[Federal Register Volume 75, Number 83 (Friday, April 30, 2010)]
[Notices]
[Pages 22853-22863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10065]
[[Page 22853]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
D-11456, PNC Financial Services Group, Inc.; and D-11602, State
Street Bank and Trust Company, et al.
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ------, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
[email protected], or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
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):
Section I--Exemption for Receipt of Fees
In connection with the investment in an open-end investment company
(a Fund(s)), as defined, below, in Section III, by certain employee
benefit plans (Client Plan(s)) for which PNC (PNC or the Applicant), as
defined below, serves as a fiduciary and is a party in interest with
respect to such Client Plan, the restrictions of section 406(a)(1)(D)
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)(D) through
(F) \1\ of the Code, shall not apply, effective February 1, 2008 to:
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\1\ For purposes of this exemption reference to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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(a) The receipt of fees by PNC and its affiliate PNC Capital
Advisors, Inc. (PCA) from the Funds in connection with the investment
by the Client Plans in shares of the Funds where PNC or its affiliate
PCA acts as an investment advisor for such Funds; and
(b) the receipt of fees by PNC or its affiliates from the Funds in
connection with providing certain secondary services, as defined below,
(Secondary Services) to such Funds in which a Client Plan invests;
provided that the conditions of Section II are met.
Section II--General Conditions
(a) PNC, which serves as a fiduciary for a Client Plan, satisfies
any one (but not all) of the following:
(1) A Client Plan invested in a Fund does not pay any plan-level
investment management fee, investment advisory fee, or similar fee
(Plan-Level Fee(s)) to PNC or its affiliates with respect to any of the
assets of such Client Plan which are invested in shares of such Fund
for the entire period of such investment (the Offset Fee Method). This
condition does not preclude the payment of investment advisory fees by
the Funds to PNC under the terms of an investment management agreement
adopted in accordance with section 15 of the Investment Company Act of
1940 (the ``1940 Act'');
(2) A Client Plan invested in the Funds pays an investment
management fee or similar fee based on total Client Plan assets from
which a credit has been subtracted representing such Client Plan's pro
rata share of investment advisory fees paid by the Funds to PNC (the
Subtraction Fee Method). If, during any fee period for which a Client
Plan has prepaid its investment management or similar fee, the Client
Plan purchases shares of such Fund, the requirement of this Section
II(a)(2) shall be deemed to have been met with respect to such prepaid
fee if, by a method reasonably designed to accomplish the same, the
amount of the prepaid fee that constitutes the fee with respect to plan
assets invested in shares of such Fund
[[Page 22854]]
(i) is anticipated and subtracted from the prepaid fee at the time of
payment of such fee, (ii) is returned to the Client Plan no later than
during the immediately following fee period, or (iii) is offset against
the prepaid fee for the immediately following fee period or for the fee
period immediately following thereafter. For purposes of this Section
II(a)(2), a fee shall be deemed to have been prepaid for any fee period
if the amount of such fee is calculated as of a date not later than the
first day of such period; or
(3) A Client Plan invested in a Fund receives a ``credit'' \2\ (the
Credit Fee Method) of such Plan's proportionate share of all fees
charged to the Funds by PNC for investment advisory or similar
services, on a date which is no later than one business day after
receipt of such fees by PNC from the Fund. The crediting of all such
fees to such Client Plan by PNC is audited by an independent accountant
firm (the Auditor) on at least an annual basis to verify the proper
crediting of such fees to such Client Plan.
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\2\ PNC represents that it would be accurate to describe ``the
credit'' as a ``credited dollar amount'' to cover situations in
which the ``credited amount'' is used to acquire additional shares
of a Fund, rather than being held by a Client Plan in the form of
cash. It is represented that the standard practice is to reinvest
the ``credited dollar amount'' in additional shares of the same Fund
with respect to which the fees were credited.
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(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 the transaction, as
defined, below in Section III, and is the same price which would have
been paid or received for such shares by any other investor in such
Fund at that time;
(c) PNC, including any officer or director of PNC, does not
purchase or sell shares of the Funds from or to any Client Plan;
(d) A Client Plan does not pay sales commissions in connection with
any purchase or sale of shares of a Fund, and a Client Plan does not
pay redemption fees in connection with any sale of shares to a Fund,
unless
(1) Such redemption fee is paid only to a Fund, and
(2) The existence of such redemption fee is disclosed in the
prospectus for such Fund in effect both at the time of the purchase of
such shares and at the time of such sale;
(e) The combined total of all fees received by PNC for the
provision of services by PNC to Client Plans and to Funds in which a
Client Plan invests, is not in excess of ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act;
(f) PNC does not receive any fees payable pursuant to Rule 12b-1
under the 1940 Act in connection with the transactions;
(g) No Client Plan is an employee benefit plan sponsored or
maintained by PNC;
(h) A second fiduciary (Second Fiduciary), as defined below in
Section III, who is acting on behalf of a Client Plan receives, in
advance of any initial investment by a Plan Client in a Fund, full and
detailed written disclosure of information concerning such Fund
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, including the nature and
extent of any differential between the rates of such fees for:
(i) Any investment advisory or similar services to be paid by such
Fund,
(ii) Any Secondary Services to be paid by such Fund to PNC, and
(iii) All other fees to be charged to or paid by the Client Plan
and by such Fund;
(3) The reason why PNC, acting as a fiduciary for such Client Plan,
considers investment in such Fund to be appropriate for such Client
Plan;
(4) A statement describing whether there are any limitations
applicable to PNC with respect to which assets of a Client Plan may be
invested in such Fund, and if so, the nature of such limitations; and
(5) Upon the request of the Second Fiduciary, acting on behalf of a
Client Plan, a copy of the proposed exemption and/or copy of the final
exemption, if granted, once such documents are published in the Federal
Register.
(i) On the basis of the information described, above, in Section
II(h), a Second Fiduciary, acting on behalf of a Client Plan,
authorizes in writing: (1) The investment of the assets of such Client
Plan in shares of each particular Fund; and (2) the fees received by
PNC in connection with services provided by PNC to such Fund. Such
authorization by a Second Fiduciary must be consistent with the
responsibilities, obligations, and duties imposed on fiduciaries by
Part 4 of Title I of the Act.
(j)(1) All authorizations described above, in Section II(i), made
by a Second Fiduciary, regarding:
(i) Investments by a Client Plan in a Fund;
(ii) Fees paid to PNC for investment management advisory services
or similar services; and
(iii) Fees paid for Secondary Services shall be terminable at will
by the Second Fiduciary, acting on behalf of such Client Plan, without
penalty to such Client Plan, upon receipt by PNC, acting as fiduciary
on behalf of such Client Plan, of a written notice of termination. A
form (the Termination Form), as defined, below, in Section III(j),
expressly providing an election to terminate the authorizations,
described, above, in Section II(i), with instructions on the use of
such Termination Form must be provided to such Second Fiduciary at
least annually. However, if a Termination Form has been provided to
such Second Fiduciary, pursuant to Section II(k) and (l), below, then a
Termination Form need not be provided again, pursuant to this Section
II(j), unless at least six (6) months but no more than twelve (12)
months have elapsed, since a Termination Form was provided, pursuant to
Section II(k) and (l), below.
With respect to j(1)(i), (ii), and (iii) above, all such
investments and fees shall be terminable at will by the Second
Fiduciary acting on behalf of such Client Plan.
(2) The instructions for the Termination Form must include the
following information:
(i) The authorization, described above in Section II(i), is
terminable at will by the Second Fiduciary acting on behalf of a Client
Plan, without penalty to the Client Plan, upon receipt by PNC of
written notice from such Second Fiduciary; and
(ii) Failure by such Second Fiduciary to return the Termination
Form will be deemed to be an approval by the Second Fiduciary and will
result in the continued authorization, as described above, in Section
II(i) of PNC to engage in the transactions described in this proposed
exemption;
(k) For a Client Plan invested in a Fund which uses one of the fee
methods described, above, in Section II(a)(1), (a)(2), or (a)(3) in the
event of a proposed change from one of the fee methods to another or in
the event of a proposed increase in the rate of any fee paid by such
Fund to PNC for any investment advisory service or similar service that
PNC provides to a Fund over an existing rate for such service or method
of determining the fee for such service, which had been authorized by
the Second Fiduciary for such Client Plan, in accordance with Section
II(i), above, PNC, at least thirty (30) days in advance of the
implementation of such change and/or such increase, provides a written
notice (which may take the form of a proxy statement, letter, or
similar communication that is separate from the prospectus of such Fund
and which explains the nature and amount of such change from one of the
fee methods to
[[Page 22855]]
another or increase in fee) to the Second Fiduciary of each Client Plan
affected by such change from one fee method to another fee method or
increase in fee. Such notice shall be accompanied by a Termination
Form, with instructions on the use of such Termination Form, as
described, above, in Section II(j).
(l) In the event of:
(i) A proposed addition of a Secondary Service for which an
additional fee is charged; or
(ii) A proposed increase in the rate of any fee paid by a Fund to
PNC for any Secondary Service, or
(iii) A proposed increase in the rate of any fee paid for Secondary
Services that results from the decrease in the number or kind of
services performed by PNC for such fee over an existing rate for
services which had been authorized, in accordance with Section II(i),
by the Second Fiduciary for a Client Plan invested in such Fund, PNC
will at least thirty (30) days in advance of the implementation of such
fee increase or additional service for which an additional fee is
charged or a decrease in the number or kind of services being
performed, provide a written notice (which may take the form of a proxy
statement, letter, or similar communication that is separate from the
prospectus of such Fund and which explains the nature and amount of the
additional service for which an additional fee is charged or the nature
and amount of the increase in fees or the decrease in the number or
kind of services) to the Second Fiduciary of each Client Plan invested
in such Fund which is proposing to increase fees or add services for
which an additional fee is charged or decreasing the number or kind of
services being performed. Such notice shall be accompanied by a
Termination Form, with instructions on the use of such Termination
Form, as described, above in Section II(j);
(m) On an annual basis, PNC provides the Second Fiduciary of such
Client Plan invested in a Fund with:
(1) A copy of the current prospectus for such Fund in which such
Client Plan invests,
(2) Upon the request of such Second Fiduciary, a copy of the
Statement of Additional Information for such Fund which contains a
description of all fees paid by such Fund to PNC;
(3) A copy of the annual financial disclosure report which includes
information about Fund portfolios, as well as the audit findings of an
independent auditor, within sixty (60) days of the preparation of such
report; and
(4) Oral or written responses to inquiries of the Second Fiduciary
of such Client Plan, as such inquiries arise.
(n) All dealings between a Client Plan and a Fund are on a basis no
less favorable to such Client Plan than dealings between such Fund and
other shareholders invested in such Fund.
(o) PNC maintains for a period of six (6) years the records
necessary to enable the persons described, below, in Section II(p) 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 solely because of circumstances beyond the control of PNC,
the records are lost or destroyed prior to the end of the six-year
period, and
(2) No party in interest other than PNC 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 Section II(p), below.
(p)(1) Except as provided in Section II(p)(2) and notwithstanding
any provisions of section 504(a)(2) of the Act, the records referred to
in Section II(o) 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 a Client Plan who has authority to acquire or
dispose of shares of a Fund owned by such Client Plan, or any duly
authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of a Client Plan or duly
authorized employee or representative of such participant or
beneficiary.
(2) None of the persons described in Section II(p)(1)(ii) and (iii)
shall be authorized to examine trade secrets of PNC, or commercial or
financial information which is privileged or confidential.
Section III--Definitions
For purposes of this exemption:
(a) The term ``PNC'' means The PNC Financial Services Group, Inc.,
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 ``Client Plan'' means any employee benefit plan as
defined in section 3(3) of the Act; as well as Keogh plans and
individual retirement accounts, for which PNC is a fiduciary as defined
in section 3(21) of the Act (excluding any employee benefit plans
sponsored by PNC or its affiliates).
(e) The term ``Fund'' or ``Funds'' shall mean the PNC Funds, Inc.
or any other diversified open-end investment company or companies
registered under the 1940 Act for which PNC serves as an investment
advisor, but not sub-advisor, and for which PNC may serve as a
custodian, dividend disbursing agent, shareholder servicing agent,
transfer agent, fund accountant, or provide some other ``Secondary
Service,'' as defined below in Section III which has been approved by
such Funds.
(f) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales of shares of a Fund 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.
(g) The term ``relative,'' means a relative as that term is defined
in section 3(15) of the Act (or a member 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.
(h) The term, ``Second Fiduciary(ies),'' means a fiduciary of a
Client Plan who is independent of and unrelated to PNC. For purposes of
this exemption, the Second Fiduciary will not be deemed to be
independent of and unrelated to PNC if:
(1) Such fiduciary, directly or indirectly controls, through one or
more intermediaries, is controlled by, or is under common control with
PNC;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary, is an officer, director, partner, or
employee of PNC (or is a relative of such persons); or
(3) Such fiduciary, directly or indirectly, receives any
compensation or other consideration for his or her personal account in
connection with
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any transaction described in this exemption.
If an officer, director, partner, or employee of PNC (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 such Client Plan's
investment advisor, (ii) the approval of any such purchase or sale
between such Client Plan and a Fund, and (iii) the approval of any
change in fees charged to or paid by such Client Plan in connection
with any of the transactions described in Section I above, then Section
III(h)(2), above, shall not apply.
(i) The term, ``Secondary Service(s),'' means a service which is
provided by PNC to a Fund, including custodial, accounting, and/or
administrative services. The fees for providing Secondary Services to a
Fund are paid to PNC by such Fund.
(j) The term, ``Termination Form,'' means the form supplied to a
Second Fiduciary which expressly provides an election to such Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described, above, in Section II(i).
(k) The term, ``business day,'' means any day that:
(1) PNC is open for conducting all or substantially or
substantially all of its banking functions, and
(2) The New York Stock Exchange (or any successor exchange) is open
for trading.
Effective Dates: If granted, this proposed exemption will be
effective February 1, 2008.
Summary of Facts and Representations
1. PNC is a bank holding company that owns or controls PNC Bank,
National Association (PNC Bank, NA), PNC Bank, Delaware, and Yardville
National Bank and a number of non-bank subsidiaries. PNC provides,
through its subsidiaries, a wide variety of trust and banking services
to individuals, corporations and institutions. Through its banking
subsidiaries, PNC provides investment management, fiduciary and trustee
services to employee benefit plans and charitable and endowment assets,
and provides non-discretionary services and investment options for
defined contribution plans.
On March 2, 2007, PNC acquired Mercantile Bankshares Corporation
(Mercantile), the parent company of eleven Mercantile subsidiary banks
(the Mercantile Subsidiary Banks). PNC merged the Mercantile Subsidiary
Banks with and into PNC Bank, NA on September 14, 2007, pursuant to an
application filed with and approved by the Office of the Comptroller of
the Currency. Immediately after consummation of the merger, PNC Bank,
NA transferred to PNC Bank, Delaware, nine Delaware branches previously
held by two of the Mercantile Subsidiary Banks, pursuant to a Bank
Merger Act application filed with and approved by the Federal Reserve
Bank of Cleveland.
2. After October 1, 2007, the Mercantile Funds Inc. became the
Funds or the PNC Funds, Inc. The Funds are diversified open-end
investment company or companies registered under the 1940 Act. Each of
the individual Funds constitutes a distinct investment vehicle, which
has its own prospectus or joint prospectus with one or more other
Funds. The shares of each Fund represent proportionate interests in the
assets of that Fund. The Funds have 14 individual funds that offer
portfolios of equity, fixed income and money market investments. The
Funds that will be available for investment in connection with the
transactions described in this proposal include the following: Prime
Money Market Fund, Government Money Market Fund, Limited Maturity Bond
Fund, Total Return Bond Fund, Capital Opportunities Fund, International
Equity Fund, Growth & Income Fund, Diversified Real Estate Fund, Equity
Income Fund, and Equity Growth Fund.
The overall management of the Funds, including the negotiation of
investment advisory contracts, rests with the Board of Directors of the
Funds. The Applicant represents that all of the Board's current
Directors are independent of PNC and its affiliates.
3. PNC, through its affiliate PCA, serves as the investment advisor
to each Fund within the meaning of section 2(20) of the 1940 Act. Prior
to September 17, 2007, PCA was called Mercantile Capital Advisors, Inc.
PCA has retained unaffiliated sub-advisors to manage certain Funds. PNC
represents that PCA pays for the fees charged by its sub-advisors so
that such sub-advisor fees are not an additional expense for such
Funds. PNC receives maximum gross investment advisory fees from each
Fund that vary between .20% and 1.30% of the Fund's average net assets
on a daily basis. These fees are subject to waivers and reimbursements
and currently the maximum advisory fee charged is 1.06%. The Funds
charge a Rule 12b-1 distribution fee of between .50% and a 1.00% with
respect to their Class A and Class C shares. Client Plans invest only
in Fund institutional shares which do not pay 12b-1 fees.
PCA also serves as administrator for the Funds. As administrator,
PCA maintains the Fund's office, prepares filings with state securities
commissions, coordinates federal and state tax returns and performs
other administrative functions. In its capacity as administrator, PCA
is entitled to an administrative fee, computed daily and paid monthly.
On February 1, 2008, the Fund began using service providers which are
PNC affiliates. However, the custodian for the Client Plans is not a
PNC affiliate.
4. Employee benefit plans, as defined in section 3(3) of the Act,
and plans, as defined in section 4975(e)(1) of the Code, as to which
PNC serves as fiduciary, are the subject plans of the proposed
transaction. PNC, through its subsidiaries and affiliates, serves as
trustee, investment manager, and in other similar fiduciary capacities
with respect to retirement plans qualified under 401(a) of the Code,
individual retirement accounts (IRA) described in section 408 of the
Code, and welfare and or other employee benefit plans that constitute
``employee plans'' as defined in section 3(3) of the Act and/or
``plans'' as defined in section 4975(e)(1) of the Code. The specific
Client Plans of PNC for which this exemption is being requested are
those to which PNC is a fiduciary with investment discretion and whose
assets either (1) are currently invested in the Funds or (2) may in the
future be invested in the Funds.
5. As of June 30, 2007, PNC performed discretionary management
services for over 940 employee benefit accounts with total assets in
excess of $6.2 billion. These services include discretionary investment
management programs under which PNC invests assets of Client Plans in
securities, including shares of open-end investment companies (i.e.,
mutual funds) registered under the 1940 Act, the investment advisors to
which may or may not be affiliated with PNC.
When PNC is acting as discretionary trustee or investment manager,
PNC has investment discretion over the Client Plan's assets and is
responsible for implementing the Plan's investment discretion
objectives within the guidelines established by the Plan sponsor or
named fiduciary. PNC may serve as a Plan custodian, in which capacity
it 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 transactions.
The Client Plans pay fees in accordance with fee schedules
established or negotiated with PNC. Fees for custodian, trustee, and
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investment management services are based on a percentage of assets in
the account, subject to certain minimum fee amounts. PNC may also
provide other services to a Client Plan, as selected by other Plan
sponsors or named fiduciaries. Fees may be paid by the Client Plan or
the Client Plan sponsor, depending on the particular circumstances.
Where PNC provides discretionary investment management services for
Client Plans, it may invest Plan assets in the Funds as a means of
obtaining more specialized management along with enhanced liquidity,
economies of scale, and greater diversification than would be available
through a separate account investment.
6. Investments by Client Plans in the Funds occur through direct
purchases of shares of the Funds on an ongoing basis. These investments
are made in the institutional shares classes of the Funds, which are
not subject to 12b-1 fees. There are no sales commissions, loads, or
transaction fees imposed on the Client Plans for buying or selling
shares of the Funds. The Funds may impose redemption fees not to exceed
2% of the value of the shares redeemed, provided that such fees are
imposed only in accordance with Rule 22c-2 of the 1940 Act and the
conditions of PTE 77-4, 42 FR 18732, (April 8, 1977).
7. Section 406(a)(1)(D) of the Act prohibits a fiduciary with
respect to a plan from causing such plan to engage in a transaction, if
he knows or should know, that such transaction constitutes a transfer
to, or use by or for the benefit of, a party in interest, of any assets
of such plan.
Sections 3(14)(A) and (B) of the Act define the term, ``party in
interest,'' to include, respectively, any fiduciary of a plan and any
person providing services to a plan. Under section 3(21)(A)(i) of the
Act, a person is a fiduciary with respect to a plan to the extent such
person exercises authority or control with respect to the management or
disposition of a plan's assets.
Under section 406(b) of the Act, a fiduciary with respect to a plan
may not: (1) Deal with the assets of a plan in his own interest or for
his own account, (2) in his individual or in any other capacity act in
any transaction involving a plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of such plan or the
interests of its participants or beneficiaries, or (3) receive any
consideration for his own personal account from any party dealing with
a plan in connection with a transaction involving the assets of such
plan.
Reliance on PTE 77-4
8. PTE 77-4 provides an exemption from section 406 of the Act and
section 4975 of the Code for a plan's purchase or sale of mutual fund
shares where such fund's investment advisor: (1) Is a plan fiduciary or
affiliated with a plan fiduciary; and (2) is not an employer of
employees covered by the plan. The conditions of PTE 77-4 prohibit the
payment of commissions by a plan, limit the payment of redemption fees
by such plan, prohibit the payment of double investment advisory fees,
and require prior disclosure to and approval by a Second Fiduciary.
In order to meet the condition of PTE 77-4 that a Client Plan does
not pay duplicative fees for investment advisory services, PNC has not
charged a Client Plan any direct fees for investment management
services for assets that are invested in the Funds. With respect to
such assets, these Client Plans have paid fees to PNC solely for non-
investment trust or custody services. The fees PNC has received for
investment management of a Client Plan's assets that were invested in
the Funds have come from the Funds in accordance with relevant
investment advisory and sub-advisory agreements with such Fund. Where
PNC is a fiduciary with respect to a Client Plan, the investment of
that Client Plan's assets in a Fund advised by an affiliate of PNC may
potentially raise issues under sections 406(a)(1)(D), 406(b)(1),
406(b)(2) and 406(b)(3) of the Act, unless an exemption is available.
9. Client Plans have not paid any commissions or other sales
charges in connection with their investments in the Funds, as required
under PTE 77-4. In addition, PNC has satisfied certain conditions in
PTE 77-4. These conditions include advance written disclosure of
information to a Client Plan regarding the fees to be received by PNC
from each Fund as well as advance written authorization from an
independent and unrelated Second Fiduciary of such Client Plan for
investment in the Fund. The Second Fiduciary is generally the Plan's
named fiduciary or sponsoring employer, and in the case of an IRA, the
Second Fiduciary is generally the owner of the IRA.
10. PNC is requesting an exemption similar to PTE 77-4, with
respect to the receipt of fees by PNC and related entities from the
Funds for acting as investment advisor, as well as for providing non-
advisory Secondary Services. The requested exemption, however, contains
two differences from PTE 77-4. First, beginning on February 1, 2008,
use of a ``Termination Form'' took the place of the PTE 77-4
requirement that an independent fiduciary approve any change in mutual
fund fees--substituting a ``negative consent'' requirement for those
fee changes in place of affirmative approval. Second, the requested
exemption would permit a Credit Fee Method with respect to PNC's
receipt of Plan and Fund-Level Fees. As a result, the requested
exemption would allow three ways to deal with duplicative fee--a Client
Plan may use the (a) Offset Fee Method, (b) Credit Fee Method, or (c)
the Subtraction Fee Method.
Receipt of Fees Pursuant to the Fee Methods
11. PNC will charge investment advisory fees to the Funds in
accordance with the investment advisory agreement between PNC and the
Funds, payable monthly. This agreement is approved annually 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 gross fees will have to be approved by such
Directors. These fees will not be increased without the approval of the
shareholders of the affected Funds. PNC represents that as of February
1, 2008, the following fee methods dealing with duplicative fees were
in place: (a) The Offset Fee Method, (b) the Subtraction Fee Method,
and (c) the Credit Fee Method,\3\ as described in Section II(a)(1),
(a)(2), and (a)(3) of this proposed exemption.
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\3\ 77-4 for PNC's. It is the view of PNC that the Credit Fee
Method is covered by PTE 77-4. The Department does not concur with
PNC's view that the Credit Fee Method is covered under PTE 77-4.
Accordingly, the Department has determined that no relief is
available under use of the Credit Fee Method.
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Offset Fee Method
12. With regard to the Offset Fee Method, PNC represents that it
does not charge a Client Plan any direct fees for investment management
with respect to such Client Plan's assets invested in the Funds. Such
Client Plan pays fees to PNC solely for non-investment trust or custody
services. The fees a Client Plan pays for those assets invested in the
Funds come solely from the Funds in accordance with certain advisory
agreements. The result is that the Plan-Level Fees are offset, and the
Client Plan pays only an investment advisory or similar Fund-Level Fee
with respect to those plan assets invested in a Fund.
[[Page 22858]]
Subtraction Fee Method
13. Under this method, PNC charges the Client Plan a direct
investment management fee, but credits to the benefit of such client
Plan, as a subtraction to such Client Plan's Plan-Level Fees, its
proportionate share of the investment advisory fee of Client Plan
assets invested in the Funds and paid to PNC, including the Client
Plan's share of any investment advisory fees paid by PNC to sub-
advisors, as reduced by any waiver or rebate by PNC of such fees to the
Funds, such as a waiver or rebate due to state law or other limits on
Fund expenses.\4\ The result is that the Client Plan pays only one
investment management fee with respect to those assets. The subtraction
is solely against those Plan-Level Fees charged by PNC for serving as
investment manager, and does not include non-investment management
trustee fees.
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\4\ While fees above a certain limit may be waived or rebated by
PNC, as a technical matter, the Funds may pay the excess fees and
then simultaneously receive a credit of the excess amount. For
purposes of the fee structure described in this section, PNC intends
to credit to Client Plans only the net fees that it receives, and
not to credit any of the excess fees that have been rebated to the
Funds.
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The credit under this Subtraction Fee Method and the Credit Fee
Method, below, will not include the fees for ``Secondary Services''
payable by the Funds to PNC, because such services rendered at the Fund
level will not be duplicative of any services provided directly to the
Client Plan. The services to the Client Plan may 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, asset and transaction reporting, execution
and settlement of transactions, processing benefit payments and loans,
valuing loan assets, and producing statement and reports regarding
overall plan holdings. PNC represents that these Plan-level services
will be necessary regardless of whether such Client Plan's assets are
invested in the Funds.
Credit Fee Method
14. Under this method, PNC will charge standard (or negotiated)
fees, as applicable to each Client Plan, for serving as trustee and/or
investment manager. At the beginning of each month, and in no event
later than one business day after the payment of investment advisory
fees by the Funds to PNC for the previous month, PNC will pay a
``credited dollar amount'' to a Client Plan that constituted its
proportionate share of all investment advisory fees charged by PNC to
the Funds for the previous month. The standard practice will be to
reinvest this ``credited dollar amount'' in additional shares of the
same Fund with respect to which the fees were credited. The additional
shares so acquired will be valued at the net asset value on the date
the purchase request is transmitted to the Fund, which is the same day
the ``credited dollar amount'' is made to the Client Plan's account.
It is represented that a Client Plan could request that a rebate be
made in cash. The cash would be invested in a money market account
pending investment direction from the investment officer for the
account. PNC does not anticipate notifying Client Plans in each
instance that they have the option to request that credits be made in
cash rather than additional shares.
15. PNC, as a trustee and investment manager for Client Plans in
connection with the decision to invest Client Plan assets in the Funds,
will monitor all fees paid by a Fund to PNC and third parties for
services provided to the Fund, to ensure that there will not be any
payment of ``double'' fees for duplicative services to the Fund.
For each Client Plan, the combined total of all fees PNC receives
directly and indirectly from 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.
Audit of the Credit Fee Method
16. It is represented that there are sufficient safeguards to
permit exemptive relief for the use by PNC of the Credit Fee Method.
Accordingly, PNC will maintain a system of internal accounting controls
for the rebating of investment advisory fees to Client Plans. In
addition, PNC will retain the services of an independent Auditor to
audit annually the crediting of fees to the Client Plans under the
Credit Fee Method. Such audits will provide independent verification of
the proper crediting to such Client Plans. In the annual audit of the
Credit Fee Method, the Auditor will use procedures designed to review
and test compliance with the specific operational controls and
procedures established by PNC for making the credits. Specifically, the
Auditor will: (i) Verify on a test basis the investment advisory fees
paid by the Funds to PNC; (ii) verify on a test basis the monthly
factors used to determine the investment advisory fees; (iii) verify on
a test basis the credits paid in total for a one-month period; (iv) re-
compute, on a test basis, using the monthly factors described above,
the amount of the credit determined for selected Client Plans; (v)
verify on a test basis the proper assignment of identification fields
for receipt of fee credits to the Client Plans; and (vi) verify on a
test basis that the credits were posted to the Client Plans within the
required time frame.
In the event either the internal audit made by PNC or the
independent audit made by the Auditor identifies an error in the
crediting of fees to a Client Plan, PNC will correct the error. With
respect to any shortfall in credited fees to a Client Plan, PNC will
make a cash payment to such Client Plan equal to the amount of the
error, plus interest paid at money market rates offered by PNC for the
period involved. Any excess credits made to a Client Plan will be
corrected by an appropriate deduction from such Client Plan or
reallocation of cash during the next payment period after discovery of
the error to reflect accurately the amount of total credits due to such
Client Plan for the period involved.
Receipt of Secondary Services Fees
As described in Representation 3 above, on February 1, 2008, the
Funds used PNC-affiliated service providers for secondary services.
Accordingly, PNC requests an administrative exemption, effective as of
February 1, 2008 for receipt of fees by PNC for the provision of
Secondary Services to the Funds.
In the Interest of Client Plans
17. The applicant represents that the proposed exemption is in the
interest of the Client Plans and their participants and beneficiaries.
In this regard, the Funds provide advantages for Client Plans,
including professional management, the ability to monitor performance
on a daily basis, and the flexibility to purchase and redeem shares on
a daily basis. It is represented that no sales commissions are charged
to Client Plans in connection with the purchase or sale of shares in
any of the Funds. In addition, these investments in the Funds by Client
Plans are made in certain classes of shares, which are not subject to
12b-1 fees. Redemption fees are charged only if disclosed in the
prospectuses in effect at both the time of the original investment in
the shares of a Fund and the time of redemption.
It is further represented that the Funds provide a means for Client
Plans with limited assets to achieve diversification of investment in a
manner that may not be attainable through direct investment. For these
reasons, the applicant maintains that the availability of the Funds as
investments
[[Page 22859]]
enables PNC, as investment manager, to better meet the investment goals
and strategies of a Client Plan.
Protective of Client Plans
18. It is represented that the proposed exemption contains
sufficient safeguards for the protection of the Client Plans invested
in the Funds. In this regard, prior to any investment by a Client Plan
in a Fund, the investment must be authorized in writing by the Second
Fiduciary of such Client Plan, based on full and detailed written
disclosure concerning such Fund.
In addition to the initial disclosures received by the Second
Fiduciary of a Client Plan invested in a Fund, PNC provides to such
Second Fiduciary ongoing disclosures regarding such Fund and the fee
methods. Specifically, on an annual basis, such Second Fiduciary
receives copies of the current Fund prospectuses, as well as copies of
the annual financial disclosure reports containing information about
the Funds and audit findings of the Auditor within sixty (60) days of
the preparation of such report.
It is represented that PNC or an appropriate affiliate, thereof,
will respond to inquiries from a Second Fiduciary. In addition, a
Second Fiduciary, upon request, will receive copies of the Statements
of Additional Information for the Funds and a copy of the proposed
exemption and a copy of the final exemption, if granted, once such
documents are published in the Federal Register.
Furthermore, each investment of the assets of a Client Plan in a
Fund will be subject to the ongoing ability of the Second Fiduciary of
such Client Plan to terminate the investment in such Fund without
penalty to such Client Plan at any time upon written notice of
termination to PNC. In this regard, a Termination Form, expressly
providing an election to terminate the authorization, with instructions
on the use of such Termination Form, will be supplied to the Second
Fiduciary at least annually.
The Termination Form may be used to notify PNC, in writing to
effect a termination by selling the shares of the Funds held by a
Client Plan. Such sales are to occur within one (1) business day, as
defined in Section III(k) of this exemption, following receipt by PNC
of the Termination Form. If, due to circumstances beyond the control of
PNC, the sale cannot be executed within one (1) business day, PNC will
be obligated to complete the sale within the next business day.
By using the Termination Form that PNC provides thirty (30) days in
advance of any increase in the rate of fees and change in services, the
Second Fiduciary will have sufficient opportunity to terminate a Client
Plan's investment in a Fund, without penalty to the Client Plan, and
withdraw the Client Plan's investment from such Fund in advance of any
such increase in fee and change in services.
Feasibility
19. PNC represents that the proposed exemption is feasible in that
compliance with the terms of the exemption will be monitored by the
Second Fiduciary of a Client Plan who is independent of PNC. Further,
PNC provides internal accounting safeguards to ensure the accuracy of
the calculation of the ``credited dollar amounts'' under the Credit Fee
Method, and an independent Auditor will provide assurance that the
Credit Fee Method is properly administered. For these reasons, the
applicant maintains that the Department will not have to monitor the
implementation and enforcement of the exemption.
It is represented that the negative consent procedure, as described
herein, for obtaining the approval from the Second Fiduciary of each
Client Plan invested in a Fund for increases in fees and the addition
of services for which a fee is charged is more efficient, cost
effective, and administratively feasible than written affirmative
consent approval, as described in PTE 77-4.
Under PTE 77-4, an increase in fees and any change in services may
not be implemented until written approval of such increase or change is
obtained from every Second Fiduciary of Client Plans invested in a
Fund. A communication failure that results in not obtaining an
affirmative written approval from a Second Fiduciary of a Client Plan
could force PNC to transfer a Client Plan's investments out of a Fund.
Under the negative consent procedure, as set forth herein, the
difficulties of obtaining written affirmative approval from the Second
Fiduciary of each Client Plan and coordinating any fee increases and
any additional services for which a fee is charged will be avoided
while such Second Fiduciary will still receive the necessary
disclosures. Specifically, each Second Fiduciary of a Client Plan
invested in a Fund will receive advance notice in a statement separate
from such Fund's prospectus of any proposed change from one fee method
to another or any proposed increase in a rate of fee for investment
advisory services, or similar services, paid to PCA that was previously
disclosed in the Fund prospectus. In addition, each Second Fiduciary
will receive advance notice of any additional Secondary Service for
which a fee is charged and any increase of any rate of any fee paid for
Secondary Services to PNC or an increase in a rate of any fee that
results from a decrease in the number or kind of service performed by
PNC in connection with a previously authorized fee for such service.
With regard to the affected Fund, the advance notice will contain an
explanation of the nature and amount of the increase in fees and the
nature and amount of the addition (or elimination) of a service for
which an additional fee is charged. The Second Fiduciary will receive
such advance notice thirty (30) days prior to the effective date of
such increase in the rate of fees and change in services with respect
to a Client Plan's investment in a Fund. Such advance notice must be
accompanied by a Termination Form that would allow the Second Fiduciary
to terminate, without penalty to the Client Plan, the authorization to
invest in the Funds. The notice requirement would not apply if an
increase is the result of the cessation of a voluntary temporary waiver
of fees by PNC, and the full fee level had previously been described in
writing to and authorized by the Second Fiduciary. Failure to return
the Termination Form by the thirtieth (30th) day will result in the
negative consent of the Second Fiduciary to the increase in fees or to
the increase in the fees that results from an addition or elimination
in the number or kind of service performed by PNC in connection with a
previously authorized fee for such service and to the addition of
services for which an additional fee is charged.
20. In summary, the proposed transactions satisfy or will satisfy
the statutory criteria of section 408(a) of ERISA for the following
reasons:
a. The Funds provide the Client Plans with an effective investment
vehicle.
b. Client Plan investments in the Funds and the payment of any fees
by the Funds to PNC in connection with such investments will require an
advance authorization in writing by the Second Fiduciary after full
written disclosure, including current prospectuses for the Funds and a
statement describing the fee method to be used.
c. Any authorization made by the Second Fiduciary will be
terminable at will by that fiduciary, without penalty to the Client
Plan, within one business day following receipt by PNC of written
notice of termination from the fiduciary on a form expressly providing
an election to terminate the authorization,
[[Page 22860]]
which will be supplied to the Second Fiduciary no less than annually,
or in any other written notice of termination.
d. No sales commissions will be paid by the Client Plans in
connection with the acquisition or sale of shares of the Funds.
Redemption fees not to exceed two percent (2%) of the value of the
shares redeemed may be paid only in accordance with Rule 22c-2 of the
1940 Act and the conditions imposed on such fees by PTE 77-4.
e. All dealings among the Client Plans, any of the Funds, PCA, as
well as PNC and its affiliates will be on a basis no less favorable to
the Client Plans than such dealings with the other shareholders of the
Funds.
f. Plans investing in the Funds would pay only a single level of
investment advisory-type fees with respect to their assets so invested,
either receiving a rebate of the Fund investment advisory fees or not
being charged the Plan-Level investment management fees.
g. PNC will require annual audits by an independent accounting firm
to verify that the Client Plan using the Credit Fee Method receives
proper credits for the fees paid to the Funds.
For Further Information Contact: Mr. Anh-Viet Ly of the Department,
telephone (202) 693-8648. (This is not a toll-free number.)
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, in accordance with the procedures set forth in 29 CFR Part 2570,
Subpart B (55 FR 32836, 32847, August 10, 1990).\5\
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\5\ For purposes of this proposed exemption, references to
section 406 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------
If the proposed exemption is granted, the restrictions of sections
406(a), 406(b)(1) and 406(b)(2) of the Act (or ERISA) 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 as of
December 22, 2009 to the cash sale of certain fixed income securities
(the Securities) for an aggregate purchase price of $113,977,880.15 by
the Quality D Short-Term Investment Fund (the Fund) to State Street, a
fiduciary with respect to the Fund and a party in interest with respect
to employee benefit plans (the Plans) invested, directly or indirectly,
in the Fund, provided that the following conditions are met:
(a) The sale was a one-time transaction for cash;
(b) The Fund received an amount which was equal to the sum of (1)
the aggregate current amortized cost of the Securities as of the date
of the transaction plus (2) the aggregate accrued interest on the
Securities through the date of the transaction, calculated at the
applicable contract rate for each of the Securities;
(c) The Fund did not bear any commissions, fees, transaction costs,
or other expenses in connection with the sale;
(d) The amount received by the Fund with respect to each of the
Securities was no less than the fair market value of each such
Security, based upon the closing price obtained from an independent
pricing service, as of the close of business on the date prior to the
date of the transaction;
(e) State Street, as trustee of the Fund, determined that the sale
of the Securities was appropriate for and in the best interests of the
Fund, and the Plans invested, directly or indirectly, in the Fund, at
the time of the transaction;
(f) State Street took all appropriate actions necessary to
safeguard the interests of the Fund and the Plans invested, directly or
indirectly, in the Fund, in connection with the transaction;
(g) State Street and its affiliates, as applicable, maintain, or
cause to be maintained, for a period of six (6) years from the date of
any covered transaction such records as are necessary to enable the
person described below in paragraph (h)(1), to determine whether the
conditions of this exemption have been met, except that:
(1) No party in interest with respect to a Plan which engages in
the covered transaction, other than State Street and its affiliates, as
applicable, shall be subject to a civil penalty under section 502(i) of
the Act or the taxes imposed by sections 4975(a) and (b) of the Code,
if such records are not maintained, or not available for examination,
as required, below, by paragraph (h)(1); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of State Street or its affiliates, as applicable, such records are lost
or destroyed prior to the end of the six-year period.
(h)(1) Except as provided, in paragraph (h)(2), and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act,
the records referred to in paragraph (g) are unconditionally available
at their customary location for examination during normal business
hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(B) Any fiduciary of any Plan that engages in the covered
transaction, or any duly authorized employee or representative of such
fiduciary;
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a Plan that engages in the
covered transaction, or any authorized employee or representative of
these entities; or
(D) Any participant or beneficiary of a Plan that engages in the
covered transaction, or duly authorized employee or representative of
such participant or beneficiary;
(2) None of the persons described, above, in paragraphs (h)(1)(B)-
(D) shall be authorized to examine trade secrets of State Street or its
affiliates, or commercial or financial information which is privileged
or confidential; and
(3) Should State Street refuse to disclose information on the basis
that such information is exempt from disclosure, State Street shall, by
the close of the thirtieth (30th) day following the request, provide a
written notice advising that person of the reasons for the refusal and
that the Department may request such information.
Effective Date: If granted, this exemption will be effective as of
December 22, 2009.
Summary of Facts and Representations
1. State Street is a Massachusetts state-chartered trust company
subject to regulation by the Massachusetts Division of Banks. As of
December 31, 2009, State Street managed assets in excess of $1.9
trillion. State Street provides a wide range of banking and fiduciary
services to a broad array of clients, including employee benefit plans
subject to the Act and plans subject to Section 4975 of the Code. State
Street is a subsidiary of State Street Corporation, a financial holding
company organized under the laws of Massachusetts.
2. The Fund is a group trust that is exempt from federal income tax
pursuant to Rev. Rul. 81-100. State Street serves as a trustee and
investment manager for the Fund. The Fund is a short-term investment
fund that values its assets based on their amortized cost, and seeks to
maintain a constant unit value equal to $1.00. The Fund invests
primarily in fixed income investments, including certificates of
deposit, asset-backed securities, commercial paper, corporate notes,
asset-backed
[[Page 22861]]
commercial paper, bank notes, time deposits and repurchase agreements.
The Fund is maintained in connection with State Street's securities
lending program, and it is maintained exclusively for the purposes of
investing cash collateral generated by that program.
3. As of December 21, 2009, the value of the Fund's portfolio was
approximately $48,594,086,914. As of December 21, 2009, there were
approximately 136 direct investors in the Fund, a substantial number of
which were employee benefit plans or trusts subject to the Act, with
the remaining investors being government-sponsored employee benefit
plans, church-sponsored employee benefit plans and unaffiliated group
trusts.\6\ No in-house Plan of State Street invested in the Fund. Of
the ERISA-covered Plans investing in the Fund, none had a greater that
20% interest (direct or indirect) therein.
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\6\ It is represented that section 408(b)(8) of the Act would
apply to the investment by the ERISA-covered Plans in the Fund.
Section 408(b)(8) of the Act provides a statutory exemption for any
transactions between a plan and a common or collective trust fund
maintained by a party in interest which is a bank or trust company
supervised by a State or Federal agency if certain requirements are
met.
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4. On December 22, 2009, the Fund held the following asset backed
securities, which it valued at their amortized cost:
----------------------------------------------------------------------------------------------------------------
Acquisition Maturity
CUSIP No. Issuer date Original face value date
----------------------------------------------------------------------------------------------------------------
78442GPR1............................ SLM Student Loan Trust.. 08/19/05 $26,132,000.00 10/25/40
14041NCR0............................ Capital One Multi-Asset 03/02/06 22,581,000.00 12/16/13
Execution.
161571BB9............................ Chase Issuance Trust.... 02/21/06 64,371,000.00 04/15/13
78453VAA7............................ Superannuation Members 11/18/03 9,900,000.00 05/09/30
Home.
---------------------
Total............................ ........................ ............ $122,984,000.00 ............
----------------------------------------------------------------------------------------------------------------
The decision to invest in the Securities was made by State Street.
Prior to each investment, State Street conducted an investigation of
the potential investment, examining and considering the economic and
other terms of the Securities. State Street represents that each
investment in the Securities was consistent with the applicable
investment policies and objectives of the Fund, including the Fund's
desire to maintain a constant unit value equal to $1.00. At the time
the Fund acquired each of the Securities, each Security was rated at
least ``A-1+'' by Standard & Poor's Corporation and ``P-1'' by Moody's
Investor Services, Inc. Based on its consideration of the relevant
facts and circumstances, State Street states that it was prudent and
appropriate for the Fund to acquire the Securities.\7\ State Street
also represents that none of the issuers or sellers of the Securities
were related to State Street.
\7\ The Department is expressing no opinion in this proposed
exemption regarding whether the acquisition and holding of the
Securities by the Fund violated any of the fiduciary responsibility
provisions of Part 4 of Title I of the Act. In this regard, the
Department notes that section 404(a) of the Act requires, among
other things, that a fiduciary of a plan act prudently, solely in
the interest of the plan's participants and beneficiaries, and for
the exclusive purpose of providing benefits to participants and
beneficiaries when making investment decisions on behalf of a plan.
Section 404(a) of the Act also states that a plan fiduciary should
diversify the investments of a plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent
not to do so.
Moreover, the Department is not providing any opinion as to
whether a particular category of investments or investment strategy
would be considered prudent or in the best interests of a plan as
required by section 404 of the Act. The determination of the
prudence of a particular investment or investment course of action
must be made by a plan fiduciary after appropriate consideration of
those facts and circumstances that, given the scope of such
fiduciary's investment duties, the fiduciary knows or should know
are relevant to the particular investment or investment course of
action involved, including a plan's potential exposure to losses and
the role the investment or investment course of action plays in that
portion of the plan's portfolio with respect to which the fiduciary
has investment duties (see 29 CFR 2550.404a-1). The Department also
notes that in order to act prudently in making investment decisions,
a plan fiduciary must consider, among other factors, the
availability, risks and potential return of alternative investments
for the plan. Thus, a particular investment by a plan, which is
selected in preference to other alternative investments, would
generally not be prudent if such investment involves a greater risk
to the security of a plan's assets than other comparable investments
offering a similar return or result.
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5. State Street represents that prior to December 22, 2009, the
market value of the Securities had decreased and the Securities had
been consistently trading below their amortized cost. In addition,
market conditions with respect to the Securities reflected a diminished
degree of liquidity with respect to the Securities.
6. In view of the foregoing, State Street, as trustee of the Fund,
determined that it would be appropriate and in the best interest of the
Fund to sell each of the Securities to State Street at a price equal to
the greater of (a) the fair market value of such Security (determined
based on the closing price of such Security on the day prior to the
date of the sale transaction, as obtained from an independent pricing
service) or (b) the sum of (i) the Fund's current amortized cost of the
applicable Security on the date of the sale transaction, plus (ii)
accrued interest on the applicable Security through the date of the
sale transaction, calculated at the applicable contract rate for such
Security. State Street determined that such a sale would protect the
Fund from any potential investment loss with respect to the Securities,
enhance the liquidity of the Fund, be consistent with the Fund
maintaining a constant unit value equal to $1.00, and alleviate any
concerns the investors in the Fund might have regarding the foregoing
matters. Finally, State Street determined that the purchase of the
Securities would be permissible under applicable banking law.
7. On December 21, 2009, prior to consummation of the transaction,
State Street sent written notice to the designated representative of
each of the investors having a direct interest in the Fund of State
Street's intent to cause the Fund to sell the Securities to State
Street. While such notice did not contemplate or require any response,
it should be noted that this notice did not generate any negative
reaction from any of the recipients thereof.
8. State Street represents that on December 22, 2009, it purchased
the Securities from the Fund for an aggregate lump sum cash payment of
$113,977,880.15, which amount represented the sum of (a) the aggregate
current amortized cost of the Securities ($113,959,596.43) on the date
of the sale transaction plus (b) the aggregate accrued interest on the
Securities through the date of the sale transaction, calculated at the
applicable contract rate for each of the Securities ($18,283.72). Three
of the four Securities had a current amortized cost equal to their face
value. The fourth Security had a current amortized cost slightly less
than the purchase price because it was
[[Page 22862]]
purchased on the secondary market at a discount to face value. The
purchase price of each Security was determined as follows:
----------------------------------------------------------------------------------------------------------------
Face value as of
CUSIP No. 12/22/09 Amortized cost Accrued interest Net proceeds
----------------------------------------------------------------------------------------------------------------
78442GPR1................... $26,132,000.00 $26,131,247.84 $12,917.07 $26,144,164.91
14041NCR0................... 22,581,000.00 22,581,000.00 1,999.25 22,582,199.25
161571BB9................... 64,371,000.00 64,371,000.00 3,418.65 64,374,418.65
78453VAA7................... 876,348.59 876,348.59 748.75 877,097.34
-----------------------------------------------------------------------------------
Total................... 113,960,348.59 113,959,596.43 18,283.72 113,977,880.15
----------------------------------------------------------------------------------------------------------------
The contract rate used to calculate the applicable accrued interest for
each Security was a floating rate based on a LIBOR-based formula that
resets on a monthly or quarterly basis.
9. Prior to its consummation of the foregoing transaction, State
Street represents that it contacted Interactive Data Corporation (IDC),
an independent pricing service, to obtain the closing price of each of
the Securities on December 21, 2009 (the day preceding the date of the
transaction) and determined that such closing price for each Security
was less than the price State Street would pay for each such Security.
The information provided by IDC was as follows:
------------------------------------------------------------------------
Market
CUSIP No. price Fair market value
------------------------------------------------------------------------
78442GPR1............................. 83.5324 $21,828,058.47
14041NCR0............................. 99.30296 22,423,601.40
161571BB9............................. 99.54217 64,076,290.25
78453VAA7............................. 99.7209 873,902.70
---------------------------------
Total............................. ........... 109,201,852.82
------------------------------------------------------------------------
10. State Street, as trustee of the Fund, believed that the sale of
the Securities by the Fund to State Street was in the best interests of
the Fund and the Plans invested, directly or indirectly, in the Fund,
at the time of the transaction. State Street states that any sale of
the Securities on the open market at that time would have produced
losses for the Fund and for the participating investors in the Fund.
11. State Street represents that the sale of the Securities by the
Fund to State Street benefited the Plan investors in the Fund because
the purchase price paid by State Street for each Security exceeded the
fair market value of such Security. In addition, State Street
represents that the transaction was a one-time sale for cash in
connection with which the Fund did not bear any commissions, fees,
transaction costs or other expenses. State Street further represents
that it took all appropriate actions necessary to safeguard the
interests of the Fund and its participating investors in connection
with the sale of the Securities.
Accordingly, State Street requests an administrative exemption from
the Department with respect to the sale of the Securities by the Fund
to State Street. If granted, the exemption will be effective as of
December 22, 2009.
12. In summary, State Street represents that the transaction
satisfied the statutory criteria of section 408(a) of the Act and
section 4975 of the Code because: (a) The sale of the Securities by the
Fund to State Street was a one-time transaction for cash; (b) the Fund
received an amount equal to the sum of (i) the aggregate current
amortized cost of the Securities as of the date of the transaction,
plus (ii) the aggregate accrued interest on the Securities through the
date of the transaction, calculated at the applicable contract rate for
each of the Securities, which amount was greater than the closing price
of each of the Securities as of the close of business on the date
immediately prior to the date of the sale transaction, as determined
based on information obtained from IDC, an independent pricing service;
(c) the Fund did not pay any commissions, fees, transaction costs, or
other expenses with respect to the sale; (d) the amount received by the
Fund with respect to each of the Securities was no less than the fair
market value of each such Security as of the close of business on the
date prior to the date of the transaction; and (e) State Street, as
trustee of the Fund, determined that the sale of the Securities by the
Fund to State Street was in the best interests of the Fund and the
Plans invested, directly or indirectly, in the Fund, at the time of the
transaction.
For Further Information Contact: Mr. Brian Shiker of the
Department, telephone (202) 693-8552. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and
[[Page 22863]]
not in derogation of, any other provisions of the Act and/or the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 26th day of April 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration.
[FR Doc. 2010-10065 Filed 4-29-10; 8:45 am]
BILLING CODE 4510-29-P