Proposed Exemptions; Keystone Brokerage, Inc. (Keystone) [Notices] [01/22/2001]

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Proposed Exemptions; Keystone Brokerage, Inc. (Keystone) [Notices] [01/22/2001]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Keystone Brokerage, Inc. (Keystone) [01/22/2001]

[PDF Version]

Volume 66, Number 14, Page 6679-6695

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10571, et al.]

Proposed Exemptions; Keystone Brokerage, Inc. (Keystone)

AGENCY: Pension and Welfare Benefits Administration, Labor

ACTION: Notice of proposed exemptions.

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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 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ______, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5638, 200 Constitution Avenue, NW.,
Washington, DC 20210.

Notice to Interested Persons

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

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.

Keystone Brokerage, Inc. (Keystone), et al. Located in
Williamsport, PA

[Application No. D-10571]

Proposed Exemption

Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 4975(c)(2) of the Code and in accordance with
the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
August 10, 1990).\1\
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\1\ This proposed exemption applies to IRAs described in section
408(a) of the Code. Pursuant to 29 CFR 2510.3-2(d), the IRAs are not
``employee benefit plans'' covered under Title I of the Act.
However, the IRAs are subject to jurisdiction pursuant to section
4975 of the Code.
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Section I. Covered Transactions
If the exemption is granted, the sanctions resulting from the
application of section 4975 of the Code, by reason of 4975(c)(1)(A)
through (D) of the Code shall not apply, effective October 3, 1997
through June 30, 2000, to the purchase or redemption of shares, by a
self-directed individual retirement account (the IRA), of investment
portfolios (the Portfolios) of certain mutual funds that were
affiliated with Keystone (the Affiliated Funds) or in other mutual
funds that were unaffiliated with Keystone (the Third Party Funds),\2\
in connection with the IRA's participation in the KeyPremier Nautilus
Series Program, or its successor, the Nautilus Series Program,
(together, the Investment Advisory Program).
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\2\ The Affiliated Funds and the Third Party Funds are
collectively referred to herein as the Funds.
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In addition, the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of
the Code, shall not apply, effective October 3, 1997 through June 30,
2000, to (1) the provision, by Keystone, of asset allocation and
related services to an independent fiduciary of an IRA (the Independent
Fiduciary), which resulted in the selection of Portfolios in the
Investment Advisory Program by the Independent Fiduciary for the
investment of IRA assets; and (2) the receipt of fees by Martindale
Andres & Co., Inc. (Martindale) and Governor Group Advisors, Inc.
(GGA), affiliates of Keystone, in connection with provision of
investment advisory or sub-advisory services to the Fund Portfolios.
This proposed exemption is subject to the conditions set forth
below in Section II.

[[Page 6680]]

Section II. General Conditions
(a) The participation by an IRA in the Investment Advisory Program
was approved by an Independent Fiduciary.
(b) As to each IRA, the total fees that were paid to Keystone and
its affiliates constituted no more than reasonable compensation for the
services provided.
(c) With the exception of distribution-related fees paid to
Keystone pursuant to Rule 12b-1 (the Rule 12b-1 fees) of the Investment
Company Act of 1940 (the Investment Company Act) which were offset, no
IRA paid a fee or commission by reason of the acquisition or redemption
of the shares of the Funds.
(d) The terms of each purchase or redemption of shares in the Funds
remained at least as favorable to an investing IRA as those obtainable
in an arm's length transaction with an unrelated party.
(e) Keystone provided written documentation to each IRA's
Independent Fiduciary of its recommendations or evaluations regarding
the Fund Portfolios as well as the design and parameters with respect
to an asset allocation model (the Asset Allocation Model), based upon
objective criteria that were uniformly applied.
(f) Any recommendation or evaluation made by Keystone to an
Independent Fiduciary was implemented only at the express direction of
such Independent Fiduciary.
(g) The quarterly fee paid by an IRA to Keystone and its affiliates
for asset allocation and related services rendered to such IRA under
the Investment Advisory Program (the Outside Fee) was offset by--
(1) All gross investment management fees (the Advisory Fees) that
were paid by the Affiliated Funds to Keystone, including any sub-
advisory fees that were paid by the Affiliated Funds to third party
sub-advisers;
(2) All administrative fees (the Administrative Fees) that were
paid to GGA and BISYS Fund Services Limited Partnership (BISYS), an
unrelated party; and
(3) All Rule 12b-1 Fees that were paid by the Third Party Funds to
Keystone or its current and former affiliates with respect to an
Investment Advisory Account (the Account), such that the sum of the
offset and the net Outside Fee always equaled the aggregate Outside
Fee, thereby making the selection of Affiliated Funds or Third Party
Funds revenue-neutral.
(h) With respect to its participation in the Investment Advisory
Program, prior to purchasing shares in the Portfolios of the Affiliated
Funds and the Third Party Funds--
(1) Each Independent Fiduciary received the following written or
oral disclosures from Keystone:
(A) A brochure describing the Investment Advisory Program; an
Investment Advisory Program Account Agreement (the Account Agreement);
a description of the Asset Allocation Models; and a reference guide/
disclosure statement providing details about the Investment Advisory
Program, the fees charged thereunder, the procedures for establishing,
making additions to and withdrawing from the Accounts, and other
related information;
(B) A risk tolerance and goal analysis questionnaire (the
Questionnaire) or a written report of responses given by the
Independent Fiduciary in a personal interview (the Interview) with a
Keystone representative (the Interview Report);
(C) Copies of applicable prospectuses (the Prospectuses) for the
Fund Portfolios discussing the investment objectives of the Portfolios;
the policies employed to achieve the objectives of the Portfolios; the
corporate affiliation existing between Keystone and its affiliates; the
compensation paid to such entities; disclosures relating to rebalancing
and reallocating Asset Allocation Models; and information explaining
the risks attendant to investing in Portfolios for the Affiliated Funds
and the Third Party Funds;
(D) Upon written or oral request to Keystone, a Statement of
Additional Information supplementing the applicable Prospectus, which
described the types of securities and other instruments in which the
Portfolios could invest and the investment policies and strategies that
the Portfolios could utilize, including a description of the risks;
(E) A copy of the Account Agreement between the IRA and Keystone
relating to the IRA's participation in the Investment Advisory Program;
(F) A written recommendation of a specific Asset Allocation Model,
together with a copy of the Questionnaire and response or the Interview
Report;
(G) Upon written request to Keystone, a copy of any investment
advisory agreement or sub-advisory agreement between Keystone and the
Affiliated Funds; and
(H) Written disclosures of Keystone's affiliation or non-
affiliation with the parties who act as sponsors, distributors,
administrators, investment advisers and sub-advisers, custodians and
transfer agents of the Portfolios.
(2) If accepted as an investor in the Investment Advisory Program,
the Independent Fiduciary was required to acknowledge in writing to
Keystone prior to purchasing shares of the Fund, that such Independent
Fiduciary had received copies of the documents described in paragraph
(h)(1) of this Section II and represent to Keystone that such
individual was--
(A) Independent of Keystone and its affiliates;
(B) Knowledgeable with respect to the IRA in administrative matters
and funding matters related thereto; and
(C) Able to make an informed decision concerning participation in
the Investment Advisory Program.
(i) Subsequent to its participation in the Investment Advisory
Program, each Independent Fiduciary received the following written or
oral disclosures from Keystone with respect to ongoing participation:
(1) Written confirmations of each purchase or redemption
transaction involving shares of an Affiliated Fund or a Third Party
Fund Portfolio (including transactions resulting from the realignment
of assets caused by a change in the Asset Allocation Model's investment
mix and from periodic rebalancing of Account assets);
(2) Telephone quotations of such Independent Fiduciary's IRA
Account balance;
(3) A periodic, but not less frequently than quarterly, Statement
of Account specifying the net asset value of the IRA's assets in such
Account, a summary of purchase, sale and exchange activity and
dividends received or reinvested, a summary of cumulative realized
gains and/or losses, and a statement of fees paid to Keystone and its
affiliates;
(4) Semiannual and annual reports that included financial
statements for the Portfolios;
(5) A quarterly report pertaining to the applicable Asset
Allocation Model describing the Asset Allocation Model's performance
during the preceding quarter; market conditions and economic outlook;
and, if applicable, prospective changes in Portfolio allocations for
the Asset Allocation Model and the reasons therefor;
(6) At least annually, a written or oral inquiry from Keystone to
ascertain whether the information provided on the Questionnaire or in
the Interview Report was still accurate or required updating; and
(7) At least annually during the first calendar quarter of each
year after March 24, 1999, or at other times specified in Section
II(l), a termination form (the Termination Form), meeting the
requirements of Section II(k) and (l) below.

[[Page 6681]]

(j) If authorized in writing by the Independent Fiduciary, the IRA
was automatically rebalanced on a quarterly basis by Keystone (using
the net asset values of the affected Funds as of the close of business
on a pre-established date) to the Asset Allocation Model previously
prescribed by the Independent Fiduciary, if one or more Fund
allocations deviated from the Asset Allocation Model prescribed by the
Independent Fiduciary because--
(1) At least one transaction required to rebalance the IRA among
the Funds involved a purchase or redemption of securities valued at
$250 or more; and
(2) The net asset value of the Fund affected was more than 5
percent of the IRA's investment in such Fund.
(k) Keystone was authorized to provide written notice to the
Independent Fiduciary, at least 30 days prior to the implementation of
any of the following changes:
(1) A change in the asset mix outside the current Asset Allocation
Model;
(2) The division of a class of assets (the Asset Class);
(3) The replacement of a Third Party Fund with an Affiliated Fund,
or an Affiliated Fund with a Third Party Fund; and
(4) An increase in the Outside Fee.
(l) The written notice described above in Section II(k) was
required to--
(1) State that the Independent Fiduciary could terminate the IRA's
participation in the Investment Advisory Program at will and without
penalty, upon receipt by Keystone of written notice from the
Independent Fiduciary; and
(2) Explain that any of the proposed changes noted in paragraphs
(k)(1)-(4) of Section II would go into effect if the Independent
Fiduciary did not elect to withdraw by the effective date.
(3) For changes occurring after March 24, 1999, the notice was to
be accompanied by a Termination Form containing instructions identical
to those set forth above in paragraphs (l)(1)-(2) of this Section II.
(m) Keystone was not authorized to replace an Affiliated Fund with
a Third Party Fund Portfolio or vice versa, nor was Keystone authorized
to make an additional Third Party Fund Portfolio available for
investment under the Investment Advisory Program.
(n) Keystone will maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (o) of this
Section II to determine whether the conditions of this exemption have
been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Keystone and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period; and
(2) No party in interest, other than Keystone, shall be subject to
the taxes imposed by section 4975(a) and 4975(b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (o) of this Section II below.
(o)(1) Except as provided in section (o)(2) of this paragraph, the
records referred to in paragraph (o) of this Section II are
unconditionally available at their customary location during normal
business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission;
(B) Any Independent Fiduciary of a participating IRA or any duly
authorized representative of such Independent Fiduciary; and
(C) Any participant or beneficiary of any participating IRA or any
duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in paragraphs (o)(1)(B) and
(o)(1)(C) of this paragraph (o) are authorized to examine the trade
secrets of Keystone or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Keystone'' means Keystone Brokerage, Inc. and any
affiliate of Keystone, as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of Keystone includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Keystone; (For purposes of this subparagraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual.)
(2) Any individual who is an officer, director or partner in
Keystone or a person described in subparagraph (b)(1); and
(3) Any corporation or partnership of which Keystone or an
affiliate or a person described in subparagraphs (b)(1) or (b)(2) of
this Section III, is a 10 percent or more partner or owner.
(c) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer performing a
policy-making function for the entity.
(d) The term ``IRA'' includes a self-directed individual retirement
account which is described in section 408(a) of the Code and which is
not an ``employee benefit plan'' covered under Title I of the Act. The
term ``IRA'' does not include any IRAs that were sponsored or
maintained by Keystone or its affiliates for their own employees nor
does it include any IRAs that were held by employees of Keystone or its
affiliates in their individual capacities.
(e) The term ``Independent Fiduciary'' means an individual who was
covered under a self-directed IRA which invested in shares of the
Funds.
(f) The term ``Asset Class'' means an asset class under a
classification system used by Morningstar, Inc. (Morningstar) or
Lipper, Inc. (Lipper). For purposes of this exemption, two Funds were
not in the same Asset Class if they were classified differently under
either the Morningstar or Lipper classification systems. Thus, for
example, if two Funds were treated in separate Asset Classes under the
Morningstar system, they would be treated as being in separate Asset
Classes even if the Funds were in the same Asset Class (or were not
classified at all) under the Lipper system.
(g) The term ``Affiliated Fund'' means a portfolio of an investment
company registered under the Investment Company Act for which Keystone
or an affiliate acted as the investment adviser and may have also acted
as the sub-adviser, co-administrator or custodian.
(h) The term ``Third Party Fund'' means a portfolio of an
investment company that is registered under the Investment Company Act
for which neither Keystone nor any affiliate acted as an investment
adviser, sub-adviser, co-administrator or custodian.
(i) The ``Advisory Fees'' refer to the investment advisory fees
that were paid by the Affiliated Funds to Keystone and its affiliates.
(j) The ``Administrative Fees'' refer to the co-administration fees
that were paid by the Affiliated Funds to GGA and BISYS.
(k) The ``Rule 12b-1 Fees'' were paid to Keystone and its
affiliates by the Third Party Funds in connection with certain
distribution-related services (e.g., advertising) that were made
pursuant to a written plan of distribution.
EFFECTIVE DATE:
If granted, this proposed exemption will be effective from October
3, 1997 until June 30, 2000.

[[Page 6682]]

Summary of Facts and Representations

Description of the Parties
1. The parties to the transactions are described as follows:
(a) Keystone Financial, Inc. (KFI) is a bank and financial services
holding company headquartered in Harrisburg, Pennsylvania. KFI provides
a full range of banking and non-banking services to persons and
entities in Pennsylvania, Maryland, West Virginia, Virginia, New York,
Ohio and Delaware.
(b) Keystone is a second-tier subsidiary of KFI. Keystone provided
services to the IRAs under the Investment Advisory Program described
herein and served as a broker-dealer for trades under such Program.
(c) Key Trust Company (KeyTrust) of Horsham, Pennsylvania, is a
subsidiary of KFI. KeyTrust served as custodian for those IRAs
utilizing the Investment Advisory Program.
(d) Martindale of West Conshocken, Pennsylvania, is a subsidiary of
KFI. Martindale served as the sub-adviser to the Affiliated Funds and
prior to February 1, 1999, it served as the investment adviser to such
Funds.
(e) BISYS of Columbus, Ohio, is a registered broker-dealer. As
noted above, BISYS is not affiliated with Keystone, KFI, KeyTrust or
Martindale. BISYS, through its affiliated clearing broker, Corelink
Financial, Inc. (Corelink), acted as the clearing broker with respect
to purchases and sales of Fund shares by the IRAs participating in the
Investment Advisory Program. In addition, BISYS performed various
administrative, accounting, and recordkeeping functions on behalf of
Keystone. In this capacity, BISYS, through Corelink, held Fund shares
on behalf of IRAs participating in the Investment Advisory Program and
served as sub-custodian for IRAs utilizing the Program under a
custodial services agreement with KeyTrust. Further, BISYS served as
distributor, Fund accountant, transfer agent, and administrator or co-
administrator for the Affiliated Funds.\3\
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\3\ As discussed herein, Funds shares were sold to the IRAs at
no load. Thus, the participating IRAs did not compensate Corelink,
or for that matter, BISYS. Keystone represents that it does not know
whether BISYS compensated Corelink for services rendered nor is it
certain why BISYS executed trades through Corelink rather than
performing this service directly.
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(f) GGA, a wholly-owned subsidiary of KFI, served as the investment
adviser to the Affiliated Funds. In addition, GGA and BISYS served as
co-administrators for the Affiliated Funds.
(g) The IRAs participating in the Investment Advisory Program
included self-directed IRAs which are described in section 408(a) of
the Code and which are not ``employee benefit plans'' covered under
Title I of the Act. All IRA holders were outside clients of Keystone
and its affiliates rather than employees of these entities. The IRAs
did not include any IRAs sponsored by Keystone and/or its affiliates
nor did they include IRAs held by employees of Keystone and/or its
affiliates in their individual capacities.
Description of the Funds
2. The Affiliated Funds participating in the Investment Advisory
Program consisted of a group of Fund Portfolios referred to as
``Governor Funds.'' Originally, the Affiliated Funds included the
following Fund Portfolios of ``The Sessions Group'': the KeyPremier
Prime Money Market Fund, the KeyPremier Intermediate Term Income Fund,
the KeyPremier Established Growth Fund and the KeyPremier Aggressive
Growth Fund.
The Sessions Group was an open-end management investment company
registered under the Investment Company Act of 1940 (the Investment
Company Act), for which Martindale served as the investment adviser.
The Sessions Group was also an Ohio business trust that offered shares
in 19 separate series. Each series of shares constituted a different
Portfolio, only 4 of which were offered to investors under the
Investment Advisory Program. The Sessions Group was designed to provide
a convenient means of investing in separate Portfolios that were
professionally managed by Martindale. Shares in The Sessions Group were
offered to trust customers of KeyTrust, other banking subsidiaries of
Keystone, and the general public. Although some Portfolios required
investors to pay load charges, all Fund Portfolios were offered to IRA
investors at no load.
3. Pursuant to an advisory agreement, Martindale served as the
investment adviser to the Affiliated Funds comprising The Sessions
Group from October 3, 1997 until February 1, 1999. Martindale's
investment advisory agreement had been approved by the Board of
Trustees (the Trustees) for an initial period of up to two years and
was required to be re-approved thereafter by the Trustees or the
Portfolios' shareholders, at least annually.
Subject to the supervision and direction of the Trustees,
Martindale managed the investment and reinvestment of the assets of
each Portfolio of The Sessions Group and provided investment guidance
and policy direction in connection with the objectives and policies of
each such Portfolio. Although each Affiliated Fund Portfolio paid
Martindale an Advisory Fee for services rendered, Martindale agreed to
waive a portion of such fee. The waiver continued throughout
Martindale's tenure as investment adviser.
The Advisory Fees were computed daily and paid monthly at an annual
rate based on a percentage of the value of the Portfolio's average
daily net assets. Depending upon the Affiliated Fund Portfolio managed,
the annualized Advisory Fees that were payable to Martindale are shown
in the following table. The left-hand column of the table reflects the
Advisory Fees that would have been paid to Martindale had the waiver
been lifted while the right-hand column of the table shows the Advisory
Fees that were actually paid to Martindale during the waiver.

4. Effective February 1, 1999, The Sessions Group was reorganized
into ``Governor Funds,'' a Delaware business trust which then comprised
the Affiliated Funds. Like The Sessions Group, Governor Funds
constituted an open-end management investment company registered under
the Investment Company Act where shares were offered to IRA investors,
at no load. These Affiliated Funds were advised by GGA and consisted of
the following 12 Portfolios: the Prime Money Market Fund, the U.S.
Treasury Obligations Money Market Fund, the Established Growth Fund,
the Aggressive Growth Fund, the Emerging Growth Fund, the International
Equity Fund, the Intermediate Term Income Fund, the Limited Duration
Government Securities Fund, the Pennsylvania Municipal Bond Fund, the
Lifestyle Conservative Growth Fund, the Lifestyle Moderate Growth Fund,
and the Lifestyle Growth Fund.
Under the Investment Company Act, Governor Funds, as the successor
Affiliated Funds, continued the business of The Sessions Group. In this
regard, amounts formerly invested in

[[Page 6683]]

The Sessions Group were reinvested in the corresponding Affiliated Fund
Portfolios of Governor Funds.
5. As investment adviser to the Affiliated Funds, GGA also waived a
portion of its Advisory Fees. The waiver remained in effect for the
duration of the Investment Advisory Program. The following table shows
the Advisory Fees that were payable to GGA. Such fees are expressed as
a percentage of each Portfolio's net assets. The left-hand column of
the table shows the Advisory Fees that would have been paid to GGA had
the waiver been lifted while the right-hand column of the table shows
the Advisory Fees that were actually paid to GGA during the waiver.

------------------------------------------------------------------------
Before After
Portfolio waiver waiver
(percent) (percent)
------------------------------------------------------------------------
Prime Money Market Fund......................... 0.40 0.20
U.S. Treasury Obligations Money Market Fund..... 0.40 0.20
Established Growth Fund......................... 0.75 0.60
Aggressive Growth Fund.......................... 1.00 0.70
Emerging Growth Fund............................ 1.25 0.50
International Equity Fund....................... 1.25 0.40
Intermediate Term Income Fund................... 0.60 0.30
Limited Duration Government Securities Fund..... 0.60 0.30
Pennsylvania Municipal Bond Fund................ 0.60 0.30
Lifestyle Conservative Growth Fund.............. 0.25 0.15
Lifestyle Moderate Growth Fund.................. 0.25 0.15
Lifestyle Growth Fund........................... 0.25 0.15
------------------------------------------------------------------------

Martindale served as sub-adviser to each of the Affiliated Funds,
except the International Equity Fund. For sub-advisory services
rendered, Martindale was paid an annualized sub-advisory fee by the
Affiliated Funds, as a percentage of each Portfolio's net assets.
Martindale's sub-advisory fees, which were paid out of GGA's Advisory
Fees, are presented as follows:

------------------------------------------------------------------------
Sub-
Portfolio advisory fee
(percent)
------------------------------------------------------------------------
Prime Money Market Fund................................ 0.10
U.S. Treasury Obligations Money Market Fund............ 0.20
Established Growth Fund................................ 0.40
Aggressive Growth Fund................................. 0.50
Emerging Growth Fund................................... 0.50
Intermediate Term Income Fund.......................... 0.30
Limited Duration Government Securities Fund............ 0.30
Pennsylvania Municipal Bond Fund....................... 0.30
Lifestyle Conservative Growth Fund..................... 0.05
Lifestyle Moderate Growth Fund......................... 0.05
Lifestyle Growth Fund.................................. 0.05
------------------------------------------------------------------------

In addition, GGA and BISYS served as co-administrators for the
Affiliated Funds. The maximum annualized fee payable to each entity
under their Management and Co-Administration Agreement was 0.15 percent
of the average daily net assets of the Prime Money Market Fund, the
Pennsylvania Municipal Bond Fund, the Established Growth Fund, the
Intermediate Term Income Fund, the Aggressive Growth Fund, the U.S.
Treasury Obligations Money Market Fund, the Limited Duration Government
Securities Fund, the Emerging Growth Fund and the International Equity
Fund. Because GGA and BISYS waived a portion of their Administrative
Fees, the aggregate annualized fee paid to each co-administrator was
reduced to 0.115 percent.
6. Overall responsibility for management and supervision of the
Affiliated Funds was vested in five Trustees, three of whom were
unrelated to Keystone and its affiliates. The Trustees approved all
significant agreements involving the Affiliated Funds and the persons
and companies that furnished services to such Funds. A Trustee could be
removed by either (a) a two-thirds vote of the Trustees or (b) by a
vote of shareholders owning at least two-thirds of the outstanding
shares of all series of the Affiliated Funds. If a Trustee was an
officer or a director of Keystone, a sub-adviser, Martindale, GGA, or
BISYS, it was precluded from receiving compensation from The Affiliated
Funds.
Each Affiliated Fund Portfolio was required to bear its own
expenses. These expenses included all fees and other costs not
specifically waived and/or borne by the Affiliated Funds' service
providers.
7. The Third Party Funds were open-end, diversified investment
companies registered under the Investment Company Act whose sponsors,
administrators, distributors, investment advisers, and sub-advisers
were not affiliated with Keystone or its affiliates. The Third Party
Funds were made available by Keystone to the IRAs, at no load, in the
event the Affiliated Funds failed to offer a Portfolio in a particular
Asset Class.
IRA investors participating in the Investment Advisory Program were
offered two Third Party Funds. These Funds were The Putnam Fund for
Growth and Income and The T. Rowe Price International Stock Fund.
For distribution-related services that were rendered to the Third
Party Funds, Keystone and its affiliates received Rule 12b-1 Fees that
were paid by the respective Third Party Funds to their distributors.
The Rule 12b-1 Fees were in the form of trailing commissions and did
not exceed 0.25 percent of the assets invested in each Third Party Fund
Portfolio.
Description of the Investment Advisory Program/Request for Exemptive
Relief
8. The Investment Advisory Program was an asset allocation program
that was offered by Keystone to IRA participants between October 3,
1997 and June 30, 2000. Formerly known as the ``KeyPremier Nautilus
Series Program'' but later referred to as the ``Nautilus Program,'' the
Investment Advisory Program was designed to provide small- and medium-
sized investors with access to the type of investment advice typically
available only to larger investors. The Investment Advisory Program
offered IRA investors the following features: (a) A unified Account
statement covering all investments; (b) automatic allocation of assets
and contributions; (c) a single asset allocation fee; and (d) no sales
charges on purchases, redemptions, or transfers between investments.
The minimum investment required for an Independent Fiduciary to
establish an Account under the Investment Advisory Program was $25,000.
Effective June 30, 2000, Keystone discontinued the Investment
Advisory Program. Currently, it is providing asset allocation services
under a separate program which does not involve investment in any
Affiliated Funds or Third Party Funds from which it will receive fees.
However, for the interim period between October 3, 1997 and June 30,
2000, Keystone and the other parties to the transactions have requested
an administrative exemption from the Department in order to provide
retroactive relief for any prohibited transactions that may have arisen
during the operation of the Investment Advisory Program.
If granted, the proposed exemption would be effective from October
3, 1997 until June 30, 2000. The proposed exemption would permit the
purchase

[[Page 6684]]

or redemption, by an IRA, of shares of certain Affiliated Fund and the
Third Party Fund Portfolios, in connection with the IRA's participation
in the Investment Advisory Program. In addition, the proposed exemption
would permit Keystone's provision of asset allocation and related
services to an IRA's Independent Fiduciary, which resulted in such
Independent Fiduciary's selection of Portfolios in the Investment
Advisory Program for the investment of IRA assets, and the receipt of
fees by Keystone and/or its affiliates.
Keystone believes that because it and Key Trust would be considered
disqualified persons with respect to the IRAs participating in the
Investment Advisory Program, the decision by an Independent Fiduciary
to participate in such Program would be statutorily exempt under
section 4975(d)(2) of the Code. However, Keystone notes that there is
uncertainty regarding the availability of section 4975(d)(2) of the
Code where the asset allocation recommendations provided to an
Independent Fiduciary of an IRA under the Investment Advisory Program
may cause such entities to be considered fiduciaries with respect to
the IRAs. Therefore, Keystone has requested retroactive exemptive
relief from the Department for the transactions described above.
Operation of the Investment Advisory Program
9. Before opening an Account in the Investment Advisory Program,
Keystone provided each Independent Fiduciary with the following
information: (a) A brochure describing the Investment Advisory Program;
(b) an Account Agreement; (c) a description of the available Asset
Allocation Models; and (d) a reference guide/disclosure document
providing detailed information outlining the mechanics of the
Investment Advisory Program, the fees charged under such Program, the
procedures for establishing Accounts and making withdrawals and
additions, and other related information. If an Independent Fiduciary
wished to open an Account with Keystone, such Independent Fiduciary
would complete an Account Agreement and answer a series of questions
regarding investment objectives and risk tolerance. Answers to these
questions were communicated to an investment adviser representative for
Keystone (the Keystone Representative) either through a personal
Interview, or by obtaining and completing a Questionnaire (which was in
paper or electronic form).
Once completed, the Questionnaire was presented to the Keystone
Representative. If answers were given through an Interview, the
Keystone Representative would prepare a written report of the answers
(i.e., the Interview Report). Then, a copy of the Interview Report
would be given to the Independent Fiduciary. The responses provided by
the Independent Fiduciary during the Interview or on the Questionnaire
were scored by the Keystone Representative to determine which of
several Asset Allocation Models were the most appropriate, given the
financial goals, objectives and risk tolerances previously identified
by the Independent Fiduciary in the Interview or Questionnaire.
10. The Asset Allocation Models were designed to satisfy a variety
of risk tolerances, investment horizons, and tax planning concerns.
There were six Asset Allocation Models available to the IRAs under the
Investment Advisory Program. Each Asset Allocation Model consisted of
an asset distribution among the Asset Classes.
The Asset Allocation Models were developed and maintained by an
investment committee (the Allocation Committee) consisting of
investment professionals of the Asset Management Division of KFI.
In constructing the Asset Allocation Models, the Allocation
Committee utilized Encorr Software which had been developed by Ibbotson
Associates, an unrelated party, to determine the optimal allocations
for various risk/return tolerances among five general Asset Classes
based on historical risk and return. The Allocation Committee then
divided one of these Asset Classes (e.g., Large Cap) into two asset
sub-classes (e.g., Large Cap and Large Cap Growth) on the basis of
historical risk and return data as shown below in Table I.

Table I.--Sample Asset Allocation Model
----------------------------------------------------------------------------------------------------------------
Asset class Fund type Portfolio Percentage
----------------------------------------------------------------------------------------------------------------
Money Market........................... Affiliated................ Prime Money Market Fund....... 6
Fixed Income........................... Affiliated................ Intermediate Term Income Fund. 76
Large Cap Growth....................... Affiliated................ Established Growth Fund....... 8
Large Cap Value........................ Third Party............... Putnam Fund for Growth and 10
Income.
------------
Total.............................. .......................... .............................. 100
----------------------------------------------------------------------------------------------------------------

11. The Allocation Committee could make adjustments to the Asset
Allocation Models to take into consideration the investment goals and
risk tolerances represented by such Models, and to account for changes
in the economy and market conditions. These adjustments could include
changing the investment mix of the Asset Allocation Models by modifying
the proportion of assets invested in each Asset Class. In no event
could Keystone change the asset mix of an Asset Allocation Model
without first notifying the Independent Fiduciary in writing of the
proposed change and giving such Independent Fiduciary at least 30 days
within which to elect not to have the change made. However, if the
Independent Fiduciary did not elect otherwise, Keystone was authorized
to make the change.
12. The Retail Investment Product Committee of KFI (the Review
Committee) was responsible for selecting the Portfolios used to satisfy
the asset allocations specified by the Allocation Committee for each
Asset Allocation Model. The Review Committee was composed of KFI
officers with substantial portfolio management, investment and
regulatory compliance experience. These officers also served on the
Allocation Committee.
The Review Committee selected Portfolios of the Affiliated Funds
for investment to the extent that the Affiliated Funds offered a
Portfolio in a particular Asset Class. If no Affiliated Fund offered
the requisite Portfolio, the Review Committee selected Portfolios of
the Third Party Funds for investment. Any changes in the Portfolios on
the part of Keystone in order to satisfy investment in a particular
Asset Class were only made after Keystone had provided written notice
to all affected

[[Page 6685]]

Independent Fiduciaries. In addition, these changes would only be
implemented if the Independent Fiduciaries did not elect otherwise
within 30 days of such notification.
13. Based on the results generated from the Interview or
Questionnaire, a Keystone Representative recommended to the Independent
Fiduciary an Asset Allocation Model, together with the corresponding
initial investment mix of Portfolios that comprise the Asset Allocation
Model. The asset allocation services provided by the Keystone
Representative were of an advisory nature and were not binding upon the
Independent Fiduciary. No action was taken on the initial
recommendation unless and until the Independent Fiduciary accepted and
approved, in writing, the Asset Allocation Model and corresponding
investment mix recommended by the Keystone Representative. The
Independent Fiduciary could add or withdraw IRA assets to or from the
Account at any time (subject to any applicable minimum redemption and
purchase requirement). Further, the Independent Fiduciary could also
choose a different Asset Allocation Model by submitting a new
Questionnaire or by means of a new Interview if the investment needs
and goals of the Independent Fiduciary had changed.
Rebalancing of IRA Accounts
14. Keystone invested the Account in the Affiliated Funds and/or
Third Party Funds that the Allocation Committee had previously chosen
to satisfy the allocation called for by the Asset Allocation Model.\4\
However, it was anticipated that over time, disproportionate earnings
as between asset types would cause an Account's investment mix to drift
out of balance with the Asset Allocation Model originally chosen by the
Independent Fiduciary. For example, if the chosen Asset Allocation
Model called for 50 percent of an Account's assets to be invested in
the Fixed Income Class through the Intermediate Term Income Fund, and
50 percent in cash through the Prime Money Market Fund, and if the
Intermediate Term Income Fund performed better than the Money Market
Fund during a particular period of time, more than 50 percent of the
Account's assets would be invested in the Fixed Income Class by the end
of the period.
---------------------------------------------------------------------------

\4\ The Independent Fiduciary could specifically instruct
Keystone not to invest in a specific Portfolio, in which case any
IRA assets invested in that Portfolio would be reinvested within
five business days in another Portfolio selected by Keystone and
specifically approved by the Independent Fiduciary. A fee was
charged for each such special instruction.
---------------------------------------------------------------------------

To correct this imbalance, Keystone would periodically move assets
among the chosen investments by buying and selling shares of selected
Portfolios from appropriate distributors on the second to the last
business day of each calendar quarter. For purposes of rebalancing,
Keystone used the net asset values of the affected Funds as of the
close of business for the preceding trading day.\5\ Keystone had no
discretion as to the timing or amount of the rebalancing.
---------------------------------------------------------------------------

\5\ Neither Keystone nor any of its affiliates received a
commission from such purchases and sales.
---------------------------------------------------------------------------

In the case of the foregoing example, Keystone would sell shares of
the Intermediate Term Income Fund and invest the proceeds in the Prime
Money Market Fund so that the Account would again be 50 percent
invested in Fixed Income Securities and 50 percent in cash. Rebalancing
would be conducted on a quarterly basis and confined to bringing the
Account into balance with the Asset Allocation Model chosen by the
Independent Fiduciary. Moreover, rebalancing would only occur if the
percentage of assets invested in a particular Portfolio varied from the
Asset Allocation Model by more than a predetermined threshold set forth
in the Account Agreement.\6\ As stated above, Keystone used the net
asset values of the Affiliated Funds as of the close of business on the
preceding trading day.
---------------------------------------------------------------------------

\6\ In other words, an Account would be rebalanced if the
transactions requiring rebalancing had a ``material effect'' on the
allocation. To have a material effect on an allocation of an
Account, at least one transaction required to rebalance the Account
had to be greater than $250 and at least one transaction had to
change the value of the Fund Portfolio by more than 5 percent (i.e.,
the percentage of an IRA's assets invested in a Portfolio compared
to the percentage called for in the Asset Allocation Model selected
for the IRA). However, Keystone reserved the right to rebalance an
Account even if the required minimums were not satisfied.
For example, if under the Asset Allocation Model, 35 percent of
an IRA's assets were invested in the Established Growth Fund, then
rebalancing would occur if the percentage actually invested in the
Established Growth Fund increased above 40 percent or decreased
below 30 percent (but only if the dollar amount of the rebalancing
transaction would exceed $250).
---------------------------------------------------------------------------

Reallocation of IRA Accounts
15. Keystone represents that from time to time, it was authorized
to make changes to the asset mix of the Asset Allocation Models, as
well as to the mix and identity of Affiliated Fund and/or Third Party
Fund Portfolios that satisfied the Asset Allocation Models. However,
Keystone states that it never utilized the reallocation method during
the time period the Investment Advisory Program was in effect. Had
Keystone decided to implement the reallocation mechanism, it would have
been required to inform each affected Independent Fiduciary in advance
and in writing of the proposed change. In addition, Keystone would have
been required to provide each Independent Fiduciary with the
opportunity to elect not to permit such change.\7\ If the Independent
Fiduciary took no action, Keystone would have been authorized to
realign each Account on a quarterly basis to make the Account's
investment mix match the new investment mix of the Asset Allocation
Model selected by the Independent Fiduciary.
---------------------------------------------------------------------------

\7\ For reallocations occurring after March 24, 2000, Keystone
would have been required to include a Termination Form with the
notice. See Representation 21. However, as stated above, Keystone
never implemented the reallocation mechanism even though this change
was communicated to IRA investors in the Termination Form.
---------------------------------------------------------------------------

Disclosures
16. Aside from the Questionnaire and Interview Report described
above, in order for an IRA to participate in the Investment Advisory
Program, Keystone provided an Independent Fiduciary with the following
materials and oral disclosures:
A brochure describing the Investment Advisory Program;
an Account Agreement; a description of the Asset Allocation Models;
and a reference guide/disclosure statement providing details about
the Investment Advisory Program, the fees charged thereunder, the
procedures for establishing, making additions to and withdrawing
from Accounts, and other related information.
Copies of applicable Prospectuses for the Portfolios
discussing the investment objectives of the Portfolios, the policies
employed to achieve these objectives, and the corporate affiliation
existing between Keystone and its affiliates, the compensation paid
to such entities, disclosures relating to rebalancing and
reallocating Asset Allocation Models (even though the reallocation
service was never implemented), and information explaining the risks
attendant to investing in the Portfolios.
Upon written or oral request to Keystone, a Statement
of Additional Information supplementing the Prospectuses, which
described the type of securities and other instruments in which the
Portfolios may invest and the investment policies and strategies
that the Portfolios may utilize, including a description of the
risks.
A copy of the Account Agreement between the IRA and
Keystone relating to the IRA's participation in the Investment
Advisory Program.
A written recommendation of a specific Asset Allocation
Model, together with a copy of the Questionnaire and response, or
the Interview Report.

If accepted as an investor in the Investment Advisory Program, the
Independent Fiduciary was required to

[[Page 6686]]

acknowledge in writing to Keystone, prior to investing through such
Program, that such Independent Fiduciary had received copies of the
aforementioned documents. In addition, the Independent Fiduciary was
required to represent to Keystone that such individual was (a)
independent of Keystone and its affiliates; (b) knowledgeable with
respect to the IRA in administrative matters and funding matters
related thereto; and (c) able to make an informed decision concerning
participation in the Investment Advisory Program.
17. In addition, on an ongoing basis, Keystone was required to
provide each Independent Fiduciary with the following oral or written
disclosures:

Written confirmations of each purchase and redemption
of shares of a Portfolio (including transactions resulting from the
realignment of assets caused by a change in the Asset Allocation
Model's investment mix and from periodic rebalancing of Account
assets).
Telephone quotations of Account balances.
A periodic, but not less frequently than quarterly,
Statement of Account specifying the net asset value of the IRA's
assets invested in such Account, a summary of purchase, sale and
exchange activity and dividends received or reinvested, a summary of
cumulative realized gains or losses, and a statement of the fees
paid to Keystone and its affiliates.
Semiannual and annual reports that included financial
statements for the Portfolios.
A quarterly report pertaining to the applicable Asset
Allocation Model describing such Asset Allocation Model's
performance during the preceding quarter, market conditions and
economic outlook and, if applicable, prospective changes in
Portfolio allocations for the Asset Allocation Model, and the
reasons therefor.
At least annually, a written or oral inquiry from
Keystone to ascertain whether the information provided in the
Questionnaire or Interview Report was still accurate, and to
determine whether such information should be updated.
At least annually, a Termination Form.

Fee Structure

18. As to each investing IRA, the total fees paid to Keystone and
its affiliates constituted not more than reasonable compensation for
the services provided within the meaning of section 4975(d)(2) of the
Code. Keystone charged each participating IRA an annual investment fee
(the Outside Fee) at rates set forth in the Account Agreement. For
example, if the average daily value of the Account--

Exceeded $149,999, the Outside Fee charged was 1.30
percent; or
Was less than $150,000, the Outside Fee charged was
1.55 percent.

The Outside Fee was computed quarterly on the average daily value
of the assets in an IRA's Account during the quarter and was deducted
directly from the Account (or paid directly by the Independent
Fiduciary), also on a quarterly basis.
Although Keystone was authorized to increase the Outside Fee
periodically, it never implemented this change. Assuming the Outside
Fee had been increased, Keystone would have been required to notify the
Independent Fiduciaries of all IRAs participating in the Investment
Advisory Program, in writing, at least 30 days prior to the effective
date of a such fee increase. The Independent Fiduciary would have been
permitted to withdraw from the Investment Advisory Program at will and
without penalty, and the fee increase would only have gone into effect
if the Independent Fiduciary did not elect to withdraw by the effective
date.
As stated above, each investing IRA did not pay any sales loads on
the purchase of Portfolio shares through the Investment Advisory
Program. The Accounts were invested only in Portfolios which charged no
front- end or back-end sales charges or for which the sales charges had
been waived.
As discussed in Representation 3, Martindale received Advisory Fees
from the Affiliated Funds. These annualized fees were paid at the Fund
Portfolio-level and were based on a percentage of the assets held by
such Portfolio, of between 0.20 percent and 0.50 percent. Similarly,
GGA received annualized Advisory Fees of between 0.15 percent and 0.70
percent and Martindale received sub-advisory fees ranging from 0.05
percent to 0.50 percent.
In addition to the Advisory Fees, GGA and BISYS received
Administrative Fees from the Affiliated Funds of 0.115 percent.
Further, Keystone and its affiliates received Rule 12b-1 Fees from
certain Third Party Fund distributors with respect to IRA assets
invested in the Third Party Funds through the Investment Advisory
Program. The Rule 12b-1 Fees were in the form of trailing commissions
of up to 0.25 percent per annum of the net asset value of each Third
Party Fund.
Besides the aforementioned fees, each Portfolio incurred certain
expenses. These expenses included charges for legal and accounting
services, printing costs, registration fees, regulatory compliance
costs, costs associated with maintaining the Fund's legal existence,
and shareholder communication costs.
19. Keystone represents that with respect to each Account, it
offset, quarterly, against the Outside Fee it received, (a) all
Advisory Fees (including sub-advisory fees that were paid to third
party sub-advisers), (b) all Administrative Fees GGA and BISYS received
from the Affiliated Funds, and (c) all Rule 12b-1 Fees that were paid
to Keystone and its affiliates by the respective Third Party Funds.
Thus, the sum of the offset and the net Outside Fee would always equal
the aggregate Outside Fee and the selection of Affiliated Funds or
Third Party Funds would always be revenue-neutral. Moreover, Keystone
believed this method of offsetting of all Fund-level fees would
eliminate any conflicts of interest resulting from the investment of an
Account's assets in certain Fund Portfolios that generated higher
overall fees for Keystone and its affiliates.
At the end of each quarter, Keystone calculated the percentage of
gross revenues that it and its affiliates earned during the quarter in
the form of Advisory Fees (from the Affiliated Funds) or Rule 12b-1
Fees (from the Third Party Funds). These figures were calculated as a
percentage of the average daily net value of assets in each Portfolio.
The weighted average of such revenues (the Offset Percentage) were then
calculated for each Asset Allocation Model as shown below in TABLE II.
This yielded the amount of the Advisory Fees and Rule 12b-1 Fees that
were earned by Keystone and its affiliates. Such fees were expressed as
a percentage of the average daily net value of Account assets. Because
the Outside Fee was also calculated as a percentage of the average
daily net value of Account assets, Keystone reduced the Outside Fee for
the quarter for each IRA by subtracting from the Outside Fee, the
Offset Percentage for the Asset Allocation Model in which the IRA's
assets had been invested during the quarter. Only after the Offset
Percentage had been subtracted would Keystone deduct the Outside Fee
from the IRA's Account.

[[Page 6687]]

Table II.--Example of Outside Fee Offset Based on an Account With an Average Daily Value of $150,000 or More
[All percentages annualized]
----------------------------------------------------------------------------------------------------------------
Percentage of
Total revenues assets Weighted fee
Fund type Asset class (percentage) allocated to percentage
fund
----------------------------------------------------------------------------------------------------------------
Affiliated Fund............... Fixed Income.......... 0.60 x 35.00 ... 21.00
Affiliated Fund............... Money Market.......... 0.40 x 30.00 ... 12.00
Third Party Fund.............. International Equity.. 0.20 x 35.00 ... 7.00
---------------
Total..................... ...................... .............. ... 100 ... 40.00
Outside Fee:.................. ...................... .............. ... 1.30 ... ..............
Weighted Average of Keystone ...................... .............. ... 0.40 ... ..............
Revenues (40 100):
Net Account Fee (Annual) Would ...................... .............. ... 0.90 ... ..............
be Calculated Quarterly.
----------------------------------------------------------------------------------------------------------------

20. Like the Affiliated Funds, the Third Party Funds also incurred
expenses for shareholder services, custody, the costs of regulatory
compliance, legal fees, and shareholder communication costs, as well as
the management and service fees imposed by investment advisers and
service providers unaffiliated with Keystone or its affiliates. As for
both the Affiliated and the Third Party Funds, these Fund-level
expenses were not offset against Keystone's Outside Fee.
Termination Form
21. An Independent Fiduciary had the ability to withdraw from the
Investment Advisory Program at any time, provided such fiduciary gave
proper notice to Keystone. In addition, Keystone was authorized to
provide 30 days' advance written notice to the Independent Fiduciary if
it wished to change the asset mix of an Account outside of an Asset
Allocation Model, divide an Asset Class, replace a Third Party Fund
with an Affiliated Fund or vice versa, or increase its Outside Fee. The
written notice was required to (a) state that the Independent Fiduciary
could terminate the IRA's participation in the Investment Advisory
Program at will and without penalty, upon receipt by Keystone of
written notice from the Independent Fiduciary; and (b) explain that any
of the changes noted above would go into effect if the Independent
Fiduciary did not elect to withdraw by the effective date.
However, under either circumstance, there was no formalized
structure in place whereby Keystone could inform an Independent
Fiduciary of his or her right to withdraw from the Investment Advisory
Program on a more frequent basis or to document the Independent
Fiduciary's withdrawal decision. Therefore, on March 24, 1999, Keystone
began distributing the Termination Form to each Independent Fiduciary
participating in the Investment Advisory Program. Although distribution
of such form would be required thereafter, at least annually (i.e.,
during the first calendar quarter of each year), it was considered
mandatory in all cases where Keystone wished to make the changes noted
above.
The Termination Form was to be accompanied by instructions on its
use. The instructions, which contained information similar to the
contents of Keystone's formerly-disseminated notice, provided that (a)
the authorization was terminable at any time and without penalty,
either by completing and returning the Termination Form or by sending
other written notice to Keystone; and (b) no purchases and sales under
the Account Agreement would be executed after the next business day
following Keystone's receipt of the Termination Form or other written
withdrawal notice. Assuming Keystone proposed to modify an asset mix or
raise its Outside Fee, the Termination Form would also have stated that
the change would only go into effect if the Independent Fiduciary did
not elect to withdraw by the effective date.
Keystone represents that it never replaced an Affiliated Fund with
a Third Party Fund Portfolio or vice versa, nor did it otherwise make
an additional Third Party Fund Portfolio available for investment under
the Investment Advisory Program, change an asset mix outside of an
Asset Allocation Model or increase its Outside Fee. Therefore, there
were no special circumstances to warrant an earlier distribution of
such form. Moreover, because of the contemplated termination of the
Investment Advisory Program on June 30, 2000, Keystone made no further
annual distribution of the Termination Form to Independent Fiduciaries.
22. It is represented that the transactions satisfied the statutory
criteria for an exemption under section 4975(c)(2) of the Code because:
(a) The investment of an IRA's assets under the Investment Advisory
Program was made by a fiduciary that was independent of Keystone and
its affiliates and such Independent Fiduciary maintained complete
discretion with respect to the IRA's continued participation in the
Investment Advisory Program.
(b) No IRA paid a fee or commission by reason of the acquisition or
redemption of shares of Fund Portfolios.
(c) As to each IRA, the total fees that were paid to Keystone and
its affiliates constituted no more than reasonable compensation for the
services provided.
(d) Prior to investing under the Investment Advisory Program, each
Independent Fiduciary received offering materials and disclosures from
Keystone which set forth all material facts concerning the purpose, fee
structure, rebate arrangement, operation, rebalancing, risks and
participation in such Program.
(e) Keystone provided written documentation to an Independent
Fiduciary of its recommendations based upon objective criteria that
were uniformly applied.
(f) The quarterly Outside Fee that was paid by an IRA to Keystone
for asset allocation and related services rendered to such IRA under
the Investment Advisory Program was offset by--(1) all gross Advisory
Fees received by Keystone and/or its affiliates from the Affiliated
Funds, including sub-advisory fees that are paid to third party sub-
advisers; (2) all Administrative Fees received by GGA and BISYS from
the Affiliated Funds; and (3) all Rule 12b-1 Fees that were paid by the
Third Party Funds to Keystone and/or its affiliates, such that the sum
of the Outside Fee

[[Page 6688]]

and the Offset Fees equaled the total Outside Fee, and the selection of
Affiliated or Third Party Fund Portfolios was revenue-neutral.
(g) Although Keystone had discretion to make unilateral Model
Adjustments to an IRA's Asset Allocation Model, it was bound by the
financial goals and risk tolerances that the Model represented and it
was limited in the degree of change that it could make to an Asset
Allocation Model's investment mix.
(h) In rebalancing an IRA investor's Account, neither Keystone nor
its affiliates exercised discretionary management or control over the
IRA.
(i) Although the Independent Fiduciary could withdraw from the
Investment Advisory Program at any time, any authorizations made by
such IRA investors with respect to increases in the Outside Fee, Model
Adjustments that were outside of an Asset Allocation Model, the
addition or substitution of a Fund, would be terminable at will and
without penalty to the IRA, upon receipt by Keystone of a Termination
Form from such IRA investor which would advise the Independent
Fiduciary (1) of his or her right to withdraw from the Investment
Advisory Program and (2) that absent affirmative approval, the change
would be effective as of a given date.
(j) Each Independent Fiduciary received disclosures from Keystone
regarding the participation of the IRA in the Investment Advisory
Program.
(k) All dealings between an IRA, the Funds and Keystone remained on
a basis which was at least as favorable to the IRA as such dealings are
with other shareholders of the Funds holding the same classes of shares
as the IRA.

Notice to Interested Persons

Keystone will provide notice of the proposed exemption to
Independent Fiduciaries of IRAs formerly investing in the Investment
Advisory Program within 30 days of the publication of the notice of
pendency in the Federal Register. Such notice will be provided by
first-class mail and will include a copy of the notice of proposed
exemption, as published in the Federal Register, as well as a
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2).
The supplemental statement will inform interested persons of their
right to comment on and/or to request a hearing with respect to the
pending exemption. Therefore, comments and requests for a hearing must
be received by the Department no later than 60 days from the date of
the publication of this notice of proposed exemption in the Federal
Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)

Reagent Chemical & Research, Inc. Employees Profit Sharing Plan and
Trust (the Plan) Located in Middlesex, New Jersey

[Application No. D-10793]

Proposed Exemption

Summary of Facts and Representations

1. The Plan was adopted on December 12, 1962. The Plan is a defined
contribution plan with approximately 309 participants. As of July 22,
1999, the Plan had approximately $30,438,854 in total assets. Reagent
Chemical & Research, Inc. (RCR) is the sponsor of the Plan. RCR is a
subchapter ``S'' corporation organized under the laws of State of
Delaware. RCR is in the business of manufacture, distribution and sale
of specialty chemicals. The Plan's current trustees are John T. Skeuse,
brother of Brian Skeuse, and Stephen T. Finney, brother-in-law of Brian
Skeuse.
2. On November 3, 1980, the Plan purchased approximately 34.58
acres of land (the Land) from Joe and Wenona Russo, unrelated third
parties, for $225,000.\8\ The Property is a 2.5 acre parcel of the
Land. Therefore, the applicant represents that the cost of the Property
to the Plan, based on the per acre price paid for the Land, was
$16,304.35. The Property is adjacent to the Skeuses' personal family
residence. It is represented that the decision to purchase the Property
as a investment for the Plan was made by Robert Dallas and Thomas
Skeuse, Sr., who were the Plan's trustees at the time of the
transaction.\9\
---------------------------------------------------------------------------

\8\ The Plan sold approximately 10 acres of the Land in 1987 to
Brian Skeuse, a party in interest, pursuant to the terms and
conditions of Prohibited Transaction Exemption (PTE) 87-17, 52 FR
2630 (January 23, 1987). The Department is providing no opinion
herein as to whether the conditions of PTE 87-17 were met.
\9\ The Department is not providing any opinion in this proposed
exemption as to whether the acquisition and holding of the Land,
including the Property, by the Plan violated any of the provisions
of Part 4 of Title I of the Act.
However, the Department notes that an investigation regarding
the subject investments made by the Plan and related transactions
has been conducted by the Department's Regional Office in New York.
In this regard, the proposed exemption, if granted, will enable the
Plan to be made ``whole'' with regard to the total costs to the Plan
for the Property and will allow the Plan to reinvest the proceeds of
the proposed sale in other assets which may yield greater returns.
---------------------------------------------------------------------------

The Property is held in the Plan's aggregate portfolio and has not
been allocated to any participant's account in the Plan. At the time of
the Plan's purchase in 1980, the Property represented less than 1% of
the Plan's total assets. The applicant represents that as of November
27, 2000, the Property continued to represent less than 1% of the total
value of the Plan's assets.
3. The applicant represents that the Property has not been used or
leased by anyone, including the parties in interest described herein,
since it was acquired by the Plan. Thus, the applicant states that the
Property has not been an income-producing asset and has been held for
possible appreciation.
The Plan has paid for taxes, insurance and maintenance on the
Property since the acquisition (the Holding Costs). Specifically, the
Plan has paid a total of approximately $34,870 in property taxes for
the Property during this period. Further, the Plan has paid
approximately $4,500 for the design and approval of a residential
septic tank system for the Property. The applicant estimates that the
insurance costs incurred by the Plan for the Property during the period
from 1980 until 1999 were approximately $1,000. The applicant states
that the Holding Costs for the Property have been approximately
$40,370. Therefore, the total cost for the Property (i.e, the
acquisition price of $16,304, plus the Holding Costs of approximately
$40,370) was approximately $56,674 as of December 2000.

[[Page 6689]]

4. The Property is located on 30 Old Hill Road, Raritan Township,
Hunterdon County, New Jersey. The Property was appraised on May 11,
1999, as having a fair market value of $95,000 (the Appraisal). The
Appraisal was prepared by George A. Copeland, Jr., MAI (Mr. Copeland),
who is an independent, qualified real estate appraiser in the State of
New Jersey. Mr. Copeland is with Copeland Appraisal Associates, Inc.,
located at 971 U.S. Route 202 in Somerville, New Jersey. Mr. Copeland
states that consideration was given in the Appraisal to three
approaches to value, i.e., the cost approach, sales comparison
approach, and income approach. However, Mr. Copeland relied on the
sales comparison approach to determine the fair market value of the
Property.
Mr. Copeland also submitted several updates to the Appraisal of the
Property. The first update is dated March 23, 2000 (Update I). Update I
states that the fair market value of the Property was $100,000 as of
March 23, 2000.
The second update to the Appraisal of the Property is dated
November 20, 2000 (Update II). Update II states that the fair market
value of the Property was $105,000, as of November 20, 2000.
Finally, the applicant also submitted a supplement to the Update II
dated December 22, 2000 (the Supplement). Because the Property is
adjacent to the Skeuses' personal family residence, Mr. Copeland
considered whether a sale of the Property by the Plan to the Skeuses
would merit a premium above the fair market value for the Property.
However, in the Supplement, Mr. Copeland states that the Property would
not merit a premium above its fair market value in any sale to an
adjacent property owner.
5. The applicant now proposes that the Skeuses purchase the
Property from the Plan in a one-time cash transaction. The applicant
represents that the proposed transaction would be in the best interest
and protective of the Plan. The Plan will pay no commissions or other
expenses associated with the sale. The Skeuses will pay the Plan the
greater of either: (a) $105,000; or (b) the current fair market value
of the Property, as established by a qualified independent appraiser at
the time of the transaction. In this regard, Mr. Copeland or another
independent qualified appraiser will update the Appraisal to determine
the current fair market value for the Property at the time of the
proposed sale. The sale of the Property will enable the Plan to sell an
illiquid non-income producing asset and reinvest the sale proceeds in
assets that may yield higher returns.
6. In summary, the applicant represents that the transaction will
satisfy the statutory criteria of section 408(a) of the Act and section
4975(c)(2) of the Code because:
(a) The proposed sale will be a one-time cash transaction;
(b) the Plan will receive the greater of either: (i) $105,000; or
(ii) the current fair market value for the Property, as established at
the time of the sale by an independent qualified appraiser;
(c) the Plan will pay no fees, commissions or other expenses
associated with the sale; and
(d) the sale will enable the Plan to divest itself of a non-income
producing asset and acquire investments which may yield higher returns.

Notice to Interested Persons

The applicant represents that notice of the proposed exemption (the
Notice) will be distributed to interested persons, by first class mail,
or by posting in RCR's facilities, within thirty (30) days of the date
the Notice is published in the Federal Register. Such interested
persons will include all participants in the Plan, all fiduciaries of
the Plan, and any officer or director of RCR. The distribution to
interested persons shall include a copy of the Notice, as published in
the Federal Register, and a supplemental statement, as required
pursuant to 29 CFR 2570.43(b)(2), which shall inform such persons of
their right to comment and/or request a hearing with respect to the
Notice.
Comments and requests for a public hearing with respect to the
Notice are due sixty (60) days following the publication of the Notice
in the Federal Register.

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

Ibbotson Associates, Inc. (Ibbotson) Located in Chicago, Illinois

[Exemption Application No.: D-10897]

Proposed Exemption

The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (F) of the Code, shall
not apply to the provision of asset allocation services (the Service)
by Ibbotson to Plan participants and the receipt of fees by Ibbotson
from Service Providers in connection with the provision of such asset
allocation services, provided that the following conditions are met.
I. General Conditions
A. The retention of Ibbotson to provide the Service will be
expressly authorized in writing by an independent fiduciary of each
Plan.
B. Ibbotson shall provide the independent fiduciary of each Plan
with the following, in writing:
(1) Prior to authorization, a complete description of the Service
and disclosures of all fees and expenses associated with the Service.
(2) Any other reasonably available information regarding the
Service that the independent fiduciary requests.
(3) A contract for the provision of the Service which defines the
relationship between Ibbotson, the Service Providers and the Plan
sponsor, and the obligations thereunder. Such contract shall be
accompanied by a termination form with instructions on the use of the
form. The termination form must expressly state that a Plan may
terminate its participation in the Service without penalty at any time.
However, a Plan which terminates its participation in the Service
before the expiration of the contract will pay its pro-rata share of
the fees that it would otherwise owe for the Service under the contract
and, if applicable, any direct costs actually incurred by Ibbotson
which would have been recovered from the Plan but for the termination
of the contract, including any direct setup expenses not previously
recovered. Thereafter, the termination form shall be provided no less
than annually.
(4) At least 45-days prior to the implementation of any material
change to the Service or increase in fees or expenses charged for the
Service, notification of the change and an explanation of the nature
and the amount of the change in the Service or increase in fees or
expenses.
(5) A copy of the proposed and final exemption, if granted, as
published in the Federal Register.
(6) An annual report of Plan activity which summarizes the
performance of the asset allocation categories provided to the Plan and
provides a breakdown of all fees and expenses paid to Ibbotson in
connection with the provision of the Service to the Plan for the year.
Such report shall be provided no more than 45 days after the period to
which it relates. Upon the independent fiduciary's or Plan sponsor's
request,

[[Page 6690]]

such report may be provided more frequently.
C. Ibbotson will provide each Plan participant with the following:
(1) Written notice that the Service is available and provided by
Ibbotson, an entity independent of the Service Provider and the Plan
sponsor.
(2) Prior to using the Service, full written disclosures that will
include information about Ibbotson and a description of the Service.
(3) Access to Ibbotson's web site or paper-based communications
which will clearly indicate that the Plan participant is receiving the
Service from Ibbotson, and that Ibbotson is independent of the Service
Provider.
(4) A tolerance questionnaire which must be completed prior to
utilization of the Service.
(5) An investment advisory service agreement under which the Plan
participant will acknowledge his or her understanding that the Service
is provided by Ibbotson and not the Service Provider. This agreement
must be completed prior to utilization of the Service.
D. Any investment advice given to a Plan participant by Ibbotson
under the Service will be based solely on the responses provided by the
Plan participant through the Service's interactive computer program or
through a paper or telephone interview and will be based on the
application of an objective methodology developed by Ibbotson.
E. Any investment advice given to a Plan participant will be
implemented only at the express direction of the Plan participant.
F. The total fees paid to Ibbotson and a Service Provider, in
connection with the provision of the Service, by each Plan does not
exceed ``reasonable compensation'' within the meaning of section
408(b)(2) of the Act.
G. The only fees which are payable to Ibbotson in connection with
the provision of the Service include, subject to negotiation, one or
more of the following:
(1) An annual flat fee based on a fixed dollar amount per Plan
participant for the Service. This fee may be paid by the Plan, Plan
sponsor, Plan participant or the Service Provider.
(2) A technology licensing fee payable by the Service Provider in
the first year that the Service is provided to a Plan. The fee will be
a fixed dollar amount based on the number of Plan participants and
beneficiaries contained on the Service Provider's record-keeping
system. Each time the number of Plan participants and beneficiaries on
the Service Provider's record-keeping system increases by at least 10%,
an additional fixed dollar amount based on the increase in Plan
participants and beneficiaries will be assessed and charged to the
Service Provider for the new Plan participants and beneficiaries (the
Revised Technology Fee).
(3) For subsequent years, Ibbotson will charge the Service Provider
an annual technology maintenance fee equal to up to 20% of the
technology licensing fee charged to the Service Provider in the first
year plus up to 20% of the Revised Technology Fee.
(4) Ibbotson will charge the Plan or Plan sponsor an Internet
customization fee where a Plan sponsor contracts directly with Ibbotson
for the provision of the Service. This flat fee will be based on the
time spent by Ibbotson personnel on its customization of the Service
for the particular Plan.
(5) For those Plan sponsors electing to receive a Plan analysis
report, an annual flat fee based on a fixed dollar amount per Plan
investment analysis report. This fee will be paid by the Plan sponsor
or Service Provider.
H. No portion of any fee or other consideration payable by the Plan
or the Plan sponsor to Ibbotson in connection with the Service will be
received or shared with a Service Provider.
I. Neither the fees charged nor the compensation received by
Ibbotson will be affected by the investment selections or the decisions
made by the Plan participants and beneficiaries regarding investments
of the assets in their accounts.
J. Each Service Provider shall represent to Ibbotson that it will
not impose any additional fees and/or charges (relating to the
investment products made available to Plans) on Plans who contract for
the Service unless such fees and charges are imposed on the Service
Provider's similarly situated clients who do not contract for the
Service.
K. Ibbotson will maintain insurance coverage from an insurer with a
rating in one of the three highest generic categories by at least one
nationally recognized statistical rating service, in the amount of at
least $5 million for the payment of any liabilities that may arise with
respect to the Service by reason of a breach of fiduciary duty
described in section 404 of the Act or a violation of the prohibitions
of section 406 of the Act or section 4975 of the Code. Such insurance
coverage will be provided under a ``claims made'' policy. In the event
that Ibbotson changes insurers or ceases to provide the Service,
Ibbotson will maintain ``trail coverage'' with respect claims made
during the period in which the policy was in effect for a period of
three years following such a change or cessation of the Service.
L. No Service Provider shall at any time own any interest, by vote
or value in Ibbotson, and neither Ibbotson nor any affiliate shall own
any interest, by vote or value, in a Service Provider.
M. The annual revenues derived by Ibbotson from any one Service
Provider shall not constitute more than 5% of the annual revenues of
Ibbotson.
N. Ibbotson will maintain for a period of six years, the records
necessary to enable the persons described in paragraph (O) of this
section to determine whether the conditions of the exemption are met,
including records of the recommendations made to Plan participants and
beneficiaries and their investment choices, except that--
1. A prohibited transaction will not be considered to have occurred
if, due to circumstances beyond the control of Ibbotson, the records
are lost or destroyed prior to the end of the six year period.
2. No party in interest, other than Ibbotson shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act,
or the taxes imposed by section 4975(a) and (b) of the Code if records
are not maintained or not available for examination as required by this
paragraph and paragraph O(1) below.
O. (1) Except as provided in subparagraph (2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of Section
504 of the Act, the records referred to paragraph (N) of this section
are unconditionally available at their customary location for
examination during normal business hours by--
(a) Any duly authorized employee or representative of the
Department of Labor, the Internal Revenue Service, or the Securities
and Exchange Commission,
(b) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary,
(c) Any contributing employer to any participating Plan or any duly
authorized representative of such employer, or an employee organization
whose members are participants and beneficiaries of a participating
Plan; or
(d) Any Plan participant or beneficiary of any participating Plan
or any duly authorized representative of such Plan participant or
beneficiary.
(2) None of the persons described in paragraph (1)(b)-(d) of this
paragraph (O) shall be authorized to examine trade secrets of Ibbotson,
or commercial or financial information which is privileged or
confidential.

[[Page 6691]]

III. Definitions
A. The term ``Service'' means the asset allocation service provided
by Ibbotson to Plans which is accessed through computer software and
other written communications in order to provide personalized
recommendations to Plan participants regarding the allocation of their
investments among the options offered under their Plan.
B. The term ``Service Provider'' means an entity that has been in
the financial services business for at least three years, and during
such period, has not been convicted of a felony offense involving abuse
or misuse of such entity's employee benefit plan position or
employment, or any felony arising out of the conduct of the business of
a broker, dealer, investment adviser, bank, insurance company or
fiduciary. Such entity is also described in one of the following
categories:
1. A bank, savings and loan association, insurance company or
registered investment adviser which meets the definition of a
``qualified professional asset manager'' (QPAM) set forth in section
V(a) of Prohibited Transaction Exemption 84-14 (49 Fed. Reg. 9494 (Mar.
13, 1984)), as corrected at 50 Fed. Reg. 41430 (Oct. 10, 1985) and in
addition, has, as of the last day of its most recent fiscal year, total
client assets under management and control in an amount not less than
$250 million; or
2. A broker dealer registered under the Securities Exchange Act of
1934, which has, as of the last day of its most recent fiscal year, $1
million in shareholders' or partners' equity, and total client assets
under management and control in an amount not less than $250 million.
C. The term ``independent fiduciary'' means a Plan fiduciary which
is independent of Ibbotson and its affiliates and independent of the
Service Provider and its affiliates.
D. The term ``affiliate'' includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, relative of, or partner in any such
person; and
(3) Any corporation or partnership, of which such person is an
officer, director or partner.
E. The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
F. The term ``Plan'' means an employee benefit pension plan as
defined in section 3(2) of the Act.

Summary of Facts and Representations

1. Ibbotson, founded by Professor Roger Ibbotson in 1976, provides
products and services to help investment professionals make asset
allocation decisions for their clients. Ibbotson's mission is to help
its clients gather, manage and retain assets. Its clients include
financial planners, brokers, brokerage firms, mutual fund companies,
institutional and small money managers, pension funds, 401(k)
providers, banks and private bankers and insurance companies. In its
application, Ibbotson states that Professor Ibbotson's study, Stocks,
Bonds, Bills and Inflation, has become an indispensable annual
reference tool for investment and financial professionals.
2. The Applicant represents that the Service will be beneficial to
Plan participants because it will provide Plan participants with
guidance involving analytical techniques and financial concepts that
typically result in a more focused and well thought out program for
Plan investments. The Applicant further states that the Service,
thereby, allows Plan participants to more fully exercise their rights
to self-direct their investments. The Service integrates retirement
planning and fund allocation recommendations, including current Plan
savings, other retirement savings, personal retirement income goals and
tolerance for risk, time horizon to retirement and the fund choices
specifically available in a participant's Plan. According to Ibbotson,
these factors can be the most crucial in developing an effective
individual retirement plan.
The Applicant further indicates that the individual guidance which
is provided by the Service is not typically available due to the
hesitancy of Plan sponsors and Service Providers to provide such advice
out of concern for potential liability, and the high cost of obtaining
this type of advice on an individual basis. Ibbotson believes that the
advice provided by the Service is similar to that used by professional
investment managers for the allocation of assets in a defined benefit
plan.
3. Before a Plan's independent fiduciary may authorize the Plan's
participation in the Service, Ibbotson must provide the independent
fiduciary with a complete description of the Service, written
disclosures of all fees and expenses associated with the Service, and a
written contract for the provision of the Service which defines the
relationship between Ibbotson, the Service Provider and the Plan
sponsor and the obligations thereunder.\10\ Such contract will be
renewable annually and will include: (a) A provision under which the
Plan shall have 45 days notice prior to implementation of any material
change to the Service or any fee or expense increases in connection
with the provision of the Service by Ibbotson; and (b) a provision
which states that a Plan may terminate its participation in the Service
at any time without penalty. However, a Plan which terminates its
participation in the Service before the expiration of the contract will
be responsible for the payment of its pro-rata share of the fees owed
under the contract as of the date of termination, and, if applicable,
any direct costs actually incurred by Ibbotson which would have been
recovered by Ibbotson but for the termination of the contract,
including any direct setup expenses not previously recovered. In
addition, Ibbotson shall provide the independent fiduciary with a copy
of the proposed and the final exemption, if granted, as published in
the Federal Register.
---------------------------------------------------------------------------

\10\ In this regard, the Department notes that the fiduciary
responsibility provisions of the Act apply to the decision of a
Plan's independent fiduciary to authorize the Plan's participation
in the Service. Section 404 of the Act requires, among other things,
that a fiduciary of a plan must act prudently, solely in the
interest of the plan's participants and beneficiaries, and for the
exclusive purpose of providing benefits to participants and
beneficiaries. Accordingly, the Plan's independent fiduciary must
act prudently when deciding to participate in the Service, and in
considering the fees associated with the Service. The Department
expects that the Plan's independent fiduciary, prior to authorizing
the Plan's participation in the Service, will understand fully the
operation of the Service, and the compensation paid thereunder,
following disclosure by Ibbotson of all relevant information
pertaining to the Service.
---------------------------------------------------------------------------

4. Ibbotson will provide the Service either directly to Plan
participants through an agreement with the Plan sponsor or through an
agreement with the Service Providers sponsoring the investment vehicles
offered to Plan participants. In situations where Ibbotson contracts
directly with the Plan Sponsor, Ibbotson will customize the Service for
each Plan.\11\ The fees

[[Page 6692]]

charged for the Service will be based on a flat fee per participant. In
many instances, Ibbotson will need to coordinate with the Plan's
record-keeper or another Service Provider in offering the Service to a
Plan's participants. Such entities will be independent of Ibbotson. All
fees for the Service will be paid by the Plan sponsor or the Plan to
Ibbotson, and the Service Providers will not receive any portion of
such fees or other consideration from Ibbotson.
In the second situation, Ibbotson will provide the Service to Plan
participants pursuant to a contract that the Plan sponsor enters into
with a Service Provider. In these instances, the fees for the Service
will still be based on a flat dollar amount per Plan participant, but
will be paid to Ibbotson by the Service Provider, the Plan or Plan
participant. In addition, Ibbotson will enter into a written agreement
with the Plan sponsor defining the relationship between the Plan
sponsor, Ibbotson and the Service Provider.
---------------------------------------------------------------------------

\11\ The provision of investment advisory services to plans
would be exempt from the prohibitions of section 406(a) of ERISA if
the conditions of section 408(b)(2) are met. Section 2550.408b-2(a)
of the Department's regulations provides that section 408(b)(2) of
the Act exempts from the prohibitions of section 406(a), payment by
a Plan to a party in interest, including a fiduciary for * * * any
service (or combination of services) if (1) such service is
necessary for the establishment or operation of the Plan; (2) such *
* * service is furnished under a contract or arrangement which is
reasonable; and (3) no more than reasonable compensation is paid for
such * * * service. The regulation also provides that section
408(b)(2) does not contain an exemption from acts described in a
section 406(b) even if such act occurs in connection with a
provision of services that is exempt under section 408(b)(2).
Section 2550.408b-2(e)(1) further provides that a fiduciary does not
engage in an act described in section 406(b)(1) of the Act if the
fiduciary does not use any of the authority, control or
responsibility which makes such person a fiduciary to cause the Plan
to pay additional fees for a service furnished by such fiduciary or
to pay a fee for a service furnished by a person in which the
fiduciary has an interest which may affect the exercise of such
fiduciary's best judgment as a fiduciary. In general, whether a
violation of section 406(b) occurs during the operation of an
investment advisory program is an inherently factual matter. See
Advisory Opinion 84-04 (January 4, 1984).
---------------------------------------------------------------------------

5. The Applicant states that, once a Plan fiduciary has authorized
its Plan's participation in the Service, Plan participants will receive
written notice that the Service is available and provided by Ibbotson,
an entity which is independent of the Service Provider. Each Plan
participant will receive an investment advisory service agreement under
which each participant will acknowledge his or her understanding that
the Service is provided by Ibbotson and not the Service Provider. In
addition, Plan participants will receive full disclosures about
Ibbotson and the Service.
Access to the Service will be provided to Plan participants through
the Internet, or by written materials. A Plan participant will answer a
questionnaire which consists of multiple questions that are designed to
evaluate a Plan participant's anticipated time horizon to retirement,
savings rate and other personal financial factors. After the interview
is completed, the Plan participant will receive recommendations with
respect to his or her savings rate, retirement age and asset
allocation\12\ and the percentage of assets that the Plan participant
should allocate to each option.
---------------------------------------------------------------------------

\12\ The recommendation will describe and identify the specific
investment options available through the participant's Plan and in
which options the Plan participant should invest.
---------------------------------------------------------------------------

If a Plan participant elects to receive his/her advice through the
Internet, the Plan participant will first access a website provided by
the Service Provider or the Plan sponsor. There will be an electronic
link from the Plan sponsor's or Service Provider's website to
Ibbotson's website where the questionnaire and investment advice is
housed. The Applicant represents that Ibbotson will always retain sole
control over the content of the Service and the advice contained
therein. Ibbotson will regularly monitor the contents of the Service
and the advice contained therein to ensure that it remains the product
of the objective methodology developed by Ibbotson. Ibbotson states
that it will be apparent to the Plan participant that Ibbotson is the
sole-provider of such advice.
For those Plan participants using the Internet, the completed
questionnaire is scored by computer. For those Plan participants who
select to receive his/her advice in paper form, Ibbotson will mail the
Service materials to Plan sponsors or Plan participants after the Plan
sponsor has decided to hire Ibbotson. The Plan participants will mail
their written responses back to Ibbotson. Ibbotson will, in turn, score
the questionnaire and send its recommendations, etc., directly back to
the Plan participant. The Plan participant, will, if she or he chooses
to implement the recommendations, then mail or telephone the
instructions to the Service Provider (or other designated agent for
receiving such investment instructions.) All recommendations will be
generated by Ibbotson's proprietary forecasting engine based on an
analysis of Plan participant's responses to the questionnaire and an
analysis of the investment options offered under the relevant Plan,
including any employer stock fund.\13\ Based on the score, the Plan
participant is categorized into one of several investment
recommendations.\14\
---------------------------------------------------------------------------

\13\ The Service will not, however, make any recommendations
will respect to investments in employer stock. Instead the Service
will treat the participant-designated level of employer stock
holdings as an investment in the particular asset class in which the
stock falls (i.e., large capitalized equity) with two times the
volatility of that class and develop an overall recommendation with
this assumption.
\14\ These recommendation involve lower to high risk portfolios.
---------------------------------------------------------------------------

Each recommendation contains a description of the investor profile
associated with such recommendation that a Plan participant can review
to see if he or she feels that he or she has been correctly classified.
The Service will also allow Plan participants to experiment with
different risk/return scenarios to better understand what impact the
recommended allocation will likely have on his/her retirement.
6. The Applicant states that the advice provided to Plan
participants will be based on the application of an objective
methodology developed by Ibbotson. The investment recommendations
generated by the Service are standardized. Such recommendations are
generated through an automated process that is then applied to each
Plan and Plan participant advised by Ibbotson. The advice provided to a
Plan participant through the Service may only be implemented if it is
expressly authorized in writing by the Plan participant. The Service
will inform Plan participants periodically of the need to review their
situation. Plan participants are advised that the investment advice is
valid for one year and it is advisable to repeat the questionnaire
process periodically and if there are significant life events (such as
the birth of a child or an increase in salary.)
7. The Applicant represents that its role in performing the Service
on behalf of a Plan, includes gathering information about the
investment options offered in a particular Plan, and developing a
recommended portfolio for each investor type. First, each Plan's
investment option style is analyzed. Then, seven (or more) Plan-
specific asset allocation recommendations (from lower to higher risk)
are generated by using proprietary Ibbotson software. Finally, the
allocations are electronically transferred to a web site ``server''
(computer system) where one of the asset allocations is recommended to
a Plan participant, based on his/her inputs.
Ibbotson constructs portfolios with different risk and return
characteristics using the investment options available under the Plan.
These portfolios form the foundation of the advice which is provided to
a Plan participant. This methodology can be broken into five steps.
Step 1: Selection of asset classes. Before creating specific
portfolios for each investment option, Ibbotson believes that it is
first necessary to construct strategic asset-class level portfolios.
These strategic portfolios reflect the underlying asset allocations
that Ibbotson would like to achieve

[[Page 6693]]

using the specific investment options available under the Plan. Asset
classes used to create the strategic portfolios may include: Large, mid
and small cap stocks, international stocks, emerging stocks, long,
intermediate and short term government bonds, high-yield bonds,
municipal bonds, cash, and company stock. The asset classes used depend
on the number and types of investment options available in the 401(k)
plan. Ibbotson requires that the investment options in a plan provide
exposure to at least small and large stocks, cash, and bonds for advice
to be given. If the exposure to each of these asset classes is not
available, Ibbotson will not provide advice services.
Step 2: Develop expected returns. Ibbotson uses historical
relationships and current yields on government bonds to generate
expected returns. This approach separates the expected return of each
asset class into three components. The first two components are a real
risk-free rate of return and an estimate of future inflation. It is
Ibbotson's belief that the current yield on a long-term, zero coupon
government bond is the best estimate of these two components. The third
component is the difference between the historical return on any asset
class and the historical return on long-term, zero coupon government
bonds. This difference represents the incremental return over the risk
free rate investors have earned from taking on the risk of investing in
an asset class. The sum of these components is the expected return
Ibbotson uses in the mean-variance optimization process. Standard
deviations and correlations for the asset classes are calculated using
historical data.
Step 3: Build model portfolios. Ibbotson employs the standard mean-
variance analysis from Modern Portfolio Theory to evaluate and
determine its strategic, asset-level portfolio recommendations.
However, rather than taking portfolios directly off of the efficient
frontier defined by the estimates created in Step 2, Ibbotson chooses
portfolios that are very close to the efficient frontier under many
different economic and investment performance scenarios. Ibbotson
believes that choosing portfolios this way ensures that the strategic
portfolio characteristics will be relatively stable over time and will
avoid drastic asset class shifts. Ibbotson deems that it is essential
to build portfolios that have these stable properties to minimize the
need for the Plan participant to make frequent changes to his or her
portfolio.
Step 4: Select funds. Once asset-level model portfolios are
developed, they are implemented using the investment options available
under the plan. Since at any time most funds are investing in
securities from several asset classes, Ibbotson employs a statistical
method to determine what asset classes a fund's investment approach is
exposing the Plan participant to. Using the asset exposures from this
technique, Ibbotson combines the funds so that the total asset class
exposure of the funds in the portfolio equals the desired strategic
portfolio weights. Since consistency of asset exposure in funds through
time is so important, investment options that have little or no history
must provide sufficient additional information to base reasonable
expectations on. A mutual fund's manager tenure and fees and expenses
are also evaluated as part of this process.
Step 5: Monitor and re-balance. The portfolio choices must be
reviewed regularly and rebalanced. Portfolio rebalancing is the process
of moving a fund's asset class exposures toward its strategic target.
This process seeks to reduce the relative performance risk associated
with moving the asset class exposures away from what was intended in
the strategic asset allocation. There are a variety of conditions that
could cause a rebalancing of a portfolio. Market movements, fund asset
exposure changes, removal and replacement of mutual funds can trigger
rebalancing.
As part of this ongoing process, the funds are evaluated quarterly
and the strategic asset allocations are updated once a year. A set of
criteria, including absolute and relative performance, is used to
evaluate the funds used in the advice portfolios. Funds that do not
meet the criteria will be placed on a watch list. The placement of a
fund on the watch list does not mean that the fund will be replaced, it
is a trigger to begin further due diligence on the fund.
To be removed from the watch list, certain pre-established
qualitative and quantitative measures must be met. After a fund has
been placed on the watch list and further due diligence has determined
that the fund no longer meets the objectives of one or more of the
portfolios, Ibbotson will advise the plan sponsor to consider a
suitable replacement. Any new fund entering the program will be studied
and analyzed using the same methodology for initial fund selection
outlined above.
8. Ibbotson next describes the steps involved in providing
individualized advice to Plan participants. The steps start with
forecasting many possible expected investment returns scenarios and the
collecting of the Plan participant's individual needs and risks. These
are then combined with the relevant tax and plan rules to show the Plan
participant the risk of his or her current investment path and to
calculate advice to optimize the 401(k) plan portfolio. Rather than
using a questionnaire to approximate the risk tolerance level of the
Plan participant, Ibbotson uses a simulation-based forecasting approach
designed to show a Plan participant the risks of various investment
decisions personalized to his or her individual circumstances. The
advice generated recommends a portfolio risk level, a savings rate and
a retirement age appropriate to that Plan participant's retirement
income goals.
Step 1: Generate return and inflation data. Ibbotson's first step
in this process is to generate hundreds of sets of asset return and
inflation data covering the next 40 years. This data is randomly
calculated using historical data and the relationships it has exhibited
through time. This forecasting software uses this data to model the
many possible wealth and income paths a Plan participant might face. By
generating a variety of possible future wealth patterns, the Plan
participant gets a better picture of not just the average path his or
her wealth might take but also of shortfalls that are possible.
Holdings of individual stocks are modeled but company stock is
modeled as a separate asset class included along with all of the asset
classes in the system. If a Plan participant is required or chooses to
hold company stock then that will be included in the solution; however,
company stock is factored into the solution with the same return as the
appropriate capitalization group asset class with twice the standard
deviation.
All of this simulation data is updated annually along with the
strategic asset allocation portfolios.
Step 2: Gather data from plan participant and record keeper.
Ibbotson's forecasting process enables the Plan participant to input
data to take into account all of the Plan participant's needs and
assets (college funding, new house, etc.) and assets (taxable and
nontaxable) before selecting the appropriate portfolio. Ibbotson
believes that this approach yields a more appropriate overall
portfolio/savings match with the Plan participant's needs. To the
extent input is provided by the Plan participant, the Ibbotson process
takes into account items such as savings, current balances, investment
makeup, and projected cash in-flows and out-flows for both Plan
participant and his or her spouse.
Step 3: Calculate current situation. The Plan participant will be
shown two separate scenarios through the Ibbotson

[[Page 6694]]

advice application. The first calculates what chance the Plan
participant might have of making his or her retirement goals if he or
she continues with the current portfolio risk level and savings rate as
entered in Step 2. The second recommends an advice solution and is
described in Step 4.
To calculate what chances the Plan participant has of making the
retirement goals if no change to the portfolio or savings rate is made,
the software uses the simulation data to calculate the wealth that
might be accumulated under hundreds of possible future scenarios. These
calculations take into account Social Security payments, taxes, and all
of the other savings and withdrawals the Plan participant has entered
as well as the various investment return and inflation scenarios. Some
of these future wealth and income levels will be good, some will be
average and some will be inadequate relative to the Plan participant's
individual retirement goals. The results of all of these calculations
are summarized into a few probability statistics that are communicated
to the Plan participant.
Step 4: Calculate advice. Ibbotson states that its advice
methodology provides the Plan participant with a recommendation that
includes the portfolio risk level, savings rate and retirement age.
Since in the 401(k) plan world, the advice can only be given on that
portfolio alone, the Ibbotson methodology takes all of the Plan
participant's total holdings into account (taxable and tax deferred)
and proposes a 401(k) portfolio that gets the Plan participant's total
holdings as close to optimal as possible.
Ibbotson believes that this presents the Plan participant with a
more balanced solution for achieving his or her goals with the
flexibility to change the parameters if he or she sees fit. Starting
with a better balanced portfolio means that Plan participants just
looking for an answer will get a sound answer more quickly and Plan
participants that want to experiment with different levels of risk,
savings rate, and or retirement age will start from a more solid
position.
Step 5: Present results. The advice process has many steps.
However, the user only sees the results of Steps 4 and 5. The typical
statistics that will be shown include the most likely income level that
the Plan participant might have along with the least likely
possibilities. These statistics for the scenario where no changes are
made and for those where the Plan participant implements the advice
will be displayed side by side so the Plan participant can easily see
the differences. When compared to the level of income the Plan
participant would like in retirement, this process shows the Plan
participant just how much risk is being taken and just how likely the
Plan participant is of hitting his or her goals. Ibbotson believes
there is no better way to show a Plan participant in terms that can be
understood of the risk and reward of the decisions he or she makes.
Ibbotson also presents a short-term risk measure to assist in
understanding volatility on the way to retirement and its impact on
long-term goals. A Plan participant can further individualize the
solution if he or she wants to take more risk, cannot save as much as
recommended, or wants to change his or her retirement age.
Once finalized, the Plan participant can then implement his or her
decision. Although the solution is a ``snapshot'' based on the then-
inputted data, the system will inform the Plan participant periodically
of the need to review his or her situation. It will also be stated that
his revisiting is most important if there have been any changes in the
Plan participant's assumptions such as a promotion or the birth of a
child. Under any circumstances, a Plan participant will be cautioned to
review his or her situation once a year to update any changes to the
information upon which the advice was based and to adjust their 401(k)
portfolio, if needed.
9. Ibbotson represents that it will maintain insurance coverage in
the amount of at least $5 million for the payment of any liabilities
that may arise by reason of a breach of fiduciary duty described in
section 404 of the Act or a violation of the prohibited transaction
provisions of section 406 of the Act or section 4975 of the Code. This
insurance coverage will be available to provide financial support to
Ibbotson in the event a breach of fiduciary duty claim is brought
against Ibbotson, and it is determined that Ibbotson has incurred
liabilities by reason of such breach. The insurance shall be provided
pursuant to a ``claims made'' policy which covers claims made during
the policy period. In the event that Ibbotson changes insurers or
ceases to provide the Service, Ibbotson will maintain ``tail coverage''
with respect to claims made for a period of up to three years after
such change.\15\
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\15\ The Department notes that the condition requiring the
maintenance of $5 million of insurance coverage will not foreclose
future consideration by the Department of another mechanism designed
to assure some degree of financial accountability in the event of
breaches of fiduciary duty described in section 404 or violations of
the prohibited transaction provisions.
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10. The Applicant represents that potential Service Providers will
include banks and trust companies, mutual fund companies, brokerage
firms and insurance companies. They will be required to meet minimum
standards prior to participating in the provision of the Service. To
qualify as a Service Provider, the entity must either be: (a) A
commercial bank or trust company, savings and loan association,
insurance company, or registered investment adviser which meets the
definition of a ``qualified professional asset manager'' (QPAM) set
forth in Part V(a) of Prohibited Transaction Exemption 84-14; and have
total client assets under management and control in an amount no less
than $250 million, or (b) a broker-dealer regulated under the
Securities Exchange Act of 1934 and which had, as of the last day of
its most recent fiscal year, $1 million in shareholders' and partners'
equity, or total client assets under management and control in an
amount no less than $250 million.
In addition, the Applicant will require that each candidate meet
minimum standards to ensure: (1) The availability of multiple
investment options across a number of asset classes, (2) adequate
service capabilities and service performance standards, with an ongoing
adherence to those standards, (3) the absence of dependence solely upon
bundled products \16\ for defined contribution Plans, and (4) the
Service Provider must in Ibbotson's view, have a high level of
professionalism and accountability.
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\16\ Bundled products provide employers with a package of
services including record-keeping, legal, administrative, trust,
educational, investment, etc., with respect to the establishment and
maintenance of plans by employers.
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Further, the entity must have adequate capitalization; have been in
the financial services business for three years and not been convicted
of a felony offense involving abuse or misuse of such entity's employee
benefit plan position or employment, or any felony arising out of the
conduct of the business of a broker, dealer, investment adviser, bank,
insurance company or fiduciary.
11. In providing the Service, depending on the specific
circumstances surrounding a particular Plan and the outcome of
negotiations between Ibbotson and the Plan sponsor or Service Provider,
the fees that Ibbotson will charge will include some or all of the
following fees. A technology licensing fee will be charged to the
Service Provider. This fee is a one-time fee charged in the first year
the Service is provided to a Plan based on the

[[Page 6695]]

number of Plan participants contained on a Service Provider's record-
keeping system. For subsequent years, Ibbotson will charge to the
Service Provider a flat per Plan participant fee for each occurrence of
at least 10% growth in Plan participants on its record-keeping system
(the Revised Technology Fee). In the second year of operation with a
Service Provider, Ibbotson will charge a Service Provider a technology
maintenance fee equaling up to 20% of the first year's technology
licensing fee plus up to 20% of the Revised Technology Fee.
When a Plan sponsor contracts with Ibbotson to customize the
Service to its particular Plan, Ibbotson will charge an Internet
customization fee to the Plan or the Plan sponsor. This fee is based on
the time spent by Ibbotson personnel in its customization of the
Service to a particular Plan. In addition, Ibbotson will charge a flat
annual per Plan participant advice fee which may be paid by the Plan,
Plan sponsor, the Plan participants or the Service Provider.
Finally, Ibbotson will also offer a Plan investment analysis report
to Plan sponsors. This report is separate from the investment analysis
advice provided to Plan participants and is optional. Ibbotson will
analyze the Plan and its investment options. For those Plan sponsors
who elect to receive a Plan investment analysis by Ibbotson, Ibbotson
will also charge a Plan investment analysis fee based on a flat dollar
amount per year. This fee may be paid by the Plan sponsor or the
Service Provider.
12. In summary, it is represented that the proposed transaction
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The participation in the Service will be expressly authorized
in writing by an independent fiduciary.
(b) Ibbotson shall provide the independent fiduciary of each Plan
with written disclosure describing the Service and all fees and
expenses associated with the Service, a written contract for the
provision of the Service, a copy of the proposed and final exemption,
and summary of annual Plan activity and expense reports.
(c) Ibbotson will furnish the Plan participants with the following:
notice that the Service is provided by Ibbotson, an entity that is
independent from the Service Provider and the Plan sponsor; and full
disclosure about the Service and Ibbotson; and a risk tolerance
questionnaire.
(d) Any investment advice given to Plan participants will be based
on the Plan participants' responses to the questionnaire and any
investment advice provided only will be implemented at the express
direction of the Plan participant.
(e) The total fees paid to Ibbotson and a Service Provider by each
Plan participant participating in the Service does not exceed
reasonable compensation within the meaning of section 408(b)(2) of the
Act.
(f) No portion of any fee or other consideration paid to Ibbotson
or in connection with the Service will be shared or received by a
Service Provider.
(g) Neither the fees charged nor the compensation received by
Ibbotson will be affected by the investment selections of Plan
participants.
(h) Participation in the Service will not cause the Plan to pay any
additional fees or commissions with respect to acquisitions or
dispositions of investments offered under the Plan.
(i) No Service Provider shall own any interest in Ibbotson.
(j) Neither Ibbotson nor any affiliate shall own an interest in a
Service Provider.
(k) The annual revenues derived by Ibbotson from any one Service
Provider shall not be more than 5% of its annual revenues.
(l) Ibbotson will maintain fiduciary liability insurance in the
amount of at least $5 million.

Notice to Interested Persons

The Applicant represents that because potentially interested Plan
participants and beneficiaries cannot be identified at this time, the
only practical means of notifying such Plan participants and
beneficiaries of this proposed exemption is by publication in the
Federal Register. Therefore, comments and requests for a hearing must
be received by the Department not later than February 21, 2001.

FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne , US Department
of Labor, (202)219-8971. (This is not a toll free number.)

General Information

The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.

Signed at Washington, DC, this 10th day of January, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits,
Administration, U.S. Department of Labor.
[FR Doc. 01-1197 Filed 1-19-01; 8:45 am]
BILLING CODE 4510-29-P