Notice of Proposed Individual Exemption to Amend and Replace
Prohibited Transaction Exemption (PTE) 99-15, Involving Salomon Smith
Barney Inc., Located in New York, NY [Notices] [06/01/2000]
Notice of Proposed Individual Exemption to Amend and Replace
Prohibited Transaction Exemption (PTE) 99-15, Involving Salomon Smith
Barney Inc., Located in New York, NY [06/01/2000]
Volume 65, Number 106, Page 35138-35144
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PENSION AND WELFARE BENEFITS ADMINISTRATION
[Application Nos. D-10809 and D-10865]
Notice of Proposed Individual Exemption to Amend and Replace
Prohibited Transaction Exemption (PTE) 99-15, Involving Salomon Smith
Barney Inc., Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Notice of proposed individual exemption to modify and replace
PTEs 99-15.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed and replacement
individual exemption which, if granted, would amend PTE 99-15 (64 FR
1648, April 5, 1999), an exemption granted to Salomon Smith Barney. PTE
99-15 relates to the operation of the TRAK Personalized Investment
Advisory Service product (the TRAK Program) and the Trust for
Consulting Group Capital Markets Funds (the Trust). If granted, the
proposed exemption would affect participants and beneficiaries of and
fiduciaries with respect to employee benefit plans (the Plans)
participating in the TRAK Program.
EFFECTIVE DATE: If granted, the proposed amendment will be effective as
of April 1, 2000.
DATES: Written comments and requests for a public hearing should be
received by the Department on or before July 17, 2000.
ADDRESSES: All written comments and requests for a public hearing
(preferably, three copies) should be sent to the Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW,
Washington, DC 20210, Attention: Application Nos. D-10809 and D-10865.
The applications pertaining to the proposed 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-5507, 200 Constitution Avenue, NW,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, telephone (202) 219-8881. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed exemption that would amend and
replace PTE 99-15. PTE 99-15, provides an exemption from certain
prohibited transaction restrictions of section 406 of the Employee
Retirement Income Security Act of 1974 (the Act) and from the sanctions
resulting from the application of section 4975 of the Internal Revenue
Code of 1986 (the Code), as amended, by reason of section 4975(c)(1) of
the Code. Specifically, PTE 99-15 provides exemptive relief from the
restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, for the purchase or redemption
of shares in the Trust by an employee benefit plan, an individual
retirement account (the IRA), a retirement plan for a self-employed
individual (the Keogh Plan), or an individual account pension plan that
is subject to the provisions of Title I of the Act and established
under section 403(b) of the Code (the Section 403(b) Plan).
PTE 99-15 also provides exemptive relief from the restrictions of
section 406(b) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(E) and (F) of the Code, with respect to the provision, by
the Consulting Group of Salomon Smith Barney (the Consulting Group), of
(1) investment advisory services or (2) an automatic reallocation
option to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's
selection of a portfolio (the Portfolio) in the TRAK Program for the
investment of Plan assets.\1\
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\1\ PTE 99-15 also (a) described a series of corporate mergers
which changed the names of the parties identified in two prior TRAK
exemptions which it superseded [i.e., PTE 94-50 (59 FR 32024, June
21, 1994) and PTE 92-77 (55 FR 45833, October 5, 1992)] and which
would permit broader distribution of TRAK-related products; (b)
implemented a recordkeeping reimbursement offset procedure under the
TRAK Program; (c) adopted an automated reallocation option under the
TRAK Program that would reduce the asset allocation (or ``outside'')
fee paid to Salomon Smith Barney by a Plan investor; and (d)
expanded the scope of the exemption to include Section 403(b) Plans.
PTE 94-50 permitted Smith, Barney Inc. (Smith Barney), Salomon
Smith Barney's predecessor, to add a daily-traded collective
investment fund (the GIC Fund) to the existing Fund portfolios and
to describe the various entities operating the GIC Fund. PTE 94-50
also replaced references to Shearson Lehman Brothers, Inc. (Shearson
Lehman) with Smith Barney and amended and replaced PTE 92-77.
Finally, PTE 92-77 permitted Shearson Lehman to make the TRAK
Program available to Plans that acquired shares in the former Trust
for TRAK Investments and allowed the Consulting Group to provide
investment advisory services to an Independent Plan Fiduciary which
might result in such fiduciary's selection of a Portfolio in the
TRAK Program for the investment of Plan assets.
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[[Page 35139]]
As of December 31, 1998, the TRAK Program held assets that were in
excess of $9.6 billion. Of those assets, approximately $1.9 billion
were held in 407 Plan accounts having cash or deferred compensation
arrangements and approximately $4.2 billion were held in more than
59,000 employee benefit plan and IRA/Keogh-type Plan accounts. At
present, the Trust consists of 17 Portfolios that are managed by the
Consulting Group and advised by one or more unaffiliated sub-advisers
selected by Salomon Smith Barney.
Salomon Smith Barney requests a modification of PTE 99-15 and a
replacement of that exemption with a new exemption for purposes of
uniformity.\2\ Specifically, Salomon Smith Barney requests that the
term ``affiliate,'' as set forth in PTE 99-15, in Section II(h) of the
General Conditions and in Section III(b) of the Definitions, be amended
and clarified to avoid possible misinterpretation. In this regard,
Salomon Smith Barney also requests that the term ``officer'' be defined
and incorporated into the proposed exemption, in new Section III(d), to
limit the affiliate definition to persons who have a significant
management role. Further, Salomon Smith Barney requests that Section
II(i) of PTE 99-15 be amended to permit an independent sub-adviser (the
Sub-Adviser), under certain circumstances, to exceed the current one
percent limitation on the acquisition of securities that are issued by
Salomon Smith Barney and/or its affiliates, notably in the Sub-
Adviser's replication of a third-party index. If granted, the proposed
exemption would be effective as of April 1, 2000.
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\2\ The Department deems PTE 94-50 as having been effectively
superseded by PTE 99-15. Therefore, the proposed amendments
described herein will not apply to PTE 94-50.
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The proposed exemption has been requested in an application filed
on behalf of Salomon Smith Barney pursuant to 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,
August 10, 1990). Effective December 31, 1978, section 102 of
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978)
transferred the authority of the Secretary of the Treasury to issue
exemptions of the type requested to the Secretary of Labor.
Accordingly, the proposed exemption is being issued solely by the
Department.
I. Proposed Modification of the Term ``Affiliate''
Salomon Smith Barney represents that in early December 1999,
Citigroup and State Street Corporation announced an agreement to form a
joint venture called CitiStreet LLC, a Delaware limited liability
company (the Joint Venture). The Joint Venture, which was closed on
April 1, 2000, is each 50 percent owned by Keeper Holdings LLC (Citi),
a wholly owned subsidiary of Citigroup, and by State Street Bank and
Trust Company (State Street), a wholly owned subsidiary of State Street
Corporation. Both Citigroup and State Street Corporation are publicly-
held corporations.
Salomon Smith Barney explains that the formation of the Joint
Venture may have resulted in the disqualification of State Street
Global Advisers (SSgA), a division of State Street, from acting as a
Sub-Adviser in the TRAK Program due to certain ambiguities in the
meaning of the word ``affiliate.'' Salomon Smith Barney represents that
SSgA is currently a Sub-Adviser with respect to approximately $800
million in assets in the International Equity Investments Portfolio and
the Emerging Markets Equity Investments Portfolio.
A. Sections II(h) and III(b)
Section II(h) of PTE 99-15 provides that--
Any sub-adviser (the Sub-Adviser) that acts for the Trust to
exercise investment discretion over a Portfolio will be independent
of Salomon Smith Barney and its affiliates.
Although the term ``independent'' is not defined in the exemption,
Salomon Smith Barney notes that this condition was added to the
original Shearson Lehman exemption request when Shearson Lehman agreed
not to use affiliated Sub-Advisers. Therefore, Salomon Smith Barney
presumes that the term ``independent'' means ``not an affiliate.''
Salomon Smith Barney represents that Section III(b) of PTE 99-15
defines the term ``affiliate'' of Salomon Smith Barney to include:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Salomon Smith Barney. (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 officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
Salomon Smith Barney notes that problems of interpretation have arisen
because subparagraphs (2) and (3) of the affiliate definition use the
term ``such person'' rather than referring directly to Salomon Smith
Barney. Salomon Smith Barney explains that when defining an
``affiliate'' of Salomon Smith Barney, the definition may be construed
to encompass only relationships with Salomon Smith Barney that involve
shared control, influence or economic interests or it could be
interpreted to cover affiliates of Salomon Smith Barney's affiliates,
where there is no basis for common management or identical economic
interests, because subparagraphs (2) and (3) have no clear antecedents.
Salomon Smith Barney asserts that State Street is not under common
corporate control with either it or any of its corporate affiliates.
Instead, State Street is a subsidiary of an independently-owned and
managed public company. Therefore, there is no control relationship, as
contemplated in subparagraph (1) of Section III(b), between Citigroup
and State Street Corporation, the respective parent companies of
Salomon Smith Barney and of State Street. Salomon Smith Barney also
states that the Joint Venture is not necessarily its affiliate under
subparagraph (1) of the definition because Salomon Smith Barney's
indirect 50 percent ownership interest in the Joint Venture is not a
``controlling interest.'' Therefore, if the Joint Venture is not an
affiliate, Salomon Smith Barney believes that State Street is not a
partner of Salomon Smith Barney, nor an officer or director of Salomon
Smith Barney, as contemplated in subparagraph (2) of Section III(b).
Further, Salomon Smith Barney explains that State Street's exclusive
ownership by State Street Corporation does not trigger the ownership
provisions of subparagraph (3) of Section III(b).
In addition to the above, Salomon Smith Barney states that it will
not exercise control or influence in the operation of the Joint Venture
that will inure to State Street. In addition, Salomon Smith Barney
represents that Citi will not exercise control of the Joint Venture
because it has only a 50 percent interest. Further, since all
significant corporate actions of the Joint Venture will require
unanimity, Salomon Smith Barney explains that neither Citi nor State
Street will be able to exercise exclusive control over the Joint
Venture.
[[Page 35140]]
B. Proposed Amendment
Salomon Smith Barney submits that subparagraph (1) of Section
III(b) does not require any clarification. However, it proposes that
subparagraphs (2) and (3) of the affiliate definition be modified to
cover only those persons and entities that have a significant role in
the decisions made by Salomon Smith Barney or which are managed or
influenced by Salomon Smith Barney. These entities or persons include
individual officers, directors and partners in Salomon Smith Barney and
its corporate affiliates, and corporations and partnerships in which
Salomon Smith Barney and its corporate affiliates have a 10 percent or
greater interest. Salomon Smith Barney believes that this tailoring of
the affiliate definition will avoid future problems in determining the
independence of the Sub-Advisers, including SSgA.
Thus, on the basis of the foregoing, Section III(b) of PTE 99-15 is
hereby modified in this notice of proposed exemption to read as
follows:
(b) An ``affiliate'' of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Salomon Smith Barney; (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
Salomon Smith Barney or a person who is described in subparagraph
(b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney
or an affiliate described in subparagraph (b)(1), is a 10 percent or
more partner or owner; and
(4) Any corporation or partnership of which any individual which
is an officer or director of Salomon Smith Barney, is a 10 percent
or more partner or owner.
In connection with the revised affiliate definition, Salomon Smith
Barney requests that the term ``officer'' be defined in new
subparagraph (d) of Section III to limit this portion of the affiliate
definition to individuals who have a significant management role.
Salomon Smith Barney points out that there are job titles at fairly
modest levels of authority within it as well as in any company, and it
wishes to ensure that future factual inquiries into an individual's
status as an affiliate do not require that it contact virtually every
official in its corporate population in a due diligence effort.
Therefore, Salomon Smith Barney proposes that Section III(d) should
read as follows:
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 who performs a
policy-making function for the entity.
Under the foregoing modifications, Salomon Smith Barney believes
that Sections II(h) and III(b) of the proposed exemption will no longer
have conflicting meanings.
II. Proposed Modification of the One Percent Limitation on Stock
Issued by Salomon Smith Barney and/or Its Affiliates
Salomon Smith Barney represents that there are a number of
established market indexes that have been created by parties which are
unaffiliated with Citigroup, its indirect parent. For example, the S&P
500 Index is a widely-used benchmark index of domestic equity
performance. This index consists of 500 stocks that have been selected
by the Standard & Poor's Company (S&P) for market capitalization,
liquidity and industry group representation. The index is market-value
weighted so the performance of the larger of the included companies has
a greater impact on the performance of the index as a whole. Currently,
the common stock (the Common Stock) of Citigroup represents 1.57
percent of the S&P 500 Index.
In addition to the S&P 500 Index, Salomon Smith Barney explains
that the Russell 3000 Index is composed of the 3,000 largest United
States companies, based upon total market capitalization. Salomon Smith
Barney also points out that there are a number of Russell Indexes which
are based on subsets of the Russell 3000 Index. These Indexes include
(a) the Russell 2000 Index, which measures the performance of the
smallest 2,000 United States companies in the Russell 3000 Index and
therefore, excludes Citigroup; and (b) the Russell 1000 Index, which
measures the performance of the 1,000 largest United States companies
in the Russell 3000 Value Index and includes Citigroup. In addition,
Salomon Smith Barney represents that there are further subsets of the
Russell Indexes which are based upon Russell's characterization of
stock as either ``Growth'' or ``Value.'' For example, Salomon Smith
Barney explains that Citigroup is included within these subsets. As of
March 31, 2000, Citigroup Common Stock represented 3.8981 percent of
the Russell 1000 Value Index and 3.6343 percent of the Russell 3000
Value Index.
A. Section II(i)
Based upon the foregoing descriptions of the stock indexes, Salomon
Smith Barney requests that Section II(i) of PTE 99-15 be modified in
order to permit an independent Sub-Adviser which manages the assets in
a Portfolio to exceed the one percent investment limitation on
securities issued by Salomon Smith Barney and/or its affiliates under
certain circumstances. As currently drafted, Section II(i) states
that--
Immediately following the acquisition by a Portfolio of any
securities that are issued by Salomon Smith Barney and/or its
affiliates, the percentage of that Portfolio's net assets invested
in such securities will not exceed one percent.
In other words, the exception will apply to ``any higher percentage''
which may result from a Sub-Adviser's management of an index fund (the
Index Fund) Portfolio which includes Citigroup Common Stock. The index
will be an established third party index and the Sub-Adviser will track
the index results using the ``passive full replication'' trading
method.\3\
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\3\ According to Salomon Smith Barney, there are two forms of
index trading--passive full replication (wherein each stock in the
same weightings as the index is owned by a mutual fund) and sampling
(in which each sector, but not necessarily all stocks in such
sector, in the same weightings as the index is also owned by a
mutual fund). Salomon Smith Barney notes that sampling is used most
often when a portfolio is smaller and cannot efficiently replicate
the entire index.
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Because the Sub-Adviser will purchase and sell Citigroup Common
Stock to approximate the performance of an index rather than reflect
the Sub-Adviser's evaluation of the Common Stock in its individual
merits, Salomon Smith Barney states that any additional investment by a
Portfolio in Citigroup Common Stock over the one percent threshold will
result from the implementation of the trading method and not from the
Sub-Adviser's exercise of investment discretion.
Due to the one percent limitation of Section II(i), Salomon Smith
Barney states that active Sub-Advisers for the Consulting Group may not
own or trade Citigroup Common Stock and they will continue to be
prohibited from trading in Citigroup Common Stock. However, Salomon
Smith Barney proposes that passive or pure Index Fund Sub-Advisers be
permitted to hold Citigroup Common Stock in their portfolios which
exceed the one percent limitation to the extent such higher percentage
is necessary to replicate the underlying index.\4\ Salomon Smith Barney
points
[[Page 35141]]
out that pure index Sub-Advisers that are responsible for investing
only a portion of the assets in the Consulting Group Capital Markets
Large Cap Value Fund and the Large Cap Growth Consulting Group Capital
Markets Fund, are currently in compliance with the one percent
limitation. These Portfolios, which consist of both an actively-managed
portion and a distinct, passively-managed portion, held less than one
percent of the their total assets in Citigroup Common Stock.
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\4\ In its management of a ``pure'' Index Fund, the Sub-Adviser
does not evaluate individual companies to identify attractive
investment candidates or to eliminate underperforming investments.
Instead, the Sub-Adviser attempts to mirror the composition of the
relevant index as closely as possible by adjusting the Portfolio
holdings daily to reflect the companies included in the index and
their relative weightings. Because performance of the Index Fund is
tied to the performance of the index that it tracks, investors are
advised that this investment strategy may mean losses if the
applicable index performs poorly relative to other indexes or
individual stocks.
The performance of a pure Index Fund generally does not mirror
the index performance exactly. The index is merely a composite
performance figure, based upon an established selection of
companies. It does not represent actual assets being managed so
there are no expenses deducted from its performance results. In
contrast, an Index Fund Portfolio represents actual assets under
management and has liquidity requirements associated with Fund
operation. To meet redemption requests and to pay expenses, the
Index Fund must maintain a portion of its assets in cash and cash
equivalents.
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If an index-based Sub-Adviser were to manage a greater portion or
all of either of the aforementioned Portfolios, Salomon Smith Barney
explains that the total Portfolio may include Citigroup Common Stock
which breaches the one percent threshold. Similarly, Salomon Smith
Barney notes that if the entire Portfolio, such as the Consulting Group
Capital Markets S&P 500 Index Investment Fund Portfolio, has the
investment objective of providing results that correspond to the price
and yield performance of the S&P 500 Index, the Sub-Adviser would be
expected to approximate the cited percentage of 1.57 percent for
Citigroup Common Stock in the S&P 500 Index. This would also violate
the one percent investment limitation.
Salomon Smith Barney states that the present one percent limitation
placed on Citigroup Common Stock increases the likelihood that the
performance of an Index Fund Portfolio will not replicate the
applicable index. Because Citigroup is among the largest companies on
the basis of capitalization in the S&P 500, Salomon Smith Barney states
that Citigroup's performance can have a significant impact in index
performance calculations. However, if Citigroup Common Stock is not
proportionately represented, Salomon Smith Barney explains that Index
Fund performance will deviate from the index whether Citigroup Common
Stock does well or underperforms.
In any event, Salomon Smith Barney believes that the one percent
limitation has the effect of depriving a Plan of the opportunity to
invest in a Fund (available to non-Plan investors) that might otherwise
track the applicable index more exactly. Because many Plan sponsors are
anxious to have an Index Fund available through the TRAK Program,
Salomon Smith Barney wishes to move quickly to accommodate the Plan
market's design preferences.
For these reasons, Salomon Smith Barney requests that the current
one percent restriction be lifted and allowed to be exceeded with
respect to Portfolio investments that are made by passive Sub-Advisers
in Citigroup Common Stock in their replication of third-party indexes.
In addition, Salomon Smith Barney seeks the flexibility to have the
Portfolios consist, in whole or in part, of Index Funds that are
managed by passive Sub-Advisers. However, the ownership by a Portfolio
of Citigroup Common Stock which is in excess of the one percent
limitation would result solely from the activities of the passive Sub-
Adviser in replicating an index.
B. Exemptive Safeguards
Section II(i) of the proposed exemption has been further expanded
to include a number of substantive safeguards for the protection of
Plans investing under the TRAK Program. In this regard, Section II(i)
requires that the amount held by the Sub-Adviser in managing an Index
Fund Portfolio be held in order to replicate an established third party
index. In addition, Section II(i) states that the index must represent
the investment performance of a specific segment of the public market
for equity securities in the United States and/or foreign countries. In
this regard, the organization creating the index must be (a) engaged in
the business of providing financial information; (b) a publisher of
financial news information; or (c) a public stock exchange or
association of securities dealers. The index must also be created and
maintained by an organization independent of Salomon Smith Barney and
its affiliates and must be a generally-accepted standardized index of
securities which is not specifically tailored for use by Salomon Smith
Barney and its affiliates.
Moreover, Section II(i) requires that the acquisition or
disposition of Citigroup Common Stock must not include any agreement,
arrangement or understanding regarding the design or operation of the
Portfolio acquiring the Citigroup Common Stock, which is intended to
benefit Salomon Smith Barney or any party in which Salomon Smith Barney
may have an interest.
Finally, Section II(i) requires that an Independent Plan Fiduciary
authorize the investment of a Plan's assets in an Index Fund Portfolio
which purchases and/or holds Citigroup Common Stock while the Sub-
Adviser will be responsible for voting any shares of Citigroup Common
Stock that are held by an Index Fund on any matter in which
shareholders of Citigroup Common Stock are required or permitted to
vote.
Notice to Interested Persons
Notice of the proposed exemption will be mailed by first class mail
to the Independent Plan Fiduciary Plan of each Plan currently
participating in the TRAK Program, or, in the case of a Section 404(c)
Plan, to the recordholder of Trust shares. Such notice will be given
within 15 days of the publication of the notice of pendency in the
Federal Register. The notice will contain a copy of the notice of
proposed exemption as published in the Federal Register and 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. Written comments and hearing requests are due within
45 days of the publication of the proposed exemption in the Federal
Register.
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 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 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 require, among other things, a fiduciary to
discharge his or her 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 requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) The proposed exemption, if granted, will extend to transactions
prohibited under section 406(b)(3) of the Act and section 4975(c)(1)(F)
of the Code;
[[Page 35142]]
(3) Before an exemption can be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interest of the plan
and of its participants and beneficiaries and protective of the rights
of participants and beneficiaries of the plan;
(4) This proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions. 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
(5) This proposed exemption, if granted, is subject to the express
condition that the facts and representations set forth in the notice of
proposed exemption relating to PTE 99-15 and this notice, accurately
describe, where relevant, the material terms of the transactions to be
consummated pursuant to this exemption.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemption to the address above,
within the time frame set forth above, after the publication of this
proposed exemption in the Federal Register. All comments will be made a
part of the record. Comments received will be available for public
inspection with the referenced applications at the address set forth
above.
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting the requested
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, August 10, 1990).
Section I. Covered Transactions
A. If the exemption is granted, the restrictions of section 406(a)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply, to the purchase or redemption of shares by an
employee benefit plan, an individual retirement account (the IRA), a
retirement plan for self-employed individuals (the Keogh Plan), or an
individual account pension plan that is subject to the provisions of
Title I of the Act and established under section 403(b) of the Code
(the Section 403(b) Plan; collectively, the Plans) in the Trust for
Consulting Group Capital Market Funds (the Trust), established by
Salomon Smith Barney, in connection with such Plans' participation in
the TRAK Personalized Investment Advisory Service product (the TRAK
Program).
B. If the exemption is granted, the restrictions of section 406(b)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the
Code, shall not apply, to the provision, by the Consulting Group, of
(1) investment advisory services or (2) an automatic reallocation
option (the Automatic Reallocation Option) to an independent fiduciary
of a participating Plan (the Independent Plan Fiduciary), which may
result in such fiduciary's selection of a portfolio (the Portfolio) in
the TRAK Program for the investment of Plan assets.
This proposed exemption is subject to the following conditions that
are set forth below in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved
by an Independent Plan Fiduciary. For purposes of this requirement, an
employee, officer or director of Salomon Smith Barney and/or its
affiliates covered by an IRA not subject to Title I of the Act will be
considered an Independent Plan Fiduciary with respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the
acquisition or redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares shall
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations based
upon objective criteria.
(f) Any recommendation or evaluation made by the Consulting Group
to an Independent Plan Fiduciary will be implemented only at the
express direction of such Independent Plan Fiduciary, provided,
however, that--
(1) If such Independent Plan Fiduciary shall have elected in
writing (the Election), on a form designated by Salomon Smith Barney
from time to time for such purpose, to participate in the Automatic
Reallocation Option under the TRAK Program, the affected Plan or
participant account will be automatically reallocated whenever the
Consulting Group modifies the particular asset allocation
recommendation which the Independent Plan Fiduciary has chosen. Such
Election shall continue in effect until revoked or terminated by the
Independent Plan Fiduciary in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of
a change in the Consulting Group's asset allocation recommendation,
each account based upon the asset allocation model (the Allocation
Model) affected by such change would be adjusted on the business day of
the release of the new Allocation Model by the Consulting Group, except
to the extent that market conditions, and order purchase and redemption
procedures may delay such processing through a series of purchase and
redemption transactions to shift assets among the affected Portfolios.
(3) If the change in the Consulting Group's asset allocation
recommendation exceeds an increase or decrease of more than 10 percent
in the absolute percentage allocated to any one investment medium
(e.g., a suggested increase in a 15 percent allocation to greater than
25 percent, or a decrease of such 15 percent allocation to less than 5
percent), Salomon Smith Barney will send out a written notice (the
Notice) to all Independent Plan Fiduciaries whose current investment
allocation would be affected, describing the proposed reallocation and
the date on which such allocation is to be instituted (the Effective
Date). If the Independent Plan Fiduciary notifies Salomon Smith Barney,
in writing, at any time within the period of 30 calendar days prior to
the proposed Effective Date that such fiduciary does not wish to follow
such revised asset allocation recommendation, the Allocation Model will
remain at the current level, or at such other level as the Independent
Plan Fiduciary then expressly designates, in writing. If the
Independent Plan Fiduciary does not affirmatively ``opt out'' of the
new Consulting Group recommendation, in writing, prior to the proposed
Effective Date, such new recommendation will be automatically effected
by a dollar-for-dollar liquidation and purchase of the required amounts
in the respective account.
(4) An Independent Plan Fiduciary will receive a trade confirmation
of each reallocation transaction. In this regard, for all Plan
investors other than Section 404(c) Plan accounts (i.e., 401(k) Plan
[[Page 35143]]
accounts), Salomon Smith Barney will mail trade confirmations on the
next business day after the reallocation trades are executed. In the
case of Section 404(c) Plan participants, notification will depend upon
the notification provisions agreed to by the Plan recordkeeper.
(g) The Consulting Group will generally give investment advice in
writing to an Independent Plan Fiduciary with respect to all available
Portfolios. However, in the case of a Plan providing for participant-
directed investments (the Section 404(c) Plan), the Consulting Group
will provide investment advice that is limited to the Portfolios made
available under the Plan.
(h) Any sub-adviser (the Sub-Adviser) that acts for the Trust to
exercise investment discretion over a Portfolio will be independent of
Salomon Smith Barney and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any
securities that are issued by Salomon Smith Barney and/or its
affiliates, such as Citigroup Inc. common stock (the Citigroup Common
Stock), the percentage of that Portfolio's net assets invested in such
securities will not exceed one percent. However, this percentage
limitation may be exceeded if--
(1) The amount held by a Sub-Adviser in managing a Portfolio is
held in order to replicate an established third party index.
(2) The index represents the investment performance of a specific
segment of the public market for equity securities in the United States
and/or foreign countries. The organization creating the index must be--
(i) Engaged in the business of providing financial information;
(ii) A publisher of financial news information; or
(iii) A public stock exchange or association of securities dealers.
The index is created and maintained by an organization independent
of Salomon Smith Barney and its affiliates and is a generally-accepted
standardized index of securities which is not specifically tailored for
use by Salomon Smith Barney and its affiliates.
(3) The acquisition or disposition of Citigroup Common Stock does
not include any agreement, arrangement or understanding regarding the
design or operation of the Portfolio acquiring the Citigroup Common
Stock, which is intended to benefit Salomon Smith Barney or any party
in which Salomon Smith Barney may have an interest.
(4) The Independent Plan Fiduciary authorizes the investment of a
Plan's assets in an Index Fund which purchases and/or holds Citigroup
Common Stock and the Sub-Adviser is responsible for voting any shares
of Citigroup Common Stock that are held by an Index Fund on any matter
in which shareholders of Citigroup Common Stock are required or
permitted to vote.
(j) The quarterly investment advisory fee that is paid by a Plan to
the Consulting Group for investment advisory services rendered to such
Plan will be offset by such amount as is necessary to assure that the
Consulting Group retains no more than 20 basis points from any
Portfolio (with the exception of the Government Money Investments
Portfolio and the GIC Fund Portfolio for which the Consulting Group and
the Trust will retain no investment management fee) which contains
investments attributable to the Plan investor.
(k) With respect to its participation in the TRAK Program prior to
purchasing Trust shares,
(1) Each Plan will receive the following written or oral
disclosures from the Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, Salomon Smith Barney
and its subsidiaries and the compensation paid to such entities.\5\
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\5\ The fact that certain transactions and fee arrangements are
the subject of an administrative exemption does not relieve the
Independent Plan Fiduciary from the general fiduciary responsibility
provisions of section 404 of the Act. In this regard, the Department
expects the Independent Plan Fiduciary to consider carefully the
totality of the fees and expenses to be paid by the Plan, including
the fees paid directly to Salomon Smith Barney or to other third
parties.
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(B) Upon written or oral request to Salomon Smith Barney, a
Statement of Additional Information supplementing the Prospectus which
describes the types of securities and other instruments in which the
Portfolios may invest, the investment policies and strategies that the
Portfolios may utilize and certain risks attendant to those
investments, policies and strategies.
(C) A copy of the investment advisory agreement between the
Consulting Group and such Plan relating to participation in the TRAK
Program and, if applicable, informing Plan investors of the Automatic
Reallocation Option.
(D) Upon written request of Salomon Smith Barney, a copy of the
respective investment advisory agreement between the Consulting Group
and the Sub-Advisers.
(E) In the case of a Section 404(c) Plan, if required by the
arrangement negotiated between the Consulting Group and the Plan, an
explanation by a Salomon Smith Barney Financial Consultant (the
Financial Consultant) to eligible participants in such Plan, of the
services offered under the TRAK Program and the operation and
objectives of the Portfolios.
(F) A copy of the proposed exemption and the final exemption, if
granted, pertaining to the exemptive relief described herein.
(2) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing, prior to purchasing Trust shares that such fiduciary has
received copies of the documents described above in subparagraph (k)(1)
of this Section.
(3) With respect to a Section 404(c) Plan, written acknowledgement
of the receipt of such documents will be provided by the Independent
Plan Fiduciary (i.e., the Plan administrator, trustee or named
fiduciary, as the recordholder of Trust shares). Such Independent Plan
Fiduciary will be required to represent in writing to Salomon Smith
Barney that such fiduciary is (a) independent of Salomon Smith Barney
and its affiliates and (b) knowledgeable with respect to the Plan in
administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the
Act, where investment decisions are made by a trustee, investment
manager or a named fiduciary, such Independent Plan Fiduciary is
required to acknowledge, in writing, receipt of such documents and
represent to Salomon Smith Barney that such fiduciary is (a)
independent of Salomon Smith Barney and its affiliates, (b) capable of
making an independent decision regarding the investment of Plan assets
and (c) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an
informed decision concerning participation in the TRAK Program.
(l) Subsequent to its participation in the TRAK Program, each Plan
receives the following written or oral disclosures with respect to its
ongoing participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include
financial statement for the Trust and investment management fees paid
by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis
and an
[[Page 35144]]
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required,
changes in Portfolio allocations.
(3) If required by the arrangement negotiated between the
Consulting Group and a Section 404(c) Plan, a quarterly, detailed
investment performance monitoring report, in writing, provided to an
Independent Plan Fiduciary of such Plan showing, Plan level asset
allocations, Plan cash flow analysis and annualized risk adjusted rates
of return for Plan investments. In addition, if required by such
arrangement, Financial Consultants will meet periodically with
Independent Plan Fiduciaries of Section 404(c) Plans to discuss the
report as well as with eligible participants to review their accounts'
performance.
(4) If required by the arrangement negotiated between the
Consulting Group and a Section 404(c) Plan, a quarterly participant
performance monitoring report provided to a Plan participant which
accompanies the participant's benefit statement and describes the
investment performance of the Portfolios, the investment performance of
the participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to
amend his or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all
Plans of the (a) percentage of each Portfolio's brokerage commissions
that are paid to Salomon Smith Barney and its affiliates and (b) the
average brokerage commission per share paid by each Portfolio to
Salomon Smith Barney and its affiliates, as compared to the average
brokerage commission per share paid by the Trust to brokers other than
Salomon Smith Barney and its affiliates, both expressed as cents per
share.
(m) Salomon Smith Barney shall maintain, for a period of six years,
the records necessary to enable the persons described in paragraph (n)
of this Section 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 Salomon Smith Barney 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 Salomon Smith Barney shall be subject to the civil
penalty that may be assessed under section 502(i) of the Act, or to the
taxes imposed by section 4975(a) and (b) of the Code, if the records
are not maintained, or are not available for examination as required by
paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and
notwithstanding any provisions of subparagraphs (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (m) of
this Section II shall be unconditionally available at their customary
location during normal business hours by:
(A) Any duly authorized employee or representative of the
Department or the Service;
(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 employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of
this paragraph (n) shall be authorized to examine the trade secrets of
Salomon Smith Barney or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Salomon Smith Barney'' means Salomon Smith Barney
Inc. and any affiliate of Salomon Smith Barney, as defined in paragraph
(b) of this Section III.
(b) An ``affiliate'' of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Salomon Smith Barney; (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 (as defined in Section III(d)
hereof), director or partner in Salomon Smith Barney or a person
described in subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney or
an affiliate described in subparagraphs(b)(1), is a 10 percent or more
partner or owner; and
(4) Any corporation or partnership of which any individual which is
an officer or director of Salomon Smith Barney, is a 10 percent or more
partner or owner.
(c) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is
independent of Salomon Smith Barney and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as
the recordholder of Trust shares under a Section 404(c) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under (i) a self-directed IRA or (ii) a
Section 403(b) Plan, which invests in Trust shares;
(4) A trustee, investment manager or named fiduciary responsible
for investment decisions in the case of a Title I Plan that does not
permit individual direction as contemplated by Section 404(c) of the
Act; or
(5) A participant in a Plan, such as a Section 404(c) Plan, who is
permitted under the terms of such Plan to direct, and who elects to
direct the investment of assets of his or her account in such Plan.
(d) 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 who performs a
policymaking function for the entity.
Section IV. Effective Dates
If granted, this proposed exemption will be effective as of April
1, 2000, with respect to the amendments to Section II(i) and Section
III(b) and the inclusion of new Section III(d).
The availability of this proposed exemption is subject to the
express condition that the material facts and representations contained
in the application for exemption are true and complete and accurately
describe all material terms of the transactions. In the case of
continuing transactions, if any of the material facts or
representations described in the applications change, the exemption
will cease to apply as of the date of such change. In the event of any
such change, an application for a new exemption must be made to the
Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant PTE 92-77, PTE 94-50 and
PTE 99-15, refer to the proposed exemptions and the grant notices which
are cited above.
Signed at Washington, D.C., this 25th day of May, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-13643 Filed 5-31-00; 8:45 am]
BILLING CODE 4510-29-P
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