Proposed Exemptions; Budge Clinic Profit Sharing Plan and Trust [Notices] [03/12/1996]
Proposed Exemptions; Budge Clinic Profit Sharing Plan and Trust [03/12/1996]
Volume 61, Number 49, Page 10014-10025-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10142, et al.]
Proposed Exemptions; Budge Clinic Profit Sharing Plan and Trust
(the Plan)
AGENCY: Pension and Welfare Benefits Administration, Labor.
[[Page 10015]]
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Budge Clinic Profit Sharing Plan and Trust (the Plan), Located in
Logan, Utah
[Application No. D-10142]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the proposed sale of certain improved real
property located in Logan, Utah (the Property) by the Plan to IHC
Health Services, Inc., a party in interest with respect to the Plan;
provided that the following conditions are satisfied:
(A) All terms and conditions of the transaction are no less
favorable to the Plan than those which the Plan could obtain in an
arm's-length transaction with an unrelated party;
(B) The Plan receives a cash purchase price for the Property which
is no less than the fair market value of the Property as of the sale
date; and
(C) The Plan does not incur any expenses or suffer any loss with
respect to the transaction.
Summary of Facts and Representations
1. The Plan is a defined contribution pension plan with 111
participants and total assets of $7,070,904 as of December 31, 1994.
The Plan is sponsored by the Budge Clinic, Inc. (the Employer), a Utah
professional corporation engaged in the provision of medical services
in Logan, Utah. Effective September 12, 1995, substantially all of the
assets of the Employer were acquired (the Acquisition) by IHC Health
Services, Inc. (IHC). IHC is a wholly-owned subsidiary of Intermountain
Health Care, Inc., the subsidiaries and affiliates of which provide
health care through a system of hospitals, clinics, HMOs, and PPOs in
Utah, Wyoming and Idaho. The Plan's trustee is Neal Byington (the
Trustee), an employee of the Employer.
2. The Employer's place of business is a clinic facility (the
Clinic) located at 225 East 400 North in Logan, Utah. The Clinic
consists of a 22,374 square foot medical clinic building (the Building)
and adjacent parking area situated on a commercially-zoned lot (the
Land) measuring 74,923 square feet. The Employer owns 24,298 square
feet of the Land, which is additional parking space at the rear of the
Clinic lot (the Employer Property). The remaining 50,625 square feet of
the Land, occupied by paved parking space and the Building (together,
the Plan Property), are owned by the Plan and leased to the Employer
pursuant to a 21-year lease (the Lease) executed on January 1, 1980.
The Employer's lease of the Property from the Plan is exempt from the
prohibited transactions provisions of the Act by virtue of an
individual administrative exemption, Prohibited Transaction Exemption
81-97 (PTE 81-97, 46 FR 53815, October 30, 1981). The interests of the
Plan under the Lease are represented by an independent fiduciary (the
Fiduciary), who protects the Plan's interests and monitors the
Employer's compliance with the terms and conditions of the Lease. Upon
commencement of the Lease, the Fiduciary was Roland R. Hancey, an
officer with Zion's First National Bank (the Bank) in Logan, Utah, but
Mr. Hancey has retired. The successor to Mr. Hancey as independent
fiduciary is Karl Ward, a trust officer with the Bank who continues to
serve as Fiduciary under the Lease and for purposes of PTE 81-97.
3. The Employer represents that as part of the Acquisition,
virtually all of the employees of the Employer have become employees of
IHC. The Employer and IHC have agreed that the Plan will be terminated
effective December 31, 1995, and they intend to offer all Plan
participants the opportunity to receive a cash distribution of their
account balances in the Plan or to ``roll over'' their account balances
into an I.R.A. or into the defined contribution plan maintained by IHC.
As part of the Acquisition, IHC
[[Page 10016]]
has agreed to purchase the Plan Property from the Plan, in order to
enable the rapid liquidation of that Plan asset and to secure for the
Employer the continued use and occupancy of the Plan Property. The
Employer and IHC are requesting an exemption to permit this purchase
transaction under the terms and conditions described herein.
4. It is proposed that IHC will make a single cash payment to the
Plan for the Plan Property in the amount of no less than the fair
market value of the Plan Property as of the sale date, but in no event
less than $1,180,000. The Plan Property has been appraised by Thomas D.
Singleton, MAI (Singleton), a professional independent real estate
appraiser in Logan, Utah. Singleton represents that as of December 31,
1994, the Plan Property had a fair market value of $1,180,000.
Singleton's appraisal recognizes the Employer's ownership of an
adjacent parcel, the Employer Property, as well as the Employer's
proposal to purchase the Plan Property, and the resulting valuation
reflects a premium price for the Plan Property because of the
Employer's current and proposed occupancy of the Property and its
ownership of the adjacent parcel. Singleton states that he based the
appraisal on the assumption that the Employer will continue to lease/
occupy the Plan Property because the value would likely decrease if the
Employer were to vacate and move elsewhere, due to (a) the local
market's inability to support more than one clinic of a size comparable
to the Employer, and (b) the market trend toward greater centralization
of medical facilities near major hospital campuses, such as the Logan
Hospital which has relocated to a different part of the city. Regarding
the Employer's ownership of the adjacent Employer Property, Singleton
determined that it would not be economically feasible to separate the
adjoining parcels physically or to consider them separately for
valuation purposes. Singleton determined the value of the Plan Property
by deducting from his valuation of the entire combined parcel his
estimate of the value of the Employer Property. As part of the proposed
purchase transaction, Singleton's appraisal will be updated as of the
purchase date, and the purchase price will be the greater of $1,180,000
or the fair market value as of the sale date in accordance with the
update of Singleton's appraisal. The Plan will not incur any expenses
related to the transaction. The Employer will continue to occupy the
Plan Property under the Lease through the date of the proposed
transaction, and thereafter the Employer will occupy the Clinic under
the authority of IHC. The Employer represents that the proposed
transaction is in the best interests and protective of the participants
and beneficiaries of the Plan because it will enable the Plan to make
allocations of cash to the Accounts representing their pro-rata
interests in the Plan Property as a Plan asset, and the Plan will
receive a purchase price of no less than the fair market value of the
Plan Property at the time of the transaction.
5. The Fiduciary represents that there have been no events of
default by the Employer under the Lease and that each rental payment
due under the Lease has been timely made to the Plan. The Fiduciary
states that he has caused the Plan Property to be appraised
periodically for its fair market rental value as required under the
Lease and that the rent payable under the Lease has been increased in
accordance with such appraisals. The Fiduciary represents that in all
respects the Employer has been and continues to be in compliance with
the terms and conditions of the Lease. The Trustee also represents that
there have never been any events of default under the Lease.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (a) The Plan, which is terminating, will receive
cash for the Plan Property for allocation to the Accounts on a pro-rata
basis, to enable Plan participants to receive cash distributions or to
``roll over'' into another plan or an I.R.A; (b) The purchase price
will be no less than the fair market value of the Plan Property as of
the sale date as determined by Singleton's updated appraisal, and in no
event less than $1,180,000; and (c) the Plan will not incur any
expenses related to the proposed transaction.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
C.C.L. Label, Inc., 401(k) Profit-Sharing Plan (the Plan), Located in
Grand Rapids, Michigan
[Application No. D-10168]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale by the Plan of certain
publicly traded limited partnership interests (the Interests) to CCL
Label, Inc. (CCL), a party in interest with respect to the Plan,
provided that the following conditions are satisfied: (1) the sale is a
one-time transaction for cash; (2) the Plan pays no commissions nor
other expenses relating to the sale; and (3) the purchase price is the
greater of: (a) the fair market value of the Interests as of the date
of the sale, or (b) the original acquisition cost of the Interests.
Summary of Facts and Representations
1. The Plan is a profit sharing plan sponsored by CCL. CCL, a
Michigan corporation, is a member of a controlled group of corporations
and is engaged in the manufacture of decorative labels. The Plan has
approximately 481 participants and beneficiaries. As of December 31,
1994, the Plan had total assets of approximately $9,914,333.31. The
trustee of the Plan is Comerica Bank, N.A.
2. Among the assets of the Plan are the Interests, which are 5,644
shares of the Aetna Real Estate Association Partnership (the
Partnership). The Plan acquired the Interests on January 1, 1989, when
the American Design, Inc. Profit Sharing Retirement Plan (the American
Design Plan) was merged into, and survived by, the Plan. The American
Design Plan acquired the Interests in 1986 for a total of $112,880 ($20
per share). The Partnership has made cash distributions with respect to
the Interests in the cumulative amount of $52,037.68 ($9.22 per share),
as of November 15, 1995.
The Partnership is open-ended, with no set term. The Partnership
originally invested in 15 properties, two of which have been sold,
leaving thirteen. The applicant represents that the Partnership intends
to continue holding the remaining 13 properties until the real estate
market has completely rebounded from the depressed prices of the past
few years.
3. The applicant represents that although the Interests are
publicly traded, they are very thinly traded and generally sell for
considerably less than their net asset value.<SUP>1 Moreover, the net
asset value of the Interests has been
[[Page 10017]]
declining. As of December 31, 1994, the net asset value of the
Interests as determined by Independent Property Appraisals, an
independent valuation service, was $14.96 per share, a total of
$84,434.24. A summary of the trades of other shares of the Partnership
on the secondary market for the period between February 1, 1995 and
February 28, 1995 as reported in the Investment Advisor shows that the
average price per share during that period was $7.52, which would make
the Interests worth $42,443.
<SUP>1 The Department expresses no opinion herein on whether
the acquisition and holding of the Units by the Plan violated any of
the provisions of Part 4 of Title I in the Act.
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4. In order to divest the Plan of an under-performing asset, CCL
proposes to purchase the Interests from the Plan for the greater of:
(a) The fair market value of the Interests as of the date of the sale,
or (b) the Interests' original acquisition cost to the American Design
Plan. Because the fair market value of the Interests is less than their
acquisition cost, CCL will purchase the Interests from the Plan for the
latter amount. Accordingly, CCL will pay the Plan a purchase price of
$112,880. Taking into account a purchase price of $112,880 and all cash
distributions received, the applicant represents that the Interests
will provide a simple average annual return of approximately five
percent for each of the nine years that the Plan (and its predecessor)
have held the Interests. The sale will be a one-time transaction for
cash, and the Plan will pay no commissions nor other expenses relating
to the sale.
The applicant represents that the proposed transaction is in the
interests of the Plan because the Plan cannot sell the Interests on the
open market without incurring a substantial loss. The proceeds from the
sale are to be redirected into more productive investments.
5. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) The sale will
be a one-time transaction for cash; (2) the Plan will pay no
commissions nor other expenses relating to the sale; and (3) the
purchase price will be the greater of: (a) The fair market value of the
Interests as of the date of the sale, or (b) the original acquisition
cost of the Interests.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and therefore
must be examined under applicable provisions of the Code, including
sections 401(a)(4), 404 and 415.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by personal delivery and by first-class mail within 10 days of
the date of publication of the notice of pendency in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and/or to request a
hearing with respect to the proposed exemption. Comments and requests
for a hearing are due within 40 days of the date of publication of this
notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Dauphin Deposit Bank and Trust Company, Located in Harrisburg,
Pennsylvania
[Application No. D-10187]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I--Exemption for In-Kind Transfer of CIF Assets
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (F) of the Code, shall not apply to the proposed in-kind
transfer of assets of plans for which Dauphin Deposit Bank and Trust
Company (Dauphin) acts as a fiduciary (the Client Plans), other than
plans established and maintained by Dauphin (the Banks Plans), that are
held in certain collective investment funds maintained by Dauphin
(CIFs) in exchange for shares of the Marketvest Funds (the Funds),
open-end investment companies registered under the Investment Company
Act of 1940 (the 1940 Act), in situations where Dauphin acts as
investment advisor for the Fund and may provide some other ``Secondary
Service'' to the Fund as defined in Section V(h), in connection with
the termination of such CIFs, provided that the following conditions
and the general conditions of Section III are met:
(a) No sales commissions or other fees are paid by the Client Plans
in connection with the purchase of Fund shares through the in-kind
transfer of CIF assets, and no redemption fees are payable in
connection with the sale of such shares by the Client Plans to the
Funds.
(b) Each Client Plan receives shares of a Fund which have a total
net asset value that is equal to the value of the Plan's pro rata share
of the assets of the CIF on the date of the in-kind transfer, based on
the current market value of the CIF's assets as determined in a single
valuation performed in the same manner at the close of that business
day using independent sources in accordance with Rule 17a-7 of the
Securities and Exchange Commission (SEC) under the 1940 Act (see 17 CFR
270. 17a-7) and the procedures established by the Funds pursuant to
Rule 17a-7 for the independent valuation of such assets. Such
procedures must require that all securities for which a current market
price cannot be obtained by reference to the last sale price for
transactions reported on a recognized securities exchange or NASDAQ be
valued based on an average of the highest current independent bid and
lowest current independent offer, as of the close of business on the
Friday preceding the weekend of the CIF transfers, determined on the
basis of reasonable inquiry from at least three sources that are
broker-dealers or pricing services independent of Dauphin.
(c) All or a pro rata portion of the assets of a Client Plan held
in a CIF are transferred in-kind to the Funds in exchange for shares of
such Funds.
(d) A second fiduciary who is independent of and unrelated to
Dauphin (the Second Fiduciary) receives advance written notice of the
in-kind transfer of assets of the CIFs and full written disclosure of
information concerning the Funds, including:
(1) A current prospectus for each Fund in which a Client Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, any secondary services as defined in Section IV(h),
and all other fees to be charged to or paid by the Client Plan and by
the Funds, including the nature and extent of any differential between
the rates of such fees;
(3) The reasons why Dauphin considers investing in the Fund is an
appropriate investment decision for the Client Plan;
[[Page 10018]]
(4) A statement describing whether there are any limitations
applicable to Dauphin with respect to which assets of a Client Plan may
be invested in a Fund, and, if so, the nature of such limitations; and
(5) Upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, if granted, once such
documents are published in the Federal Register.
(e) After consideration of the foregoing information, the Second
Fiduciary authorizes in writing the in-kind transfer of the Client
Plan's CIF assets to a corresponding Fund in exchange for shares of the
Fund.
(f) For all in-kind transfers of CIF assets to a Fund, Dauphin
sends by regular mail to each affected Client Plan the following
information:
(1) Within 30 days after completion of the transaction, a written
confirmation containing:
(i) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(ii) The price of each such security involved in the transaction;
(iii) The identity of each pricing service or market-maker
consulted in determining the value of such securities; and
(2) Within 90 days after completion of each in-kind transfer, a
written confirmation containing:
(i) The number of CIF units held by the Client Plan immediately
before the transfer, the related per unit value, and the total dollar
amount of such CIF units; and
(ii) The number of shares in the Funds that are held by the Client
Plan following the transfer, the related per share net asset value, and
the total dollar amount of such shares.
(g) The conditions set forth in paragraphs (e), (f) and (n) of
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
If the exemption is granted, the restrictions of section 406(a) and
406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) (A) through
(F) of the Code, shall not apply to the proposed receipt of fees by
Dauphin from the Funds for acting as an investment adviser for the
Funds as well as for providing other services to the Funds which are
``Secondary Services'' as defined in Section V(h), in connection with
the investment by the Client Plans in shares of the Funds, provided
that the following conditions and the general conditions of Section III
are met:
(a) Each Client Plan satisfies either (but not both) of the
following:
(1) The Client Plan receives a cash credit of such Plan's
proportionate share of all fees charged to the Funds by Dauphin for
investment advisory services, including any investment advisory fees
paid by Dauphin to third party sub-advisers, no later than the same day
as the receipt of such fees by Dauphin. The crediting of all such fees
to the Client Plans by Dauphin is audited by an independent accounting
firm on at least an annual basis to verify the proper crediting of the
fees to each Plan.
(2) The Client Plan does not pay any Plan-level investment
management fees, investment advisory fees, or similar fees to Dauphin
with respect to any of the assets of such Plan which are invested in
shares of any of the Funds. This condition does not preclude the
payment of investment advisory or similar fees by the Funds to Dauphin
under the terms of an investment management agreement adopted in
accordance with section 15 of the 1940 Act, nor does it preclude the
payment of fees for Secondary Services to Dauphin pursuant to a duly
adopted agreement between Dauphin and the Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section V(e), and is the same price which would have been
paid or received for the shares by any other investor at that time.
(c) Dauphin, including any officer or director of Dauphin, does not
purchase or sell shares of the Funds from or to any Client Plan.
(d) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the Funds and no redemption fees
are paid in connection with the sale of shares by the Client Plans to
the Funds.
(e) For each Client Plan, the combined total of all fees received
by Dauphin for the provision of services to a Client Plan, and in
connection with the provision of services to the Funds in which the
Client Plan may invest, are not in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(f) Dauphin does not receive any fees payable pursuant to Rule 12b-
1 under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by Dauphin.
(h) The Second Fiduciary receives, in advance of any initial
investment by the Client Plan in a Fund, full and detailed written
disclosure of information concerning the Funds, including but not
limited to:
(1) A current prospectus for each Fund in which a Client Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, any secondary services as defined in Section IV(h),
and all other fees to be charged to or paid by the Client Plan and by
the Funds, including the nature and extent of any differential between
the rates of such fees;
(3) The reasons why Dauphin may consider such investment to be
appropriate for the Client Plan;
(4) A statement describing whether there are any limitations
applicable to Dauphin with respect to which assets of a Client Plan may
be invested in the Funds, and if so, the nature of such limitations;
and
(5) Upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, if granted, once such
documents are published in the Federal Register.
(i) After consideration of the information described above in
paragraph (h), the Second Fiduciary authorizes in writing the
investment of assets of the Client Plan in each particular Fund and the
fees to be paid by such Funds to Dauphin.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to Dauphin are subject to an
annual reauthorization wherein any such prior authorization referred to
in paragraph (i) shall be terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Dauphin of written
notice of termination. A form expressly providing an election to
terminate the authorization described in paragraph (i) above (the
Termination Form) with instructions on the use of the form must be
supplied to the Second Fiduciary no less than annually; provided that
the Termination Form need not be supplied to the Second Fiduciary
pursuant to this paragraph sooner than six months after such
Termination Form is supplied pursuant to paragraph (l) below, except to
the extent required by such paragraph in order to disclose an
additional service or fee increase. The instructions for the
Termination Form must include the following information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by
[[Page 10019]]
Dauphin of written notice from the Second Fiduciary; and
(2) Failure to return the Termination Form will result in continued
authorization of Dauphin to engage in the transactions described in
paragraph (i) on behalf of the Client Plan.
(k) For each Client Plan using the fee structure described in
paragraph (a)(1) above with respect to investments in a particular
Fund, the Second Fiduciary of the Client Plan receives full written
disclosure in a Fund prospectus or otherwise of any increases in the
rates of fees charged by Dauphin to the Funds for investment advisory
services.
(l) (1) For each Client Plan using the fee structure described in
paragraph (a)(2) above with respect to investments in a particular
Fund, an increase in the rate of fees paid by the Fund to Dauphin
regarding any investment management services, investment advisory
services, or similar services that Dauphin provides to the Fund over an
existing rate for such services that had been authorized by a Second
Fiduciary in accordance with paragraph (i) above; or
(2) For any Client Plan under this proposed exemption, an addition
of a Secondary Service (as defined in Section IV(h) below) provided by
Dauphin to the Fund for which a fee is charged, or an increase in the
rate of any fee paid by the Funds to Dauphin for any Secondary Service
that results either from an increase in the rate of such fee or from
the decrease in the number of kind of services performed by Dauphin for
such fee over an existing rate for such Secondary Service which had
been authorized by the Second Fiduciary of a Client Plan in accordance
with paragraph (i) above;
Dauphin will, at least 30 days in advance of the implementation of
such additional service for which a fee is charged or fee increase,
provide a written notice (which may take the form of a proxy statement,
letter, or similar communication that is separate from the prospectus
of the Fund and which explains the nature and amount of the additional
service for which a fee is charged or of the increase in fees) to the
Second Fiduciary of the Client Plan. Such notice shall be accompanied
by a Termination Form with instructions as described in paragraph (i)
above.
(m) On an annual basis, Dauphin provides the Second Fiduciary of a
Client Plan investing in the Funds with:
(1) A copy of the current prospectus for the Funds in which the
Client Plan invests and, upon such fiduciary's request, a copy of the
Statement of Additional Information for such Funds which contains a
description of all fees paid by the Funds to Dauphin;
(2) A copy of the annual financial disclosure report prepared by
Dauphin which includes information about the Fund portfolios as well as
audit findings of an independent auditor within 60 days of the
preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(n) With respect to each of the Funds in which a Client Plan
invests, in the event such Fund places brokerage transactions with
Dauphin, Dauphin will provide the Second Fiduciary of such Plan at
least annually with a statement specifying:
(1) The total, expressed in dollars, of brokerage commissions of
each Fund that are paid to Dauphin by such Fund;
(2) The total, expressed in dollars, of brokerage commissions of
each Fund that are paid by such Fund to brokerage firms unrelated to
Dauphin;
(3) The average brokerage commissions per share, expressed as cents
per share, paid to Dauphin by each Fund; and
(4) The average brokerage commissions per share, expressed as cents
per share, paid by each Fund to brokerage firms unrelated to Dauphin.
(o) All dealings between the Client Plans and the Funds are on a
basis no less favorable to the Plans than dealings with other
shareholders of the Funds.
Section III--General Conditions
(a) Dauphin maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) 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 Dauphin, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than Dauphin or an affiliate shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act or to the taxes imposed by section 4975 (a) and (b)
of the Code if the records are not maintained or are not available for
examination as required by paragraph (b) below.
(b) (1) Except as provided below in paragraph (b)(2) and
notwithstanding any provisions of section 504(a)(2) of the Act, the
records referred to in paragraph (a) are unconditionally available at
their customary location for examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1) (ii) and
(iii) shall be authorized to examine trade secrets of Dauphin, or
commercial or financial information which is privileged or
confidential.
Section IV--Definitions
For purposes of this proposed exemption:
(a) The term ``Dauphin'' means Dauphin Deposit Bank and Trust
Company and any affiliate thereof as defined below in paragraph (b) of
this section.
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Fund'' or ``Funds'' shall include the Marketvest
Funds, Inc. or any other diversified open-end investment company or
companies registered under the 1940 Act for which Dauphin serves as an
investment adviser and may also serve as a custodian, dividend
disbursing agent, shareholder servicing agent, transfer agent, Fund
accountant, or provide some other ``Secondary Service'' (as defined
below in paragraph (h) of this Section) which has been approved by such
Funds.
(e) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(f) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member
[[Page 10020]]
of the family'' as that term is defined in section 4975(e)(6) of the
Code), or a brother, a sister, or a spouse of a brother or a sister.
(g) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of and unrelated to Dauphin. For purposes of
this exemption, the Second Fiduciary will not be deemed to be
independent of and unrelated to Dauphin if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Dauphin;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner or employee
of Dauphin (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this proposed exemption.
If an officer, director, partner or employee of Dauphin (or
relative of such persons), is a director of such Second Fiduciary, and
if he or she abstains from participation in (i) the choice of the
Client Plan's investment adviser, (ii) the approval of any such
purchase or sale between the Client Plan and the Funds, and (iii) the
approval of any change in fees charged to or paid by the Client Plan in
connection with any of the transactions described in Sections I and II
above, then paragraph (g)(2) of this section shall not apply.
(h) The term ``Secondary Service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by Dauphin to the Funds. However, for purposes of Section
II(k), the term ``Secondary Service'' will not include any brokerage
services provided to the Funds by Dauphin for the execution of
securities transactions engaged in by the Funds.
(i) The term ``Termination Form'' means the form supplied to the
Second Fiduciary which expressly provides an election to the Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described in paragraph (h) of Section II. Such Termination Form may be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify Dauphin in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan requesting such termination within one business day
following receipt by Dauphin of the form; provided that if, due to
circumstances beyond the control of Dauphin, the sale cannot be
executed within one business day, Dauphin shall have one additional
business day to complete such sale.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective as of March 29, 1996.
Summary of Facts and Representations
1. Dauphin is a banking corporation of the Commonwealth of
Pennsylvania that serves as trustee, investment manager and/or
custodian to employee benefit plans. As of December 31, 1994, Dauphin
provided trust services to approximately 1,000 employee benefit trusts,
and had total assets under management of approximately $723 million.
2. Dauphin acts as a trustee, directed trustee, investment manager,
and/or custodian for the Client Plans. The Client Plans may include
various pension, profit sharing, and stock bonus plans as well as
voluntary employees' beneficiary associations, supplemental
unemployment benefit plans, simplified employee benefit plans,
retirement plans for self-employed individuals (i.e. Keogh Plans) and
individual retirement accounts (IRAs). Some of the Client Plans may be
participant-directed individual account plans.
As custodian of a Client Plan, Dauphin is responsible for
maintaining custody over all or a portion of the Client Plan's assets,
for providing trust accounting and valuation services, for asset and
transaction reporting, and for execution and settlement of directed
transactions. Where Dauphin serves as trustee or directed trustee, it
is responsible for ownership of the assets of the Client Plan, and may
provide additional trust services such as benefit payments, loan
processing, and participant accounting. Where Dauphin is also acting as
the investment manager, Dauphin has investment discretion over the
Client Plan's assets and is responsible for implementing the Plan's
funding policies and investment objectives, executing transactions, and
periodic performance measurements.
The Client Plans pay fees in accordance with fee schedules
negotiated with Dauphin. Fees vary from fixed amounts to asset-based
amounts, depending on the level of services provided, and may include
further charges for additional trust services such as processing
benefit payments.
Dauphin maintains three CIFs specifically for its employee benefit
plan trust customers, such as the Client Plans. These CIFs are: (a) The
Employee Benefit Equity Fund; (b) the Employee Benefit Fixed Income
Fund; and (c) the Employee Benefit Short-Term Fixed Income Fund. The
CIFs are utilized for those Client Plans for which Dauphin serves as
trustee and/or investment manager. The applicant states that the CIFs
allow Dauphin to provide professional investment management with
appropriate degrees of investment diversification to Client Plans of
all sizes.
The specific Client Plans of Dauphin to which this proposed
exemption, if granted, would apply are those: (a) Whose assets are
invested in the CIFs and will be transferred to the Funds; or (b) whose
assets will be invested directly in the Funds.
However, Dauphin does not seek relief for investments in the Funds
by the Bank Plans.\2\
\2\ Dauphin represents that it will comply with the requirements
of Prohibited Transaction Exemption (PTE) 77-3, 42 FR 18734 (April
8, 1977), with respect to any investments in the Funds made by the
Bank Plans. PTE 77-3 permits the acquisition or sale of shares of a
registered, open-end investment company by an employee benefit plan
covering only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met. The Department is expressing no opinion
in this proposed exemption regarding whether any of the transactions
with the Funds by the Bank Plans would be covered by PTE 77-3.
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3. The Funds will be a Maryland corporation registered as an open-
end investment company with the SEC under the 1940 Act. The Funds will
consist of a series of investment portfolios (each a ``Fund'')
representing distinct investment vehicles, which will have their own
prospectuses or joint prospectuses with one or more other Funds. The
shares of each Fund will represent a proportionate interest in the
assets of that Fund.
The Funds that will be available for investment in connection with
the transactions described herein are the following: (a) The Equity
Fund; (b) the Short-Term Bond Fund; and (c) the Intermediate U.S.
Government Bond Fund. Additional Funds may be created in the future
which could be used for investment by the Client Plans.
The overall management of the Funds, including the negotiation of
investment advisory contracts, will rest with each Fund's Board of
Directors, more than a majority of whose members will be independent of
Dauphin. The Board of Directors will be elected by the shareholders of
the Funds.
Dauphin will serve as the investment adviser to each Fund and will
receive maximum investment advisory fees from each Fund that will vary
between 0.75% and 1.00% of the Fund's average net assets on an annual
basis, depending on the particular Fund. However, these
[[Page 10021]]
fees will be subject to voluntary waivers by Dauphin and initially will
be between 0.49% and 0.80% of the Fund's average net assets. Dauphin
also will serve as custodian of the Funds and will receive a custodial
services fee.
The other service-providers to the Funds will be independent of and
unaffiliated with Dauphin. Such service-providers currently will
include: (a) Federated Administrative Services, which will act as the
Fund's administrator; (b) Edgewood Services, Inc., a subsidiary of
Federated Investors, which will act as the Fund's distributor; and (c)
Federated Services Co., which will act as the transfer agent, dividend
disbursing agent and portfolio accountant for the Fund.
The Funds will be able to charge a distribution fee of 0.25% of a
Fund's average net assets, pursuant to Rule 12b-1 under the 1940 Act.
Dauphin represents that such 12b-1 fees will be dormant at the outset
of the Funds and will not be charged to the investments of any of the
Client Plans. Dauphin states that if the 12b-1 fee is activated at any
time, the Funds will create a separate class of shares not subject to
the 12b-1 fee, and the Client Plans will be invested in that separate
class of shares. Therefore, Dauphin will not receive any fees payable
pursuant to Rule 12b-1 under the 1940 Act in connection with the
transactions.
The Funds will also be able to charge fees of 0.25% under a
shareholder services plan. However, the Client Plans will not be
subject to these shareholder services fees.
4. Dauphin will be making the Funds available to the Client Plans
as replacements for the CIFs. Dauphin believes that there are material
advantages to the Client Plans from the use of the Funds, and Dauphin's
customers are interested in having mutual funds available as investment
vehicles for their employee benefit plan trust accounts. Mutual funds
are valued on a daily basis, whereas the CIFs were valued monthly. The
daily valuation permits: (i) Immediate investment of Plan contributions
in varied types of investments; (ii) greater flexibility in
transferring assets from one type of investment to another; and (iii)
daily redemption of investments for purposes of making distributions.
In addition, information concerning the investment performance of
mutual funds is generally available each day in newspapers of general
circulation, which will allow Client Plan sponsors and participants to
monitor the performance of their investments on a daily basis.
Furthermore, unlike CIF units, mutual fund shares can be given to
participants in plan distributions, thus avoiding the expense and delay
of liquidating plan investments and facilitating roll-overs into IRAs.
Investments by Client Plans in the Funds will occur in two ways.
First, the CIFs which are maintained by Dauphin for the Client Plans
are scheduled to be terminated on March 29, 1996, and the assets of the
CIFs will be transferred in-kind to the corresponding Funds on behalf
of those Client Plans for which independent fiduciary approval for the
transfer is obtained. Second, Client Plans will also be able to make
direct purchases of Fund shares for cash on an ongoing basis.
Dauphin states that the price that will be paid or received by a
Client Plan for shares in a Fund will be the net asset value per share
at the time of the transaction, as defined in Section V(e), and will be
the same price which will be paid or received for the shares by any
other investor at that time. In addition, Dauphin states that no sales
commissions or redemption fees will be charged in connection with the
purchase or sale of Fund shares by the Client Plans.
5. Until March 29, 1996, Dauphin generally will invest assets of
Client Plans for which it acts as a trustee with investment discretion
in the CIFs. In addition, certain Client Plans where investment
decisions are directed by a Second Fiduciary may use a CIF as an
investment option for individual accounts in the Client Plans. However,
on Friday, March 29, 1996, Dauphin plans to terminate its three CIFs.
The assets in the CIFs will be transferred to the Marketvest Equity
Fund, the Marketvest Intermediate U.S. Government Bond Fund, and the
Marketvest Short-Term Bond Fund. Each CIF will transfer its assets to
the corresponding Fund in exchange for shares of the Fund at the then
current market value of the CIF assets, in accordance with Rule 17a-7
under the 1940 Act (as discussed below).<SUP>3 The in-kind transfer of
a Client Plan's CIF assets to the Funds will be subject to the prior
written consent of the Second Fiduciary for the Client Plan. Any Client
Plan that does not provide prior written approval for the transfer of
its CIF assets to the Funds, by the deadline set for such approvals,
will receive a cash distribution of its pro rata share of the CIF
assets no later than Friday, March 29, 1996, preceding the transfers.
\3\ Rule 17a-7 permits transactions between investment funds
that use the same investment adviser, subject to certain conditions.
Rule 17a-7 requires, among other things, that such transactions be
effected at the ``independent current market price'' for each
security, involve only securities for which market quotations are
readily available, involve no brokerage commissions or other
remuneration, and comply with valuation procedures adopted by the
board of directors of the investment company to ensure that all
requirements of the Rule are satisfied.
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The in-kind transfers of the CIF assets will occur using market
values for such assets as of the close of business on Friday, March 29,
1996. The securities transferred from the CIFs will be the same as the
securities received by the Funds. The value of the securities will be
determined in a single valuation by Dauphin as investment adviser for
the Funds, in accordance with the requirement of Rule 17a-7(b) that
transactions be effected at the ``independent current market price'' of
the securities.
Under Rule 17a-7, the ``independent current market price'' for
specific types of CIF securities involved in the transactions will be
determined by Dauphin as follows:
a. If the security is a ``reported security'' as the term is
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the
'34 Act), the last sale price with respect to such security reported in
the consolidated transaction reporting system (the Consolidated
System); or, if there are no reported transactions in the Consolidated
System that day, the average of the highest current independent bid and
the lowest current independent offer for such security (reported
pursuant to Rule 11Ac1-1 under the '34 Act), as of the close of
business on the CIF valuation date.
b. If the security is not a reported security, and the principal
market for such security is an exchange, then the last sale on such
exchange or, if there are no reported transactions on such exchange
that day, the average of the highest current independent bid and lowest
current independent offer on the exchange as of the close of business
on the CIF valuation date.
c. If the security is not a reported security and is quoted in the
NASDAQ system, then the average of the highest current independent bid
and lowest current independent offer reported on Level 1 of NASDAQ as
of the close of business on the CIF valuation date.
d. For all other securities, the average of the highest current
independent bid and lowest current independent offer determined on the
basis of reasonable inquiry from at least three independent sources as
of the close of business on the CIF valuation date.
Dauphin states that it will also send by regular mail to each
affected Client Plan, not later than 30 days after completion of the
transactions, a written
[[Page 10022]]
confirmation containing the following information:
(1) The identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(2) The price of each such security involved in the transaction;
and
(3) The identity of each pricing service or market-maker consulted
in determining the value of such securities. In this regard, securities
which will be valued in accordance with Rule 17a-7(b)(4) are securities
for which the current market price cannot be obtained by reference to
the last sale price for transactions reported on a recognized
securities exchange or the NASDAQ system. As noted above, such
securities will be valued based on an average of the highest current
independent bid and lowest current independent offer, as of the close
of business on the Friday preceding the weekend of the CIF transfers,
determined on the basis of reasonable inquiry from at least three
sources that are broker-dealers or pricing services independent of
Dauphin.
Each Client Plan that approves the CIF asset transfers to the Funds
will receive account statements describing the asset transfers either
on such Plan's monthly account statement or quarterly account
statement. These statements will show the disposition of the CIF units
from the Client Plan account and the acquisition by the account of Fund
shares. This information will be provided to the affected Client Plans
with written confirmation of the number of CIF units held by the Client
Plan immediately before the transfer, the related per unit value and
the total dollar amount of such CIF units as well as the number of
shares of the Funds held by the Client Plan following the transfer, the
related per share net asset value, and the total dollar amount of such
shares.
Thus, Dauphin represents that as of Monday, April 1, 1996, Client
Plans formerly invested in the terminated CIFs will hold Fund shares
which have the same value, based on the Client Plans' pro rata share of
the underlying market value of the securities transferred to the Funds,
as their assets in the CIF as of the close of business on Friday, March
29, 1996.
6. Prior to investing a Client Plan's assets in a Fund through an
in-kind transfer of CIF assets or otherwise, Dauphin will obtain the
approval of a Second Fiduciary acting for the Client Plan. The Second
Fiduciary generally will be the Client Plan's named fiduciary, trustee
(if other than Dauphin), or the sponsoring employer. Dauphin will
provide the Second Fiduciary with a current prospectus for the Fund and
a written statement giving full disclosure of the fee structure under
which either Dauphin's investment advisory and other fees will be
credited back to the Client Plan or the Plan-level investment
management fees will be waived. The disclosure statement and the letter
that precedes the disclosure statement will describe why Dauphin
believes the investment of a Client Plan's assets in the Funds may be
appropriate. Dauphin states that these disclosures will be based on the
requirements of PTE 77-4 (42 FR 18732, April 8, 1977).<SUP>4
\4\ PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that,
among other things, the plan does not pay an investment management,
investment advisory or similar fee with respect to the plan assets
invested in such shares for the entire period of such investment.
Section II(c) of PTE 77-4 states that this condition does not
preclude the payment of investment advisory fees by the investment
company under the terms of an investment advisory agreement adopted
in accordance with section 15 of the Investment Company Act of 1940.
Section II(c) states further that this condition does not preclude
payment of an investment advisory fee by the plan based on total
plan assets from which a credit has been subtracted representing the
plan's pro rata share of investment advisory fees paid by the
investment company.
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On the basis of such information, the Second Fiduciary will
authorize Dauphin to invest the Client Plan's assets in the Funds and
to receive fees from the Funds. In connection with the proposed in-kind
asset transfers from the CIFs, if a Client Plan's Second Fiduciary does
not provide Dauphin with its approval of the investment in a
corresponding Fund by the deadline established for approvals of the
transfers from a CIF, the Client Plan will receive a distribution from
the CIF prior to such transfers and the distribution will be invested
in an appropriate investment vehicle for the Client Plan, in accordance
with the terms of the Plan.
8. Dauphin will charge investment advisory fees to the Funds in
accordance with the investment advisory agreements between Dauphin and
the Funds. These agreements will be approved by the independent members
of the Board of Directors of the Funds, in accordance with the
applicable provisions of the 1940 Act, and any subsequent changes in
the fees will have to be approved by such Directors. These fees also
will not be increased without the approval of the shareholders of the
affected Funds. The fees will be paid monthly by the Funds. In
addition, Dauphin will charge fees for custody services it will provide
to the Funds in accordance with a custodial services agreement with the
Funds.
Dauphin will avoid charging the Client Plans duplicative investment
management fees by either: (a) Crediting the Client Plan's pro rata
share of the Fund advisory fees back to the Client Plan; or (b) waiving
any investment management fee for the Client Plan at the Plan-level.
The ``crediting'' fee structure will be designed to preserve the
negotiated fee rates of the Client Plans so as to minimize the impact
of the change to the Funds on a Client Plan's fees. Dauphin will charge
a Client Plan its standard fees as applicable to the particular Client
Plan for serving as trustee, directed trustee, investment manager or
custodian. At the beginning of each month, and in no event later than
the same day as the payment of investment advisory fees by the Funds to
Dauphin for the previous month, Dauphin will credit to each Client Plan
in cash its proportionate share of all investment advisory fees charged
by Dauphin to the Funds for the previous month. The credit will include
the Client Plan's share of any investment advisory fees paid by Dauphin
to third party sub-advisors.
Dauphin states that the credit will not include the custodial fees
payable by the Funds to Dauphin because the custodial services rendered
at the Fund-level will not be duplicative of any services provided
directly to the Client Plan. The custodial services to the Fund will
involve maintaining custody and providing reporting relative to the
individual securities owned by the Fund. The services to the Client
Plan will involve maintaining custody over all or a portion of the
Client Plan's assets (which may include Fund shares, but not the assets
underlying the Fund shares), providing trust accounting and participant
accounting (if applicable), providing asset and transaction reporting,
execution and settlement of directed transactions, processing benefit
payments and loans, maintaining participant accounts, valuing plan
assets, conducting non-discrimination testing, preparing Forms 5500 and
other required filings, and producing statements and reports regarding
overall plan and individual participant holdings. Dauphin states that
these trust services will be necessary regardless of whether the Client
Plan's assets are invested in the Funds. Thus, Dauphin represents that
its proposed receipt of fees for both secondary services at the Fund-
level and trustee services at the Plan-level will not involve the
receipt of ``double fees'' for duplicative services to the Client Plans
because a Fund will be
[[Page 10023]]
charged for custody and other services relative to the individual
securities owned by the Fund, while a Client Plan will charged for the
maintenance of Plan accounts reflecting ownership of the Fund shares
and other assets.<SUP>5
5 The Department notes that although certain transactions and
fee arrangements are the subject of an administrative exemption, a
Client Plan fiduciary must still adhere to the general fiduciary
responsibility provisions of section 404 of the Act. Thus, the
Department cautions the fiduciaries of the Client Plans investing in
the Funds that they will have an ongoing duty under section 404 of
the Act to monitor the services provided to the Client Plans to
assure that the fees paid by the Client Plans for such services are
reasonable in relation to the value of the services provided. Such
responsibilities will include determinations that the services
provided are not duplicative and that the fees are reasonable in
light of the level of services provided.
The Department also notes that Dauphin, as a trustee and
investment manager for a Client Plan in connection with the decision
to invest Client Plan assets in the Funds, will have a fiduciary
duty to monitor all fees paid by a Fund to Dauphin, its affiliates,
and third parties for services provided to the Fund to ensure that
the totality of such fees will be reasonable and will not involve
the payment of any ``double'' fees for duplicative services to the
Fund by such parties.
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Dauphin represents that for each Client Plan, the combined total of
all fees it will receive directly and indirectly from the Client Plans
for the provision of services to the Plans and/or to the Funds will not
be in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act.<SUP>6
6 The Department is expressing no opinion in this proposed
exemption as to whether the fee arrangements discussed herein will
comply with section 408(b)(2) of the Act and the regulations
thereunder (see 29 CFR 2550.408b-2).
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9. Dauphin will maintain a system of internal accounting controls
for the crediting of all fees to the Client Plans. In addition, Dauphin
will retain the services of KPMG Peat Marwick (the Auditor), an
independent accounting firm, to audit annually the crediting of fees to
the Client Plans under this program. Such audits will provide
independent verification of the proper crediting to the Client Plans.
In its annual audit of the credit program, the Auditor will: (i)
Review and test compliance with the specific operational controls and
procedures established by Dauphin for making the credits; (ii) verify
on a test basis the monthly credit factors transmitted to Dauphin by
the Funds; (iii) verify on a test basis the proper assignment of
identification fields to the Client Plans; (iv) verify on a test basis
the credits paid in total to the sum of all credits paid to each Client
Plan; (v) recompute, on a test basis, the amount of the credit
determined for selected Client Plans and verify that the credit was
made to the proper Client Plan account.
In the event either the internal audit by Dauphin or the
independent audit by the Auditor identifies an error made in the
crediting of fees to the Client Plans, Dauphin will correct the error.
With respect to any shortfall in credited fees to a Client Plan,
Dauphin will make a cash payment to the Client Plan equal to the amount
of the error plus interest paid at money market rates offered by
Dauphin for the period involved. Any excess credits made to a Client
Plan will be corrected by an appropriate deduction from the Client Plan
account or reallocation of cash during the next payment period after
discovery of the error to reflect accurately the amount of total
credits due to the Client Plan for the period involved.
10. Dauphin represents that the use of the ``crediting'' fee
structure will be available for any investments made by Client Plans in
the Funds. The use of this fee structure must be approved prior to the
Client Plan's initial investment in the Funds by a Second Fiduciary
acting for the Client Plan. The Second Fiduciary will receive full and
detailed written disclosure of information concerning the Funds in
advance of any investment by the Client Plan in the Funds, including
the Fund prospectuses as well as a separate statement describing the
crediting fee structure.
After consideration of such information, the Second Fiduciary will
authorize in writing the investment of assets of the Client Plan in one
or more specified Funds and the fees to be paid by the Funds to
Dauphin. In addition, the Second Fiduciary of each Client Plan invested
in a particular Fund will receive full written disclosure, in a
statement separate from the Fund prospectus, of any proposed increases
in the rates of fees charged by Dauphin to the Funds for secondary
services which are above the rates reflected in the Fund prospectuses,
at least thirty (30) days prior to the effective date of such increase.
In the event that Dauphin provides an additional secondary service
for which a fee is charged or there is an increase in the rate of fees
paid by the Funds to Dauphin for any secondary service, including any
increase resulting from a decrease in the number or kind of services
performed by Dauphin for such fees in connection with a previously
authorized secondary service, Dauphin will, at least 30 days in advance
of the implementation of such additional service or fee increase,
provide written notice to the Second Fiduciary explaining the nature
and the amount of the additional service for which a fee will be
charged or the nature and amount of the increase in fees of the
affected Fund.<SUP>7 Such notice will be made separate from the Fund
prospectus and will be accompanied by a Termination Form. The Second
Fiduciary also will receive full written disclosure in a Fund
prospectus or otherwise of any increases in the rate of fees charged by
Dauphin to the Funds for investment advisory services, even though such
fees will be credited to the investing Client Plans.
<SUP>7 With respect to increases in fees, the Department notes
that an increase in the amount of a fee for an existing secondary
service (other than through an increase in the value of the
underlying assets in the Funds) or the imposition of a fee for a
newly-established secondary service shall be considered an increase
in the rate of such fees. However, in the event a secondary service
fee has already been described in writing to the Second Fiduciary
and the Second Fiduciary has provided authorization for the fee, and
such fee was temporarily waived, no further action by Dauphin would
be required in order for the Bank to receive such fee at a later
time. Thus, for example, no further disclosure would be necessary if
Dauphin had received authorization for a fee for custodial services
from Plan investors and subsequently determined to waive the fee for
a period of time in order to attract new investors but later charged
the fee.
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The authorizations made by a Second Fiduciary of any Client Plan
will be terminable at will, without penalty to the Client Plan, upon
receipt by Dauphin of written notice of termination. A form (the
Termination Form) expressly providing an election to terminate the
authorization, with instructions on the use of the form, will be
supplied to the Second Fiduciary no less than annually. However, the
Termination Form will not need to be supplied to the Second Fiduciary
for an annual reauthorization sooner than six months after such
Termination Form is supplied for an additional service or for an
increase in fees (as discussed above), unless another Termination Form
is required to disclose additional services or fee increases. The
Termination Form will instruct the Second Fiduciary that the
authorization is terminable at will by the Client Plan, without penalty
to the Client Plan, upon receipt by Dauphin of written notice from the
Second Fiduciary, and that failure to return the Termination Form will
result in the continued authorization of Dauphin to engage in the
subject transactions on behalf of the Client Plan.
The Termination Form will be used to notify Dauphin in writing to
effect a termination by selling the shares of the Funds held by the
Client Plan, requesting such termination within one business day
following receipt by Dauphin of the form. If, due to circumstances
beyond the control of Dauphin, the sale cannot be executed within one
business day, Dauphin will
[[Page 10024]]
be obligated to complete the sale within the next business day.
11. Dauphin represents that for smaller Client Plans, the Fund-
level investment advisory fees generally do not exceed the Plan-level
investment management fees, so that the Client Plan will not benefit
from a Fund-level fee credit. In these cases, if the Second Fiduciary
authorizes the fee structure, Dauphin will waive the Plan-level
investment management fees that would otherwise be charged for the
Client Plan's assets invested in the Funds, so that the Plan-level fees
will be offset and the Client Plan will pay only one investment
management fee for those assets, at the Fund-level. This fee structure,
which is one of the fee structures described in PTE 77-4, will ensure
that Dauphin does not receive any additional investment management,
advisory or similar fee as a result of investments in the Funds by the
Client Plans.
Disclosures, approvals, and notifications with regard to any
changes in fees or secondary services will be handled in the same
manner as for the fee structure described in paragraph 10 above, with
one exception. The exception is that notifications with regard to
increases in rates of investment advisory fees for the Funds will
conform to the procedures for increases in rates of secondary service
fees as described in paragraph 10. Therefore, in such instances, there
will be prior written notification of the fee increase to the Second
Fiduciary for the Client Plan and a Termination Form will be provided.
The reason for the exception is that the total fees paid by the Client
Plan, under this fee structure, will be directly affected by any
increases in Fund-level investment advisory fees because such fees will
not be credited back to the Client Plan.
12. Dauphin states that a Second Fiduciary will always receive a
written statement giving full disclosure of the fee structures prior to
any investment in the Funds. The disclosure statement will explain why
Dauphin believes that the investment of assets of the Client Plan in
the Funds may be appropriate. The disclosure statement also will
describe whether there are any limitations on Dauphin with respect to
which Client Plan assets may be invested in shares of the Funds and, if
so, the nature of such limitations.<SUP>8
\8\ See section II(d) of PTE 77-4 which requires, in pertinent
part, that an independent plan fiduciary receive a current
prospectus issued by the investment company and a full and detailed
written disclosure of the investment advisory and other fees charged
to or paid by the plan and the investment company, including a
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested
in shares of the investment company and, if so, the nature of such
limitations.
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13. On an annual basis, the Second Fiduciary of a Client Plan
investing in the Funds will receive copies of the current Fund
prospectuses and, upon such fiduciary's request, a copy of the
Statement of Additional Information for such Funds as well as copies of
the annual financial disclosure reports containing information about
the Fund and independent auditor findings.
In addition, if the Funds obtain brokerage services in the future
from any broker-dealers that are affiliates of Dauphin, Dauphin will
provide at least annually to the Second Fiduciary of Client Plans
investing in the Funds written disclosures indicating the following:
(i) the total, expressed in dollars, of brokerage commissions of each
Fund that are paid to Dauphin by such Fund; (ii) the total, expressed
in dollars, of brokerage commissions of each Fund that are paid by such
Fund to brokerage firms unrelated to Dauphin; (iii) the average
brokerage commissions per share, expressed as cents per share, paid to
Dauphin by each Fund portfolio; and (iv) the average brokerage
commissions per share, expressed as cents per share, paid by each Fund
portfolio to brokerage firms unrelated to Dauphin. All such brokerage
services would be provided in accordance with section 17(e) of the 1940
Act and Rule 17e-1 thereunder. Such provisions require, among other
things, that the commissions, fees or other remuneration for any
brokerage services provided by an affiliate of an investment company's
investment adviser be reasonable and fair compared to what other
brokers receive for comparable transactions involving similar
securities.
14. No sales commissions will be paid by the Client Plans in
connection with the purchase or sale of shares of the Funds. In
addition, no redemption fees will be paid in connection with the sale
of shares by the Client Plans to the Funds. Dauphin states that it will
not receive any fees payable pursuant to Rule 12b-1 under the 1940 Act
in connection with the transactions. Dauphin states further that all
other dealings between the Client Plans and the Funds will be on a
basis no less favorable to the Client Plans than such dealings will be
with the other shareholders of the Funds.
15. In summary, Dauphin represents that the transactions described
herein will satisfy the statutory criteria of section 408(a) of the Act
because: (a) the Funds will provide the Client Plans with a more
effective investment vehicle than collective investment funds
maintained by Dauphin without any increase in investment management,
advisory or similar fees paid to Dauphin; (b) Dauphin will require
annual audits by an independent accounting firm to verify the proper
crediting to the Client Plans of investment advisory fees charged by
Dauphin to the Funds; (c) with respect to any investments in a Fund by
the Client Plans and the payment of any fees by the Fund to Dauphin, a
Second Fiduciary will receive full written disclosure of information
concerning the Fund, including a current prospectus and a statement
describing the fee structure, and will authorize in writing the
investment of the Client Plan's assets in the Fund and the fees paid by
the Fund to Dauphin; (d) any authorizations made by a Client Plan
regarding investments in a Fund and fees to be paid to Dauphin, or any
increases in the rates of fees for secondary services which will be
retained by Dauphin, will be terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Dauphin of written
notice of termination from the Second Fiduciary; (e) no commissions or
redemption fees will be paid by the Client Plan in connection with
either the acquisition of Fund shares or the sale of Fund shares; (f)
Dauphin will not receive any fees payable pursuant to Rule 12b-1 under
the 1940 Act in connection with the transactions; (g) the in-kind
transfers of CIF assets into the Funds will be done with the prior
written approval of independent fiduciaries (i.e., the Second
Fiduciary) following full and detailed written disclosure concerning
the Funds; (h) all dealings between the Client Plans and the Funds will
be on a basis which is at least as favorable to the Client Plans as
such dealings are with other shareholders of the Funds.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all Second
Fiduciaries of Client Plans described herein that have investments in a
terminating CIF and from whom approval will be sought for a transfer of
a Client Plan's CIF assets to a Fund. In addition, interested persons
shall include the Second Fiduciaries of all Client Plans that are
currently invested in the Funds, as of the date the notice of the
proposed exemption is published in the Federal Register, where Dauphin
is providing services to the Funds and receives fees which would be
covered by the proposed exemption, if granted.
[[Page 10025]]
Notice to interested persons shall be provided by first class mail
within fifteen (15) days following the publication of the proposed
exemption in the Federal Register. Such notice shall include a copy of
the notice of proposed exemption as published in the Federal Register
and a supplemental statement (see 29 CFR 2570.43(b)(2)) which informs
all interested persons of their right to comment on and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a public hearing are due within forty-five (45) days following the
publication of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 6th day of March, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 96-5746 Filed 3-8-96; 8:45 am]
BILLING CODE 4510-29-P
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