Notice of Proposed Individual Exemption to Amend Prohibited
Transaction Exemption (PTE) 94-50 Involving Salomon Smith, Barney Inc.
(Salomon Smith Barney) Located in New York, NY [Notices] [11/09/1998]
Notice of Proposed Individual Exemption to Amend Prohibited
Transaction Exemption (PTE) 94-50 Involving Salomon Smith, Barney Inc.
(Salomon Smith Barney) Located in New York, NY [11/09/1998]
Volume 63, Number 216, Page 60391-60398-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10574]
Notice of Proposed Individual Exemption to Amend Prohibited
Transaction Exemption (PTE) 94-50 Involving Salomon Smith, Barney Inc.
(Salomon Smith Barney) Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Notice of proposed individual exemption to modify PTE 94-50.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed individual exemption
which, if granted, would amend PTE 94-50 (59 FR 32024, June 21, 1994),
an exemption granted to Smith Barney, Inc. (Smith Barney), the
predecessor of Salomon Smith Barney. PTE 94-50 relates to the operation
of the TRAK Personalized Investment Advisory Service product (the TRAK
Program) and the Trust for TRAK Investments (subsequently renamed 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 amendments will be effective
as of November 9, 1998.
DATES: Written comments and requests for a public hearing should be
received by the Department on or before December 24, 1998.
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, N.W.,
Washington, D.C. 20210, Attention: Application No. D-10574. The
application 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, N.W.,
Washington, D.C. 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 PTE 94-
50. PTE 94-50 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 94-50 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), or a retirement plan for a self-employed
individual (the Keogh Plan). PTE 94-50 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 Smith Barney (the Consulting
Group), of investment advisory services to independent fiduciaries of
participating Plans (the Independent Plan Fiduciaries) that might
result in such fiduciary's selection of an investment portfolio (the
Portfolio) under the TRAK Program for the investment of Plan
assets.<SUP>1</SUP>
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\1\ On October 5, 1992, the Department granted PTE 92-77 at 55
FR 45833. PTE 92-77 permitted Shearson Lehman Brothers, Inc.
(Shearson Lehman) to make the TRAK Program available to Plans that
acquired shares in the Trust. In this regard, PTE 92-77 permitted
Plans to purchase or redeem shares in the Trust and allowed the
Consulting Group to provide investment advisory services to an
Independent Fiduciary of a Plan which might result in such
fiduciary's selection of a Portfolio in the TRAK Program for the
investment of Plan assets.
Subsequent to the granting of PTE 92-77, on July 31, 1993, Smith
Barney acquired certain assets of Shearson Lehman associated with
its retail business, including the TRAK Program, and applied for and
received a new exemption (PTE 94-50) for the ongoing operation of
the TRAK Program. Essentially, PTE 94-50 amended and replaced PTE
92-77. However, because of certain material factual changes to the
representations supporting PTE 92-77, the Department determined that
the exemption was no longer effective for use by Smith Barney and
its subsidiaries as of the date of the asset sale.
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[[Page 60392]]
Besides the transactions described above, PTE 94-50 permitted Smith
Barney 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. Further, PTE 94-50 replaced references to
Shearson Lehman with references to Smith Barney. PTE 94-50 is effective
as of July 31, 1993 for the transactions described in PTE 92-77 and
effective as of March 29, 1994 with respect to transactions involving
the GIC Fund.
As of December 31, 1997, the TRAK Program held assets that were in
excess of $8.4 billion. Of those assets, approximately $1.7 billion
were held in 540, 401(k) Plan accounts and approximately 57,100
employee benefit plan and IRA/Keogh-type accounts. At present, the
Trust consists of 13 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 has informed the Department of certain
changes, which are discussed below, to the facts underlying PTE 94-50.
These modifications include (1) corporate mergers that have changed the
names of the parties described in PTE 94-50 and would permit broader
distribution of TRAK-related products, (2) the implementation of a
recordkeeping reimbursement offset system (the Recordkeeping
Reimbursement Offset Procedure) under the TRAK Program, and (3) the
institution of an automated reallocation option (the Automatic
Reallocation Option) under the TRAK Program for which Salomon Smith
Barney has requested administrative exemptive relief from the
Department.
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.
1. The Corporate Mergers. Salomon Smith Barney states that in
November 1997, a subsidiary of the Travelers Group Inc. (the Travelers
Group), the parent of Smith Barney, acquired all of the shares of
Salomon Brothers, Inc. (Salomon). Subsequent to the acquisition,
Salomon and Smith Barney were operated as separately-registered broker-
dealers and as sister corporations with a common parent. On September
1, 1998, Salomon was merged with and into Smith Barney, with Smith
Barney remaining as the surviving corporation. As a result of the
merger, the corporate name of Smith Barney has been changed to
``Salomon Smith Barney Inc.''
Salomon Smith Barney also states that in April 1998, the Travelers
Group and Citicorp Inc. (Citicorp) announced a stock merger whereby
Citicorp would be merged with and into a subsidiary of the Travelers
Group. As a result of the merger, the Travelers Group would become a
bank holding company and change its name to ``Citigroup Inc.''
(Citigroup).
Salomon Smith Barney represents that the purpose of the merger is
to create more distribution channels for TRAK products. In this regard,
registered broker-dealers associated with Citigroup will be permitted
to market the TRAK Program under a different product name. However,
Salomon Smith Barney explains that the terms and conditions of PTE 94-
50 and this amendment will be complied with by the parties involved.
The merger, which occurred on October 8, 1998, required that the
affected parties obtain approval from the Federal Reserve Board under
the Bank Holding Company Act (the BHC Act). Under the BHC Act, the
Federal Reserve Board does not authorize bank holding companies, such
as Citigroup, to be affiliated with companies that organize, sponsor,
control or distribute United States open-end mutual funds. As a bank
holding company, Citigroup is required to engage an independent party
to provide certain distribution services in connection with the
marketing of mutual fund shares) for all United States, publicly-traded
mutual funds for which any subsidiary of the Travelers Group/Citigroup
acts as a distributor. Salomon Smith Barney notes that although the
Funds participating in the TRAK Program will be affected by this
change, no Plan will be required to pay distribution fees to the
independent distributors.
On October 15, 1998, Salomon Smith Barney was merged with and into
Pendex Real Estate Corp. (Pendex), a shell corporation domiciled in New
York. Pendex, the survivor of the merger, was then renamed ``Salomon
Smith Barney Inc.'' Upon completion of this merger, Salomon Smith
Barney became a New York corporation.
2. Recordkeeping Reimbursement Offset Procedure. Salomon Smith
Barney states that the Board of Trustees (the Board) of the Funds
approved, but has not yet implemented, a recordkeeping reimbursement
offset procedure under which a Plan participating in the TRAK Program
would be permitted to reduce its investment fees and expenses. The
reimbursement amount would be paid solely by the Funds as a means of
being competitive with other mutual funds offering similar
reimbursements to investors.
In May 1998, the Board approved a recordkeeping reimbursement
amount of $12.50 for each investment position held by a participant.
(In other words, a participant holding positions in three different
Funds would be eligible to receive a total annual reimbursement of
$37.50). In addition, the Board resolved that after applying such
reimbursement to recordkeeping expenses charged by recordkeepers of the
Plans, any excess reimbursement amount would be applied to reduce other
fees and expenses <SUP>2</SUP> payable by participating Plans,
including, but not limited to, the Plan-level investment advisory fee
payable to the Consulting Group for asset allocation recommendations
(the Outside Fee), after the appropriate offset has been applied (the
Net Outside Fee).<SUP>3</SUP> If implemented, Salomon Smith Barney
explains that the Funds would pay the appropriate reimbursement amount
directly to the recordkeeper of the Plan. The affected Plan would then
be required to pay only the balance of the fee, which is generally
charged on a quarterly basis, after the excess reimbursement amount has
been deducted.
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\2\ In addition to annual recordkeeping fees (the Annual Fees)
payable by a Plan participating in the TRAK Program, it is
represented that a Plan might be required to pay recordkeeping fees
associated with certain particular services (the Other Fees) such as
initial plan set-up and conversion, preparation of annual filings,
enrollment, special statement preparation and audit.
\3\ Salomon Smith Barney is offsetting, quarterly, against the
Outside Fee, such amount as is necessary to assure that the
Consulting Group retains not more than 20 basis points (as an Inside
Fee) from any Portfolio on investment assets attributable to any
Plan.
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The Recordkeeping Reimbursement Offset Procedure would work as
follows:
Assume that Plan A has $1 million in assets invested in the TRAK
Program and 100 participants. Assume further that Plan A pays its
recordkeeper $20 per participant per year in Annual Fees totaling
$2,000 per year or
[[Page 60393]]
$500 per quarter and $12 per participant per year in Other Fees,
totaling $1,200 per year or $300 per quarter. In addition, Plan A
pays the Consulting Group a total annual net investment advisory fee
(i.e., the Net Outside Fee) of $8,500.
At the end of each calendar quarter, Plan A's recordkeeper will
determine the actual number of Fund positions held by the Plan A
participants and calculate the resulting reimbursement amount. If
Plan A had 300 participant positions at the end of the quarter, the
Plan's total recordkeeping reimbursement amount would be 300 x
$3.125 (the annual amount of $12.50 divided by 4) or $937.50. That
amount would be credited as follows:
Application of Reimbursement to Recordkeeping Fees
Quarterly Portion of Annual Fees........................... $500.00
Quarterly Portion of Other Fees............................ 300.00
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Total Quarterly Recordkeeping Fees......................... 800.00
Credit for Reimbursement................................... (937.50)
Excess Reimbursement....................................... (137.50)
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Because the reimbursement amount exceeds the recordkeeping fees
due for the quarter, the Plan does not owe any recordkeeping fee for
that period. Therefore, the recordkeeper will not bill the Plan.
Application of Excess Reimbursement to the Net Outside Fee
Quarterly Net Outside Fee.................................. $2,125.00
Excess Reimbursement....................................... (137.50)
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Total.................................................. 1,987.50
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The recordkeeper will advise the Consulting Group that it is
entitled to bill the Plan for the $1,987.50 balance of its
investment advisory fee (i.e., the Net Outside Fee).
Upon participation in the TRAK Program, an Independent Plan
Fiduciary selects a recordkeeper for the Plan, from a list of
recordkeepers which maintain computer links to the Funds under the TRAK
Program. Salomon Smith Barney states that of the 23 recordkeepers
currently providing services to TRAK Program investors, only one, Smith
Barney Plan Services, is an affiliate. Because the reimbursement rate
and the timing of the offset of the excess reimbursement amount against
fees will be the same regardless of the identity of the recordkeeper
and the Independent Plan Fiduciary is responsible for the selection of
this particular recordkeeper, Salomon Smith Barney believes its
affiliation with Smith Barney Plan Services does not appear to present
additional potential abuses under section 406(b)(1) or 406(b)(3) of the
Act in its capacity as an investment adviser in recommending investment
in the Funds to Independent Plan Fiduciaries.
Salomon Smith Barney notes that the reasoning in the Frost National
Bank Advisory Opinion (ERISA Advisory Opinion 97-15A, May 22, 1997)
(the Frost Opinion), is relevant to this situation. Therefore, it has
not requested administrative exemptive relief from the Department.
Salomon Smith Barney explains that in the Frost Opinion, the bank
offered a comprehensive program of administrative and investment
services to Plan investors. Under this program, the Department opined
that section 406(b)(1) and 406(b)(3) of the Act would not be violated
if the bank received payments for services from mutual funds while
recommending mutual fund investments to plans provided such payments
were fully disclosed and then offset to reduce other plan expenses,
with any excess payments made to the plans. Salomon Smith Barney
further explains that in the Frost Opinion any benefit from payments
made by the mutual funds benefitted the plans and not the bank.
With respect to the TRAK Program, Salomon Smith Barney represents
that the reimbursement rates adopted by the Funds will be fully
disclosed to Independent Plan Fiduciaries and the offset of the excess
reimbursement amount against a Plan's expenses will be accomplished in
a manner to ensure that the Plans obtain the full benefit of the
reimbursement to reduce their recordkeeping and other Plan expenses.
Salomon Smith Barney submits that the reasoning in the Frost Opinion
would apply equally to the proposed reimbursement of expenses under the
TRAK Program. Therefore, Salomon Smith Barney does not believe any
change in the scope of the exemption is necessary.<SUP>4</SUP>
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\4\ In this proposed exemption, the Department expresses no
opinion on whether the Frost Opinion is applicable to the
recordkeeping reimbursement procedure described above. In this
regard, the Department notes that, under the facts presented in the
Frost Opinion, Frost would offset the fees received from the mutual
funds on a dollar-for-dollar basis against the trustee fees that the
plan was otherwise obligated to pay Frost.
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3. The Automatic Reallocation Option. Salomon Smith Barney wishes
to modify the TRAK Program to institute an automated reallocation
feature whereby an Independent Plan Fiduciary could elect to have his
or her current asset allocation adjusted automatically whenever the
Consulting Group changes the recommended asset allocation model (the
Allocation Model) followed by such Plan or participant.<SUP>5</SUP>
Therefore, Salomon Smith Barney proposes to amend General Condition
II(f) of PTE 94-50 which requires that any recommendation or evaluation
offered by the Consulting Group be implemented only upon the express
direction of the Independent Plan Fiduciary. With the exception of the
requested changes to General Condition II(f) of PTE 94-50, all of the
existing conditions of PTE 94-50 will continue to apply to the TRAK
Program.
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\5\ Salomon Smith Barney notes that the Automatic Reallocation
Option is to be distinguished from ``rebalancing'' which occurs
after the passage of time from the original allocation decision and
changes a participant's investment mix to bring the actual
allocation among investment alternatives back in line with the
participant's original allocation choices. For example, Salomon
Smith Barney states that a Plan participant receives a written
quarterly review that sets forth information concerning the
participant's investments and includes a chart comparing the
original asset allocation recommendation and the actual percentage
distribution of investments held in the portfolio. Salomon Smith
Barney explains that under the chart is the following legend:
TRAK is a non-discretionary investment advisory service. All
investment decisions rest with you, the participant. Therefore, you
are strongly urged to adhere to the Consulting Group's asset
allocation recommendations. Please call your Financial Consultant
should a change in allocation be warranted due to a significant
difference between the portfolio originally recommended by the
Consulting Group and your allocation or due to a change in your
objectives.
Salomon Smith Barney further explains that the Financial
Consultant is expected to contact participants at least annually to
encourage a comparison of the holdings in the portfolio against the
Consulting Group's original recommendation. Barney proposes to amend
General Condition II(f) of PTE 94-50 which requires that any
recommendation or evaluation offered by the Consulting Group be
implemented only upon the express direction of the Independent Plan
Fiduciary. With the exception of the requested changes to General
Condition II(f) of PTE 94-50, all of the existing conditions of PTE
94-50 will continue to apply to the TRAK Program.
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As noted above, General Condition II(f) of PTE 94-50 provides that
any recommendation or evaluation by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express
direction of such fiduciary. Accordingly, under the current exemption,
whenever asset allocation advice is modified by the Consulting Group,
Salomon Smith Barney states that its Financial Consultants are required
to contact the Independent Plan Fiduciary of each Plan who has chosen
the Allocation Model, and obtain such fiduciary's consent to
modification of the asset allocation applied to the Plan's account.
Salomon Smith Barney notes that many TRAK Program investors have
expressly indicated that they expect reallocations to take place in the
ordinary course of the provision of investment advisory services
offered by the Consulting Group. However, these investors do not
understand why they need to be contacted in each instance
[[Page 60394]]
for this purpose. In addition, Salomon Smith Barney explains that the
case-by-case contact and reallocation involves delay in implementing
the change at the client's express direction, putting similarly-
situated investors into the new Allocation Models at different times.
To resolve these problems, Salomon Smith Barney proposes to offer
TRAK Program investors an Automatic Reallocation Option. Because
Salomon Smith Barney recognizes that the Automatic Reallocation Option
is outside the scope of PTE 94-50, it requests a modification of the
existing terms of PTE 94-50 to the extent necessary to allow it to
offer this alternative to investors. If the exemptive relief is
granted, Salomon Smith Barney represents that it will fully disclose
the nature of the Automatic Reallocation Option to the Independent Plan
Fiduciary of each existing client Plan in a written notice (the
Announcement) and permit the fiduciary to elect the Automatic
Reallocation Option by responding in writing. The Announcement will
describe the intended operation of the Automatic Reallocation Option
and how future changes to the Allocation Model selected on behalf of
the Plan will be implemented. In order to implement the Automatic
Reallocation Option for new TRAK Program investors, the Independent
Plan Fiduciary will be required to check a box on the form of
Investment Advisory contract with Salomon Smith Barney (or on a
separate document designed for this purpose for those investors who
have already executed such an agreement with Salomon Smith Barney). By
checking the box, the Independent Plan Fiduciary will indicate its
consent to and authorization of actions to be taken by Salomon Smith
Barney to reallocate automatically the asset allocation in the Plan
account whenever the Consulting Group modifies the particular asset
allocation recommendation which the Plan or participant has chosen.
Such election will continue in effect until revoked or terminated by
the Plan, in writing.
In operation, Salomon Smith Barney represents that the Automatic
Reallocation Option will work as follows:
(a) The Consulting Group will release a modified version of the
Allocation Model for the Plan account based upon its amended
recommendation.
(b) On the day such modification is released, the Consulting Group
will adjust the Plan account to fit the new Allocation Model and to
reflect current market conditions.<SUP>6</SUP> Such adjustments will be
effected through a series of purchases and redemptions of Portfolio
shares to increase or decrease the relative investment in the various
Portfolios by the Plan account.
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\6\ Salomon Smith Barney notes that there are 12 standard
Allocation Models and that two similarly-situated Plan participants
who receive the same recommendation from the Consulting Group will
receive the same reallocation.
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(c) The reallocation of the Plan account will be effected on the
same business day as the release of the new Allocation Model by the
Consulting Group, except to the extent market conditions and orderly
purchase and redemption procedures may delay such processing. For
purposes of calculating the percentage changes in its asset allocation
recommendation underlying the Automatic Reallocation Option for a Plan
investor's account, the Consulting Group will use the net asset values
at the close of business on the preceding trading day. However, the
execution of trades to give effect to the changed percentages will
occur on the next trading day at the then-current net asset values.
(d) Participants in the TRAK Program will receive trade
confirmations of the reallocation transactions. In this regard, for all
Plan investors other than Section 404(c) Plan accounts (i.e., 401(k)
Plan accounts), Salomon Smith Barney will mail trade confirmations 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.\7\ For
example, if the recordkeeper notifies Section 404(c) Plan participants
(i.e., Independent Plan Fiduciaries) in writing after each trade, such
participants will be notified of reallocation transactions in this
manner. If, however, the recordkeeper notifies Section 404(c) Plan
participants of trading activity in a quarterly statement, the
reallocation activity would be included there.
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\7\ Under these circumstances, Salomon Smith Barney will advise
the recordkeeper of the proposed reallocation of the account of a
Section 404(c) Plan participant as soon as the Consulting Group has
determined that a change to an asset allocation recommendation is
going to be made. The communication may initially be made orally
because the recordkeeper must then promptly modify its system to
effect the necessary changes to a participant's account on the
effective date of the new recommendation. The oral communication is
customarily followed by a full written description of the changes
within two business days of the verbal update.
As noted above, a Section 404(c) Plan participant who has
elected the Automatic Reallocation Option would receive a trade
confirmation from the recordkeeper of the resulting changes to the
positions in his or her account, if that is the notification
procedure agreed to for the Plan. Also as noted above, transactions
occurring upon automatic reallocation and the underlying
recommendation changes will be disclosed in the ``Participant
Quarterly Review.''
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In addition to the trade confirmations which Salomon Smith Barney
will provide to all Plan investors except Section 404(c) Plans,
disclosure of the reallocation transactions will appear in the next
regular client statement. Such transactions will be reflected as a
series of purchase and redemption transactions that will shift assets
among the Portfolios in accordance with the Allocation Model as
modified by the Consulting Group.
(e) If, however, the reallocation to be made in response to the
Consulting Group's 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 not
automatically adjust a Plan account. Under such circumstances, Salomon
Smith Barney will send out a written notice (the Notice) to the
Independent Plan Fiduciary for each affected Plan, describing the
proposed reallocation and the date on which such allocation is to be
instituted (the Effective Date).
(f) The Notice will be mailed with the presumption of delivery
within three business days to permit timely notification and adequate
response time for the Independent Plan Fiduciary. The Notice will
instruct the fiduciary that he or she will need to do nothing if such
fiduciary decides to have his or her Plan account automatically
reallocated on the Effective Date. If, on the other hand, the
Independent Plan Fiduciary does not wish to follow the Consulting
Group's revised asset allocation recommendation, the Notice will
instruct the Independent Plan Fiduciary to inform a Financial
Consultant, in writing, at least 30 calendar days prior to the proposed
Effective Date that the fiduciary wishes to ``opt out'' of the new
Allocation Model.\8\
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\8\ The Notice will be mailed with the presumption of delivery
within three business days so that the 30 day calendar period will
not commence until the third business day following the mailing. In
addition, the Effective Date of the Automatic Reallocation Option
will occur no sooner than the business day following the thirtieth
calendar day. To avoid any misunderstandings or miscalculations by
the Independent Plan Fiduciary, Salomon Smith Barney represents that
it will conspicuously state, in the Notice, the last date for its
receipt of the Independent Plan Fiduciary's written response.
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(g) If the Independent Plan Fiduciary ``opts out,'' his or her Plan
account will not be changed on the Effective Date.
[[Page 60395]]
Under such circumstances, the Allocation Model will remain at its
current level or at such other level as the Independent Plan Fiduciary
designates. However, the Automatic Reallocation Option, will remain in
effect for future changes in such participant's Allocation Model.
(h) The Independent Plan Fiduciary will always have the ability to
elect, terminate or reinstitute the Automatic Reallocation Option or to
otherwise adjust an Allocation Model, in any way, by providing
reasonably prompt notice to a Financial Consultant. Upon request by the
Independent Plan Fiduciary, the Financial Consultant will send the
appropriate form.
Salomon Smith Barney states that it is not possible to predict the
frequency of reallocations because these changes are dictated by the
Consulting Group's analysis of market conditions. However, since
November 1991, Salomon Smith Barney represents that asset allocation
changes of the type that would trigger automatic reallocations have
been instituted by the Consulting Group on ten occasions. Eight of
these changes were of a magnitude of 10 percentage points or less. The
other two changes were 15 percent changes and impacted only
approximately one percent and 3 percent, respectively, of the total
number of clients participating in the TRAK Program at the time.\9\
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\9\ While there is no minimum percentage threshold that will
trigger the Automatic Reallocation Option, other than the historical
ranges specified above, Salomon Smith Barney notes that there may be
future market circumstances that may justify an asset allocation
adjustment of a lesser amount. Because the Consulting Group will
only adjust asset allocation recommendations to reflect current
market conditions, Salomon Smith Barney anticipates that triggers
for the Automatic Reallocation Option will continue to be only
market-related. As is currently the situation, Salomon Smith Barney
represents that a Plan investor may, at any time and for any reason,
contact a Financial Consultant to request a modification of an
existing Allocation Model.
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Salomon Smith Barney also states that the reallocation called for
under the Automatic Reallocation Option will be effected by a dollar-
for-dollar liquidation and purchase of the required amounts in the
respective Plan accounts. Because of the billing of Plan accounts
participating in the TRAK Program is leveled with respect to the
compensation received by Salomon Smith Barney and by the Financial
Consultant involved in an account, Salomon Smith Barney states that the
implementation of the Automatic Reallocation Option will be revenue-
neutral. In addition, Salomon Smith Barney represents that neither the
Plan nor the participants will pay any additional fees for electing to
use the Automatic Reallocation Option.\10\
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\10\ General Condition II(c) of PTE 94-50 as well as this
proposal states that no Plan will pay a fee or commission by reason
of the acquisition or redemption of shares in the Trust. Since the
fees paid to Salomon Smith Barney are based upon net asset values of
investments and not transactions, a change of investment allocations
and the net purchases and redemptions used to effect such changes do
not change the payable fees.
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Thus, on the basis of the foregoing, General Condition II(f) has
been revised to read as follows:
(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 least 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 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.
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 not extend to
transactions prohibited under section 406(b)(3) of the
[[Page 60396]]
Act and section 4975(c)(1)(F) of the Code;
(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 Summary of Facts and Representations set forth in
the notice of proposed exemption relating to PTE 92-77, as amended by
PTE 94-50 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), or a
retirement plan for self-employed individuals (the Keogh Plan) \11\ 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).
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\11\ The employee benefit plan, the IRA and the Keogh Plan are
are collectively referred to herein as the Plans.
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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 least 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
[[Page 60397]]
404(c) Plan accounts (i.e., 401(k) Plan 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, the percentage of that Portfolio's net assets invested in
such securities will not exceed one percent.
(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.\12\
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\12\ 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 fees and expenses to be paid by the Plan, including the
fees paid directly to Salomon Smith Barney or to other third parties
and/or indirectly through the Trust to Smith Barney.
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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 PTE 94-50 as well as the proposed exemption and the
final exemption 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 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)
[[Page 60398]]
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 subsections (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 subsection, 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.
(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 a self-directed IRA 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.
Section IV. Effective Dates
If granted, this proposed exemption will be effective as of June
21, 1994 with respect to the transactions described in Section I.A. and
B.(1). With respect to Section I.B.(2) and Section II(f)(1)-(4) of the
General Conditions, this proposed exemption will be effective November
9, 1998.
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 PTEs 92-77 and PTE 94-50,
refer to the proposed exemptions and the grant notices which are cited
above.
Signed at Washington, D.C., this 4th day of November, 1998.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-29964 Filed 11-6-98; 8:45 am]
BILLING CODE 4510-29-P
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