also serves as investment adviser to GE Institutional
Funds, an open-end management investment company registered under the
1940 Act that consists of a number of portfolios (the Institutional
Funds). The Institutional Funds are designed primarily for
institutional investors, such as corporations, foundations, endowments,
and trusts, as well as charitable, religious, and educational
institutions. Shares of the Institutional Funds are currently offered
in two classes: the Investment Class (Class I) and Service Class.
Purchasers of Class I shares do not pay any sales charges (including
front-end, contingent deferred, or asset-based sales charges), nor do
they pay shareholder service and distribution fees in connection with
their investments in the Institutional Funds.
The applicant represents that certain Institutional Funds have the
same investment objectives, investment strategies, and portfolio
managers as corresponding Retail Funds, and therefore have
substantially identical portfolio holdings as those corresponding
Retail Funds.\17\ However, the expense ratios of the Institutional
Funds are lower than the expense ratios of the corresponding Retail
Funds. The Institutional Funds that correspond to the Retail Funds in
which the Plans have in the past invested include the following: the
International Equity Fund, U.S. Equity Fund, Strategic Investment Fund,
Small-Cap Value Equity Fund, Premier Growth Equity Fund, Value Equity
Fund, and Fixed Income Fund.
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\17\ According to the applicant, where an Institutional Fund has
a corresponding Retail Fund, such Institutional Fund invests in
substantially identical underlying securities and substantially the
same proportional amounts as its corresponding Retail Fund.
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3. Historically, the investor qualification requirements
established by the Institutional Funds precluded the Plans from
investing in them. As a result of recent changes to those investor
eligibility requirements, however, the Plans may now invest in Class I
shares of the Institutional Funds.\18\ Certain Plans that previously
invested in Retail Funds have chosen to invest in the Institutional
Funds that correspond to those Retail Funds, given the lower expense
ratios of the
[[Page 60902]]
Institutional Funds and the substantial identity in investment
objectives and policies between the Retail Funds and the corresponding
Institutional Funds. This choice included a decision by the Plans to
redeem Class Y Shares of the Retail Funds and to use the proceeds to
purchase Class I shares of the corresponding Institutional Funds.
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\18\ The applicant represents that the changes to the
Institutional Funds' investor qualification requirements became
effective November 1, 2004. However, the Plans' desired investment
changes could not be implemented until certain securities law issues
under the 1940 Act were resolved with the no-action relief from the
SEC with respect to the in-kind purchases of Institutional Funds
shares discussed in Item 5. See GE Institutional Funds (pub. avail.
December 21, 2005).
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To facilitate investments by the Plans in the Institutional Funds,
the Retail Funds and the Institutional Funds determined to permit
simultaneous in-kind Redemption and in-kind purchase transactions where
possible, and such transactions were effected in March 2006. The
applicant represents that this approach benefited the Plans, as well as
other shareholders of the Retail Funds and the Institutional Funds, by
avoiding the significant brokerage costs that would have been
incurred--if portfolio securities of the Retail Funds were sold to
realize cash to pay redemption proceeds that were then used to acquire
similar portfolio securities in corresponding Institutional Funds. The
process of effecting the March 2006 Redemptions began with the
commencement of a blackout period applicable to the relevant Plans upon
the close of the New York Stock Exchange on March 15, and was completed
when the blackout was lifted at 2:30 p.m., Eastern Time, on March 20.
4. With respect to prohibited transaction issues under the Act and
the Code, the applicant has requested this exemption to cover the in-
kind Redemptions effected in March 2006. Prior to March 2006, the
applicant had discussions with the Department, through outside counsel,
about obtaining individual retroactive relief for the contemplated
Redemptions, modeled on similar prior individual exemptions. The
applicant notes that PTE 77-3 provides an exemption for the sale of
shares of a mutual fund by an employee benefit plan covering employees
of the investment adviser for the mutual fund and its affiliates,
subject to certain conditions. However, in several published
exemptions, in which the Department has granted individual relief for
the in-kind redemption of shares by plans of the investment advisers of
mutual funds--e.g., PTE 2003-01 (Northern Trust Company and
Affiliates); PTE 2002-20 (Union Bank of California); and PTE 2001-46
(Bank of America Corporation) \19\--the exemption notices describe PTE
77-3 as being available for a redemption of shares for cash, implying
that PTE 77-3 would not be available for an in-kind redemption.
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\19\ The most recent example is PTE 2007-04 (Mellon Financial
Corporation).
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The applicant requests retroactive relief for the March 2006
Redemptions and for any other in-kind Redemptions involving the Mutual
Funds that are effected prior to the date that an exemption, if
granted, is published in the Federal Register, as well as prospective
relief for any in-kind Redemptions effected on or after that
publication date, to be carried out in accordance with the conditions
of the exemption.
The applicant is not requesting relief for the in-kind acquisitions
of Institutional Funds shares effected in March 2006 (and, it is
represented, in the future would be effected) in accordance with PTE
77-3, in reliance on Advisory Opinion 98-06A (July 30, 1998).
5. The applicant represent that, with respect to issues raised
under the 1940 Act by the aforementioned transactions, the Retail Funds
effected the March 2006 in-kind Redemptions in reliance upon the no-
action relief granted by the SEC to Signature Financial Group, Inc.
(pub. avail. Dec. 28, 1999) (the Signature Letter).\20\ Further, the
Institutional Funds obtained no-action relief from the SEC with respect
to the in-kind purchases of Institutional Funds shares effected as part
of the overall exchange. See GE Institutional Funds (pub. avail.
December 21, 2005).
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\20\ In the Signature Letter, the Division of Investment
Management of the SEC states that it will not recommend enforcement
action pursuant to section 17(a) of the 1940 Act for certain in-kind
distributions of portfolio securities to an affiliate of a mutual
fund. Funds seeking to use this ``safe harbor'' must value the
securities to be distributed to an affiliate in an in-kind
distribution ``in the same manner as they are valued for purposes of
computing the distributing fund's net asset value.''
The Signature Letter does not address the marketability of the
securities distributed in kind. The range of securities distributed
pursuant to this ``safe harbor'' may therefore be broader than the
range of securities covered by SEC Rule 17a-7, 17 CFR 270.17a-7. In
granting past exemptive relief with respect to in-kind transactions
involving mutual funds, the Department has required that the
securities being distributed in-kind fall within Rule 17a-7. One of
the requirements of Rule 17a-7 is that the securities are those for
which ``market quotations are readily available.'' SEC Rule 17a-
7(a). Under this exemption request, exemptive relief also would be
limited to in-kind distribution of securities for which market
quotations are readily available. In addition, the Signature Letter
requires pro rata distributions for any in-kind redemptions.
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According to the applicant, the March 2006 Redemptions were
effected pursuant to certain procedures adopted by the Board of
Trustees of the Retail Funds, and the in-kind acquisitions were
effected pursuant to corresponding procedures adopted by the Board of
Trustees of the Institutional Funds. (The same persons serve as members
of the Boards of both the Retail Funds and the Institutional Funds.)
The securities and cash received by a Plan in an in-kind Redemption
from a Retail Fund pursuant to such procedures were used only for the
simultaneous purchase of shares of the corresponding Institutional
Fund. Any in-kind Redemptions (and simultaneous in-kind acquisitions)
occurring in the future would be effected pursuant to the same
procedures (the Procedures).
6. Under the Procedures, each in-kind Redemption was effected at
the current net asset value per Share of the relevant Retail Fund and
was effected simultaneously with the in-kind acquisition of shares of
the corresponding Institutional Fund. Pursuant to each in-kind
Redemption, subject to the exceptions noted below, a Plan received a
pro rata portion of securities of the Retail Fund that was equal in
value to the number of Retail Fund Shares redeemed, as determined in a
single valuation performed as of 4 p.m. Eastern Time (local time for
the closing of the New York Stock Exchange) on the same day, in the
same manner as such securities would be valued for purposes of
computing the Retail Fund's net asset value per share in accordance
with Rule 2a-4 under the 1940 Act and the procedures established by the
Board of Trustees of the Retail Funds (using sources independent of
GEAM and affiliates of GEAM).\21\
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\21\ The applicant further represents that, because each Retail
Fund distributed a pro rata portion of every unique lot of every
applicable security, the Plans received their proportionate share of
each Retail Fund's high tax basis holdings as well as low tax basis
holdings of each security distributed in kind. Accordingly, low-
basis securities were not disproportionately allocated to the
redeeming Plans to any material extent.
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Securities for which quotations are readily available on a national
securities exchange are valued at the last quoted sales price, or if
there is no reported sale, the security is valued at the last quoted
bid price. Certain fixed income securities are valued by a dealer or by
a pricing service based upon a computerized matrix system, which
considers market transactions and dealer supplied valuations.
Valuations for municipal bonds are based on prices obtained from a
qualified municipal bond pricing service, which prices are based on the
mean of the bid and ask prices of the secondary market. The value of
the securities received by the Plan, as determined by the Retail Fund
for purposes of an in-kind Redemption, is the same value of such
securities that is used in determining the number of Institutional Fund
shares purchased by such Plan as a result of the in-kind
[[Page 60903]]
purchase that is effected simultaneously as part of the same
Redemption/acquisition transaction (and such purchase is effected at
the net asset value per share of such Institutional Fund determined as
of the same time).
7. Furthermore, under the Procedures, securities received by a Plan
pursuant to an in-kind Redemption are limited to securities that are
traded on public securities markets or for which quoted bid and asked
prices are available from persons independent of GEAM (i.e.,
Transferable Securities) and do not include the following types of
securities or assets: (a) Securities that would have to be registered
under the Securities Act of 1933, as amended; (b) securities issued by
entities in countries that restrict the holdings of securities by non-
nationals, other than through qualified investment vehicles such as the
Mutual Funds, or otherwise limit the ability to transfer the security
other than through a local securities exchange transaction; and (c)
certain portfolio assets (such as forward foreign currency contracts,
futures and option contracts, and repurchase agreements) that, although
they may be liquid and marketable, involve the assumption of
contractual obligations, require special trading facilities, or may
only be traded with the counterparty to the transactions in order to
effect a change in beneficial ownership. The applicant further
represents that no Rule 144A securities were involved in the
Redemptions.
In addition, under the Procedures, a Plan receives from the
relevant Retail Fund (and deposits to the corresponding Institutional
Fund) cash for the portion of the Retail Fund's assets represented by
cash equivalents (such as certificates of deposit, commercial paper,
and repurchase agreements). A Plan receives from the relevant Retail
Fund (and deposits to the corresponding Institutional Fund) cash for
other securities and assets that are not readily distributable
(including securities and assets of the types described in (a), (b) and
(c) of the preceding paragraph, receivables, and prepaid expenses) net
of a pro rata portion of all liabilities (including accounts payable),
and for those portfolio securities not amounting to round lots (e.g.,
100 shares) (or would not amount to round lots if included in the in-
kind Redemption and purchase) or fractional shares and accruals on
these securities.
The applicant represents that the March Redemptions also satisfied
the remaining conditions set forth in Section I not addressed above.
Thus, for example, neither GEAM nor a GEAM Affiliate, received any fees
(including any fees pursuant to Rule 12b-1 under the 1940 Act) in
connection with any in-kind Redemption.
8. Further, the applicant retained U.S. Trust Company, N.A. (U.S.
Trust), a national bank, to act as the Independent Fiduciary on behalf
of the Plans with regard to the March 2006 Redemptions. It is
represented that U.S. Trust is independent of, and unrelated to, GEAM
and GEAM Affiliates and is qualified to perform the functions of the
Independent Fiduciary. U.S. Trust has acknowledged that it is a
fiduciary to the Plans, as defined in section 3(21) of the Act, and has
represented that it understands and accepts the duties,
responsibilities, and liabilities in acting as a fiduciary under the
Act for the Plan, pursuant to the terms of an engagement letter, dated
December 20, 2005, by and between GEAM and U.S. Trust.
As a condition of the proposed exemption, prior to any in-kind
Redemption with respect to a Plan, GEAM and the Plan must provide the
Independent Fiduciary with (or cause the Independent Fiduciary to be
provided with) information necessary for the Independent Fiduciary to
determine the fairness of the proposed in-kind Redemption. Before
authorizing any in-kind Redemption, the Independent Fiduciary must
determine, based on the information provided, that the terms of the in-
kind Redemption are fair to the participants of the Plan and are
comparable to, and no less favorable than, terms obtainable at arm's
length between unaffiliated parties, and that the in-kind Redemption is
in the best interests of the Plan and its participants and
beneficiaries. If the Independent Fiduciary makes that determination,
the Independent Fiduciary provides written authorization for such in-
kind Redemption to GEAM. However, that authorization is terminable at
any time prior to the date of the in-kind Redemption, without penalty
to the Plan.
U.S. Trust also conducted a post-transaction review, summarized in
a letter dated September 5, 2006, within 180 days of the date of the
March 2006 Redemptions. The post-transaction review confirmed that the
transfer was carried out in accordance with the required criteria and
procedures, by testing a sampling of certain material aspects of the
redemption transactions.\22\ U.S. Trust states,
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\22\ Condition (J) in Section I refers to testing ``a sampling''
of material aspects of the Redemptions by the Independent Fiduciary.
The applicant represents, however, that U.S. Trust received and
reviewed all of the data in connection with the Redemptions, thus
reviewing 100% of the security transactions, not merely a sampling.
In the Pre-Trade analysis performed by GEAM, the costs to redeem
in cash and repurchase all of the securities from the Funds to the
corresponding GE Institutional Funds were estimated to be
$435,612.34 combined for commissions, spread, taxes and fees. By
completing the redemption and reinvestment in kind rather than in
cash these costs were avoided. The Plans were immediately reinvested
after the in kind redemption; therefore, potential opportunity costs
associated with reinvestment risk were eliminated. If the Plans had
received cash instead of their pro rata portion of the assets in
each of the Funds, they would have been forced to incur their pro
rata portion of the sell side transactions costs, and they would
have had to incur all of the buy side transactions costs when they
reinvested the proceeds. Furthermore, there may have been a time lag
from the date of the redemption request to the time the Plans had
fully redeployed the proceeds. This time lag would have imposed an
opportunity cost by not being invested in securities that would have
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had the potential to match the Plans [sic] stated objectives.
With respect to any future Redemptions, as a condition of the
proposed exemption, the Independent Fiduciary will also perform such a
post-transaction review within 180 days of the date of the Redemption.
9. In summary, the applicant represents that the Redemptions have
satisfied, and will satisfy, the statutory criteria for an exemption
under section 408(a) of the Act for the following reasons:
(A) The Plan pays no sales commissions, redemption fees, or other
similar fees in connection with the Redemption (other than customary
transfer charges paid to parties other than GEAM and GEAM Affiliates);
(B) The assets transferred to the Plan pursuant to the Redemption
consist entirely of cash and Transferable Securities;
(C) With certain exceptions described below, the Plan receives in
any Redemption its pro rata portion of the securities that, when added
to the cash received, is equal in value to the number of Shares
redeemed, as determined in a single valuation performed in the same
manner and as of 4 p.m. (local time for the New York Stock Exchange) on
the same day, in accordance with Rule 2a-4 under the 1940 Act, and the
then-existing procedures established by the Board of Trustees of the
Mutual Fund (using sources independent of GEAM and GEAM Affiliates).
Notwithstanding the foregoing, Transferable Securities that are odd lot
securities, fractional shares, and accruals on such securities may be
distributed in cash;
(D) Neither GEAM, nor any GEAM Affiliate, receives any direct or
indirect
[[Page 60904]]
compensation, or any fees, including any fees payable pursuant to Rule
12b-1 under the 1940 Act, in connection with any Redemption of the
Shares;
(E) Prior to a Redemption, GEAM provides in writing to an
Independent Fiduciary a full and detailed written disclosure of
information regarding the Redemption;
(F) Prior to a Redemption, the Independent Fiduciary provides
written authorization for such Redemption to GEAM, such authorization
being terminable at any time prior to the date of Redemption without
penalty to the Plan;
(G) Before authorizing a Redemption, based on the disclosures
provided by GEAM to the Independent Fiduciary, the Independent
Fiduciary determines that the terms of the Redemption are fair to the
Plan, and comparable to, and no less favorable than, terms obtainable
at arm's length between unaffiliated parties, and that the Redemption
is in the best interests of the Plan and its participants and
beneficiaries;
(H) Not later than thirty (30) business days after the completion
of a Redemption, the Mutual Fund will provide to the Independent
Fiduciary a written confirmation regarding such Redemption containing:
(i) The total number of Shares of the Mutual Fund and the
percentage held by the Plan immediately before the Redemption (and the
related per Share net asset value and the total dollar value of the
Shares held);
(ii) The identity (and related aggregate dollar value) of each
security provided to the Plan pursuant to the Redemption, including
each security valued in accordance with Rule 2a-4 under the 1940 Act
and the then-existing procedures established by the Board of Trustees
of the Mutual Fund (using sources independent of GEAM and GEAM
Affiliates);
(iii) The current market price of each security received by the
Plan pursuant to the Redemption; and
(iv) The identity of each pricing service or market-maker consulted
in determining the value of such securities;
(I) The value of the securities received by the Plan for each
redeemed Share, when added to the cash received, equals the net asset
value of such Share at the time of the transaction, and such value
equals the value that would have been received by any other investor
for shares of the same class of the Mutual Fund at that time;
(J) Subsequent to a Redemption, within 180 days of the date of such
Redemption, the Independent Fiduciary performs a post-transaction
review that will include, among other things, testing a sampling of
material aspects of the Redemption deemed in its judgment to be
representative, including pricing;
(K) Each of the Plan's dealings with the Mutual Funds, the
investment advisers to the Mutual Funds, the principal underwriter for
the Mutual Funds, or any affiliated person thereof, are on a basis no
less favorable to the Plan than dealings between the Mutual Funds and
other shareholders holding shares of the same class as the Shares.
Notice To Interested Persons: Notice of the proposed exemption will
be given to the relevant named fiduciary of each Plan and to the
Independent Fiduciary representing the Plans by first class mail within
30 days from the date of publication of the proposed exemption in the
Federal Register. Comments and requests for a hearing from all
interested persons are due within 60 days from such date of publication
in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free number.)
Middleburg Trust Company (Middleburg) Located in Richmond, VA
[Application No. D-11405]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).\23\
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\23\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the
jurisdiction of Title I of the Employee Retirement Income Security
Act of 1974 (the Act). However, there is jurisdiction under Title II
of the Act pursuant to section 4975 of the Code.
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If the exemption is granted, 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 past
sale, on March 28, 2006, by the William T. Smith IRA (the IRA) of
certain bonds (the Bonds) to Middleburg, a disqualified person with
respect to the IRA.
This proposed exemption is conditioned upon adherence to the
material facts and representations described herein and upon
satisfaction of the following conditions:
(a) The sale was a one-time transaction for cash;
(b) The sale price for the Bonds was based on the Bonds' face
value;
(c) The Bonds' face value was in excess of bids for the Bonds
solicited from independent brokers and in excess of the price for the
Bonds quoted by an independent valuation service for the date of the
sale;
(d) Neither the IRA nor Mr. William T. Smith, the owner of the IRA,
paid any fees, commissions, or other costs or expenses associated with
the sale;
(e) The IRA received its portion of income and all interest accrued
on the Bonds through the date of the sale;
(f) The terms and conditions of the sale were at least as favorable
to the IRA as those obtainable in an arm's length transaction with an
unrelated party; and
(g) Within 30 days of the publication of the grant notice in the
Federal Register, Middleburg will pay the IRA $196.53 to make up for
the loss sustained by the IRA as a result of the sale.
Effective Date: If granted, the proposed exemption will be
effective as of March 28, 2006.
Summary of Facts and Representations
1. The plan to which the proposed exemption applies is an
individual retirement account described under section 408(a) of the
Code. The IRA is a ``traditional IRA'' in that the custodian, rather
than the IRA account holder, makes the investment decisions for such
plan. Mr. William T. Smith is the IRA account holder. As of February
28, 2006, the IRA had total assets having a fair market value of
$578,193.89.
Middleburg,\24\ an independent trust company, headquartered in
Richmond, Virginia, formerly acted as the custodian and trustee of the
IRA and had discretion over the IRA's assets. At no time did Mr. Smith
ever serve as an officer, director, or employee of Middleburg or its
affiliates or have any other relationship with these entities.
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\24\ Prior to its name change, which took effect on January 1,
2006, Middleburg was known as ``Tredegar Trust Company.''
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2. On June 28, 2005, Middleburg purchased 200 Federal Home Loan
Bank (FHLB) bonds having a combined face value of $200,000.00.\25\ Each
Bond in the entire issue had a Committee on Uniform Securities
Identification Procedures Number of 3133XB2C8. Middleburg paid a total
purchase price of $201,600 for the Bonds. The seller of the Bonds was
First Tryon Securities of Charlotte, North Carolina, an unrelated
party. Each Bond was issued in denominations of $1,000. The Bonds carry
interest at 5% and have a maturity date of March 28, 2008. The Bonds
were
[[Page 60905]]
divided among nine accounts (i.e., trust accounts and two IRAs,
including the subject IRA) that needed fixed income exposure.
Middleburg was the trustee for all nine accounts. Middleburg placed
$25,200.00 of the Bond issue (or 25 Bonds) in the IRA. Thus, the Bonds
represented approximately 4.3% of the IRA's assets. Middleburg
allocated the Bonds among the remaining accounts based on a pro rata
share of their fair market value, in conjunction with the need in the
account portfolios for fixed income exposure.
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\25\ FHLB bonds are issued in denominations of $1,000 each,
usually with minimum purchase amounts of 5 bonds ($5,000 face). Some
FHLB bonds are issued for the institutional market, requiring a 100
bonds minimum ($100,000 face). The bonds normally pay a stated fixed
coupon (interest) and will pay face value at maturity or at an
optional call date.
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3. In February 2006, Mr. Smith decided to move his IRA to another
custodian. As a result, he requested that Middleburg liquidate all of
his IRA holdings in order to transfer cash to the new custodian. While
attempting to liquidate the Bonds held by the IRA, Middleburg
discovered that the issue would trade only in $100,000.00 blocks.
Middleburg represents that the salesman neglected to mention this
limitation when the Bonds were first purchased. As a result, this
limitation made the Bonds held in the IRA illiquid.
4. In order to satisfy Mr. Smith's request, Middleburg decided that
it needed to make a market for the Bonds held in the IRA. To ensure
that the transaction would occur on terms that were at least as
favorable as an arm's length sale to a third party, Middleburg
represents that it solicited bids as if it had $100,000.00 worth of the
Bonds to sell. The bids from various independent dealers ranged from
$99.50 to $99.80 per $100.00 of Bond value, or $99,500 to $99,800,
respectively. In addition, Middleburg advertised the Bonds all day on
March 28, 2006.
5. Middleburg decided that it would buy the Bonds held by the IRA
at their full face value of $100 per $100 of Bond value, which exceeded
the fair market value at the time. In this regard, the Bond's fair
market value, as quoted by Bloomberg Fair Value Service on March 28,
2006, the trade date, was $99.87 per $100 of Bond value or $24,968 for
the Bonds. Thus, Middleburg paid the IRA $25,000.00, plus accrued
interest of $3.47, or a total purchase price of $25,003.47 for the
Bonds. Middleburg did not charge the IRA any fees or commissions in
connection with the transaction. Because the IRA sustained a loss as a
result of the sale, Middleburg will pay the IRA $196.53 within 30 days
of the publication of the grant notice in the Federal Register.
6. In summary, Middleburg represents that the subject transaction
satisfied or will satisfy the statutory criteria for an exemption under
section 4975(c)(2) of the Code for the following reasons: (a) The sale
was a one-time transaction for cash; (b) the sale price for the Bonds
was based on the Bonds' face value; (c) the Bonds' face value was in
excess of bids for the Bonds solicited from independent brokers and in
excess of the price for the Bonds quoted by an independent valuation
service for the date of the sale; (d) the IRA paid no fees,
commissions, or other costs or expenses associated with the sale; (e)
the IRA received its portion of income and all interest accrued on the
Bonds through the date of the sale; (f) the terms and conditions of the
sale were at least as favorable to the IRA as those obtainable in an
arm's length transaction with an unrelated party; and (g) within 30
days of the publication of the grant notice in the Federal Register,
Middleburg will pay the IRA $196.53 to make up for the loss sustained
by the IRA as a result of the sale.
Notice to Interested Persons
Because Mr. Smith is the only participant in the IRA, it has been
determined that there is no need to distribute the notice of proposed
exemption to interested persons. Therefore, comments and requests for a
hearing must be received by the Department within 30 days of the date
of publication of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Blessed Chuksorji of the
Department, telephone number (202) 693-8567. (This is not a toll-free
number.)
Citigroup, Inc. (Citigroup) Located in New York, NY
[Application No. D-11417]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) 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: Covered Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D) and 406(b) of ERISA and the sanctions resulting from the
application of section 4975 of the Code, including the loss of
exemption of an IRA pursuant to section 408(e)(2)(A) of the Code, by
reason of section 4975(c)(1)(D), (E) and (F) of the Code, shall not
apply to the receipt of services at reduced or no cost by an individual
for whose benefit an IRA or, if self-employed, a Keogh Plan, is
established or maintained, or by members of his or her family, from
Citigroup pursuant to an arrangement in which the account value of, or
the fees incurred for services provided to, the IRA or Keogh Plan is
taken into account for purposes of determining eligibility to receive
such services, provided that each condition of Section II of this
exemption is satisfied.
Section II: Conditions
(a) The IRA or Keogh Plan whose account value, or whose fees paid,
are taken into account for purposes of determining eligibility to
receive services under the arrangement must be established and
maintained for the exclusive benefit of the participant covered under
the IRA or Keogh Plan, his or her spouse or their beneficiaries.
(b) The services offered under the arrangement must be of a type
that a qualified affiliate could offer consistent with all applicable
federal and state banking laws and all applicable federal and state
laws regulating broker-dealers.
(c) The services offered under the arrangement must be provided by
a qualified affiliate in the ordinary course of its business as a bank
or a broker-dealer to customers who qualify for reduced or no cost
services, but do not maintain IRAs or Keogh Plans with a qualified
affiliate.
(d) For the purpose of determining eligibility to receive services,
the arrangement satisfies:
(i) Eligibility requirements based on the account value of the IRA
or Keogh Plan are as favorable as any such requirement based on the
value of any other type of account which the qualified affiliate
includes to determine eligibility; and/or
(ii) Eligibility requirements based on the amount of fees incurred
by the IRA or Keogh Plan, are as favorable as any requirements based on
the amount of fees incurred by any other type of account which the
qualified affiliate includes to determine eligibility.
(e) The combined total of all fees for the provision of services to
the IRA or Keogh Plan is not in excess of reasonable compensation
within the meaning of section 408(b)(2) of ERISA and section 4975(d)(2)
of the Code.
(f) The investment performance of the investments made by the IRAs
and/or Keogh Plans is no less favorable than the investment performance
of identical investments that could have been made at the same time by
a customer of Citigroup who is not eligible for (or who does not
receive) reduced or no cost services.
(g) The services offered under the arrangement to the IRA or Keogh
Plan customer must be the same as are offered to non-IRA or non-Keogh
Plan customers of qualified affiliates with
[[Page 60906]]
account values of the same amount or the same amount of fees generated.
Section III: Definitions
The following definitions apply to this exemption:
(a) The term ``bank'' means a bank described in section 408(n) of
the Code.
(b) The term ``broker-dealer'' means a broker-dealer registered
under the Securities Exchange Act of 1934, as amended.
(c) The term ``IRA'' means an individual retirement account
described in Code section 408(a), an individual retirement annuity
described in Code section 408(b) or a Coverdell education savings
account described in section 530 of the Code. For purposes of this
exemption, the term IRA shall not include an IRA which is an employee
benefit plan covered by Title I of ERISA, except for a Simplified
Employee Pension (SEP) described in section 408(k) of the Code or a
Simple Retirement Account described in section 408(p) of the Code which
provides participants with the unrestricted authority to transfer their
balances to IRAs or Simple Retirement Accounts sponsored by different
financial institutions.
(d) The term ``Keogh Plan'' means a pension, profit-sharing, or
stock bonus plan qualified under Code section 401(a) and exempt from
taxation under Code section 501(a) under which some or all of the
participants are employees described in section 401(c) of the Code. For
purposes of this exemption, the term Keogh Plan shall not include a
Keogh Plan which is an employee benefit plan covered by Title I of
ERISA.
(e) The term ``account value'' means investments in cash or
securities held in the account for which market quotations are readily
available. For purposes of this exemption, the term cash shall include
savings accounts that are insured by a federal deposit insurance agency
and constitute deposits as that term is defined in 29 CFR 2550.408b-
4(c)(3). The term account value shall not include investments that are
offered by Citigroup (or a qualified affiliate) exclusively to IRAs and
Keogh Plans.
(f) The term ``qualified affiliate'' means any person directly or
indirectly controlling, controlled by, or under common control with
Citigroup Inc. that is a bank or broker-dealer.
(g) The term ``members of his or her family'' refers to
beneficiaries of the individual for whose benefit the IRA or Keogh Plan
is established or maintained, who would be members of the family as
that term is defined in Code section 4975(e)(6), or a brother, a
sister, or a spouse of a brother or sister.
(h) The term ``service'' includes incidental products of a de
minimis value which are directly related to the provision of services
covered by the exemption.
(i) The term ``fees'' means commissions and other fees received by
a broker-dealer from the IRA or Keogh Plan for the provision of
services, including, but not limited to, brokerage commissions,
investments management fees, investments advisory fees, custodial fees
and administrative fees.
(j) The term ``Citigroup'' means Citigroup Inc. and any person
directly or indirectly controlling, controlled by, or under common
control with Citigroup Inc.
(k) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Effective Date: If granted, this proposed exemption will be
effective as of March 1, 2007.
Summary of Facts and Representations
1. Citigroup, Inc. is a holding company whose businesses provide a
broad range of financial services to consumer and corporate customers
around the world. As of September 30, 2006, Citigroup and its
subsidiaries had total consolidated assets of approximately $1.75
trillion. Citigroup's consumer and corporate banking business is a
global franchise encompassing, among other things, branch and
electronic banking, consumer lending services, investment services, and
credit and debit card services. Citigroup also provides securities
trading, research and brokerage services to consumer and corporate
customers, primarily through its Smith Barney business. Smith Barney, a
division of a subsidiary of Citigroup Inc., is a retail brokerage firm
with more than 12,500 financial advisors who serve approximately 7.1
million client accounts, representing approximately $1.3 trillion in
assets, and are located in approximately 600 offices across the United
States. In the ordinary course of its business, Citigroup provides a
range of financial services to IRAs and pension, profit sharing and
stock bonus plans qualified under section 401(a) of the Code under
which some or all of the participants are employees described in
section 401(c) of the Code.
2. PTE 93-33 as amended (64 FR 11044, March 8, 1999), provides
relief from the restrictions of sections 406(a)(1)(D) and 406(b) of
ERISA and the sanctions resulting from the application of sections
4975(a) and (b), 4975(c)(3) and 408(e)(2) of the Code by reason of
section 4975(c)(1)(D), (E) and (F) of the Code, and permits the receipt
of services at reduced or no cost by an individual for whose benefit an
IRA or Keogh Plan is established or maintained or by members of his or
her family, from a bank pursuant to an arrangement in which the account
balance of the IRA or Keogh Plan is taken into account for purposes of
determining eligibility to receive such services, provided the
conditions of the exemption are met. PTE 93-33 permitted banks to offer
its customers only those services that may be offered by banks under
applicable federal and state banking laws.\26\ In the case where the
service is offered by an affiliate of the bank, the service must be of
the type that the bank itself could offer customers.
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\26\ In the notice of proposed exemption for PTE 93-2 (PTE 93-33
subsequently amended PTE 93-2) the following examples of
relationship banking services were listed: free checking services,
discounted safe deposit box rents, or free loan closing costs. (52
FR 8365 (February 28, 1992)). In addition, the Department notes that
a bank may offer other services or benefits to customers as part of
its relationship banking program. For example, under PTE 93-33 a
bank may offer its relationship banking customers a higher interest
rate on their investments, provided the conditions of the exemption
are met.
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PTE 97-11 as amended, (67 FR 76425, December 12, 2002) permits the
receipt of services at reduced or no cost by an individual for whose
benefit an IRA or Keogh Plan is established or maintained or by members
of his or her family, from a broker-dealer registered under the
Securities Exchange Act of 1934 pursuant to an arrangement in which the
account value of, or the fees incurred for services provided to, the
IRA or Keogh Plan is/are taken into account for purposes of determining
eligibility to receive such services, provided that certain conditions
are met. Under PTE 97-11 relief is provided from the restrictions of
sections 406(a)(1)(D) and 406(b) of ERISA and the sanctions resulting
from the application of sections 4975(a) and (b), 4975(c)(3) and
408(e)(2) of the Code by reason of section 4975(c)(1)(D), (E) and (F)
of the Code. PTE 97-11 limits the services that may be offered by
broker-dealers under a relationship brokerage program to those services
that the broker-dealer itself may offer consistent with federal and
state laws regulating broker-dealers.\27\ Furthermore, in those
[[Page 60907]]
cases where the services are provided by an affiliate of the broker-
dealer, the service must be the type that the broker-dealer itself
could offer customers.
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\27\ In the notice of proposed exemption for PTE 97-11 (61 FR
39996 (July 31, 1996), the following examples of relationship
brokerage services were listed: financial planning services, direct
deposit/debit and automatic fund transfer privileges, enhanced
account statements, toll-free access to client service center, check
writing privileges, debit/credit cards, special newsletter and
reduced brokerage and asset management fees. In addition, the
Department notes that a broker-dealer may offer its customers
additional services and benefits as part of its relationship
brokerage program. For example, under PTE 97-11, a broker-dealer may
offer its relationship brokerage customers a higher interest rate on
their investments, provided the conditions of the exemption are met.
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The applicant requests an exemption to permit both account balances
of an IRA or Keogh Plan or fees incurred by the IRA or Keogh Plan with
respect to a qualified affiliate that serves as trustee or custodian,
to be taken into account by Citigroup in determining eligibility to
receive reduced or no cost services that are provided by its qualified
affiliates.
3. The applicant represents that the proposed exemption is
necessary and appropriate because federal and state banking and
securities laws have undergone changes since PTEs 93-33 and 97-11 were
granted. In general, banks and broker-dealers are now permitted to
offer services to its customers that integrate banking and broker-
dealer type services. These services were traditionally provided either
by a bank to its customers or by a broker-dealer to its customers.
Specifically, PTEs 93-33 and PTE 97-11 were granted by the Department
prior to the enactment of the Gramm-Leach-Bliley Act of 1999 (the
``GLBA''). According to the applicant, the GLBA altered the U.S. legal
and regulatory framework governing the operations of U.S. bank holding
companies such as Citigroup, the corporate parent of Citibank, N.A.
(``Citibank'') and Citigroup Global Capital Markets Inc. (``CGMI''),
the broker-dealer within which Smith Barney operates as a business
division. The applicant represents that the GLBA permits bank holding
companies that qualify as ``financial holding companies'' (``FHCs'')--
including Citigroup--to affiliate broadly with various types of
financial services firms, including full-service U.S. broker-dealers.
Further, the enactment of the GLBA has greatly facilitated both
financial services integration in the United States and the growth of
bank-affiliated securities operations.
According to the applicant, a second significant U.S. regulatory
development occurred in 1995 when the U.S. Federal Reserve Board (the
FRB) adopted a rule regarding inter-affiliate combined balance discount
service programs offered to individual customers of banks and bank
affiliates.\28\ In particular, the rule establishes a safe harbor (the
``Safe Harbor'') from the statutory restrictions on bank tying
arrangements to allow banks greater flexibility to package products
with their affiliates. The applicant states that the rule provided
important validation of the ability of banks and their broker-dealer
affiliates to offer to their customers' combined-balance discount
programs meeting the requirements of the Safe Harbor. Furthermore, the
applicant represents that in 1997, the FRB reaffirmed the Safe Harbor
when it re-wrote its Regulation Y, which includes a section dealing
with anti-tying restrictions. In this regard, the applicant represents
that the reduced or no cost service program described in its exemption
application meets the Safe Harbor.
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\28\ See 12 CFR 225.7(b)(2).
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In the context of the regulatory developments described above, the
applicant states that Citigroup's decision to offer discount services
as described in its application reflects the important changes in
Citigroup's business model that have occurred since PTEs 93-33 and 97-
11 were granted by the Department. The applicant states that in 1998,
Citigroup was created through the acquisition of Citicorp, Citibank's
corporate parent, by Travelers Group, to form Citigroup. As part of
this transaction, Citibank became affiliated with Smith Barney
(formerly, Salomon Smith Barney), which operates a significant retail
securities brokerage business.\29\ As a result, Citigroup developed
programs that link retail banking activities with retail brokerage
activities. Under these arrangements, qualified affiliates are able to
take into account a customer's combined balance maintained with any of
its affiliates in determining the customer's eligibility to receive
reduced or no cost services that include bank and broker-dealer
products and services.
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\29\ The applicant states that Citibank's pre-GLBA-era
securities businesses were principally institutional in nature
(e.g., underwriting and dealing in certain securities subject to
pre-GLBA restrictions and other wholesale capital markets
activities).
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4. The transactions covered by the proposed exemption are the
receipt of services at reduced or no cost by an individual for whose
benefit an IRA or, if self-employed, a Keogh Plan account, is
established or maintained, or by members of his or her family, from
Citigroup, pursuant to an arrangement in which the account balance of,
or fees paid by, the IRA or Keogh Plan account is taken into account
for purposes of determining eligibility to receive the reduced or no
cost services. The proposed exemption does not apply to IRAs or Keogh
Plans that are covered by Title I of ERISA except for a Simplified
Employee Pension (SEP) described in section 408(k) of the Code or a
Simple Retirement Account described in section 408(p) of the Code which
provides participants with the unrestricted authority to transfer their
balances to IRAs or Simple Retirement Accounts sponsored by different
financial institutions. The IRA or Keogh Plan account must be
established or maintained for the exclusive benefit of the participant
covered by the IRA or Keogh Plan, or his family members. The services
must be of a type that either a bank or broker-Dealer could offer
consistent with all federal and state laws applicable to their
businesses. Citigroup provides such services to its customers,
including customers who do not maintain IRAs or Keogh Plans with
Citigroup, in the regular course of Citigroup's business. The account
balance or fee level required for the receipt of reduced or no cost
services is equal to the lowest level required for any other type of
account which is used to determine eligibility to receive reduced or no
cost services. The investment performance of the IRA or Keogh Plan
account's investments is no less favorable than the investment
performance of identical investments that could have been made at the
same time by a customer who is not eligible for (or who does not
receive) reduced or no cost services.
5. As part of its reduced or no cost service program, the applicant
contemplates providing such services as: Reductions or waivers of fees
for services such as checking, ATM, investment advisory and account
opening or maintenance fees, preferred lending rates, premium interest
crediting rates, credit or debit cards providing services such as
enhanced mileage accumulation and reward points features and the
provision of investment information and seminars that are available on
an invitation-only basis. In this regard, the applicant offers the
following example of a reduced or no cost service program:
An individual client of Citigroup is a beneficial owner of an
IRA with assets of $250,000 and with respect to which Smith Barney
is custodian. Un-invested cash in the IRA is swept into a bank
deposit program (``BDP'') on a daily basis, pursuant to the client's
instruction. Assume that the client also maintains a Smith Barney
Financial Management Account (``FMA Account''), a securities
brokerage account, with an asset balance of $200,000, as well as
personal savings and checking accounts, with an aggregate asset
balance of $100,000, at Citibank. Without the proposed exemption,
the client is not eligible for ``Reserved'' status in regard to the
relationship with his Smith Barney custodied accounts (FMA Account
[[Page 60908]]
and IRA), which status requires asset balances of at least $500,000.
As a result, the client would be charged a $100 annual fee in
respect of the FMA Account and a $40 annual fee in respect of the
IRA. The IRA's BDP investments would receive interest at a rate
applicable to accounts having asset balances between $250,000 and
$500,000, which rate was 3.35% Annual Percentage Yield as of June
13, 2007.
If the proposed exemption is granted, Citigroup would be
permitted to aggregate the client's accounts (in accordance with the
conditions of the exemption), and the combined asset balance in
excess of $500,000 would result in an elimination of the $100 and
$40 annual fees. In addition, the BDP investments would be eligible
for a higher interest rate, equal to 3.51% Annual Percentage Yield
as of June 13, 2007. Further, as part of a Reserved relationship,
Smith Barney would waive the following fees (among others) in the
client's FMA Account: ATM fees, shipping costs for lost or stolen
cards, fees for transferring securities, safekeeping fees for
physically holding securities, Fed wire fees, fees charged for
bounced checks, fees charged to stop payment on a check, and check
reorder fees.
6. In summary, the Applicant represents that the transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act and section 4975(c)(2) since, among other things:
(a) The IRA or Keogh Plan whose account value, or whose fees paid,
are taken into account for purposes of determining eligibility to
receive services under the arrangement will be established and
maintained for the exclusive benefit of the participant covered under
the IRA or Keogh Plan, his or her spouse or their beneficiaries.
(b) The services offered under the arrangement will be of a type
that a qualified affiliate could offer consistent with all applicable
federal and state banking laws and all applicable federal and state
laws regulating broker-dealers.
(c) The services offered under the arrangement will be provided by
a qualified affiliate in the ordinary course of its business as a bank
or a broker-dealer to customers who qualify for reduced or no cost
services, but do not maintain IRAs or Keogh Plans with a qualified
affiliate.
(d) For the purpose of determining eligibility to receive services,
the arrangement will satisfy:
(i) Eligibility requirements based on the account value of the IRA
or Keogh Plan are as favorable as such requirements based on the value
of any other type of account which the qualified affiliate includes to
determine eligibility; and/or
(ii) Eligibility requirements based on the amount of fees incurred
by the IRA or Keogh Plan, are as favorable as any requirements based on
the amount of fees incurred by any other type of account which the
qualified affiliate includes to determine eligibility.
(e) The combined total of all fees for the provision of services to
the IRA or Keogh Plan will not be in excess of reasonable compensation
within the meaning of section 408(b)(2) of ERISA and section 4975(d)(2)
of the Code.
(f) The investment performance of the investments made by the IRAs
and/or Keogh Plans will be no less favorable than the investment
performance of identical investments that could have been made at the
same time by a customer of Citigroup who is not eligible for (or who
does not receive) reduced or no cost services.
(g) The services offered under the arrangement to the IRA or Keogh
Plan customer will be the same as are offered to non-IRA or non-Keogh
Plan customers of qualified affiliates with account values of the same
amount or the same amount of fees generated.
Notice to Interested Persons
The Applicant represents that because those potentially interested
persons cannot all be identified at the time this proposed exemption is
published in the Federal Register, the only practical means of
notifying the public is by publication of the notice of pendency in the
Federal Register. Therefore, written comments and/or requests for a
public hearing must be received by the Department not later than 45
days from the date of publication of this notice of proposed exemption
in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Allison Padams-Lavigne, U.S.
Department of Labor, telephone (202) 693-8564. (This is not a toll-free
number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E7-20921 Filed 10-25-07; 8:45 am]
BILLING CODE 4510-29-P
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