Grant of individual exemptions; Bank of America National Trust and Savings Association

DEPARTMENT OF LABOR

[Prohibited Transaction Exemption 94-47; Exemption Application No. D-

9516]

Grant of individual exemptions; Bank of America National Trust

and Savings Association

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of Individual Exemptions.

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SUMMARY: This document contains exemptions issued by the Department of

Labor (the Department) from certain of the prohibited transaction

restrictions of the Employee Retirement Income Security Act of 1974

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

Notices were published in the Federal Register of the pendency

before the Department of proposals to grant such exemptions. The

notices set forth a summary of facts and representations contained in

each application for exemption and referred interested persons to the

respective applications for a complete statement of the facts and

representations. The applications have been available for public

inspection at the Department in Washington, DC. The notices also

invited interested persons to submit comments on the requested

exemptions to the Department. In addition the notices stated that any

interested person might submit a written request that a public hearing

be held (where appropriate). The applicants have represented that they

have complied with the requirements of the notification to interested

persons. No public comments and no requests for a hearing, unless

otherwise stated, were received by the Department.

The notices of proposed exemption were issued and the exemptions

are being granted solely by the Department because, 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 proposed to the Secretary

of Labor.

Statutory Findings

In accordance with section 408(a) of the Act and/or section

4975(c)(2) of the Code and the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon

the entire record, the Department makes the following findings:

(a) The exemptions are administratively feasible;

(b) They are in the interests of the plans and their participants

and beneficiaries; and

(c) They are protective of the rights of the participants and

beneficiaries of the plans.

Bank of America National Trust and Savings Association (Bank of

America), Located in San Francisco, California

[Prohibited Transaction Exemption 94-47; Exemption Application No.

D-9516].

Exemption

Part I--Exemption for Cross-Trading Between Certain Funds

The restrictions of sections 406(a)(1)(A) and 406(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) of the Code, shall not apply

to (1) the purchase and sale of stock (including the stock of

BankAmerica Corporation (BAC)) between Index Funds and/or Model Driven

funds (collectively, the Funds); and (2) the purchase and sale of

stocks (including the common stock of BAC) between Index or Model-

Driven Funds and various large pension plans (the Large Plans) pursuant

to portfolio restructuring programs of the Large Plans; provided that

the following conditions and the General Conditions of Part III are

met:

(a) The Index or Model-Driven Fund is based on an index which

represents the investment performance of a specific segment of the

public market for equity securities in the United States and/or foreign

countries. The organization creating and maintaining the index must be

(1) engaged in the business of providing financial information,

evaluation, advice or securities brokerage services to institutional

clients, (2) a publisher of financial news or information, or (3) a

public stock exchange or association of securities dealers. The index

must be created and maintained by an organization independent of Bank

of America and its affiliates. The index must be a generally accepted

standardized index of securities which is not specifically tailored for

the use of Bank of America or its affiliates.

(b) The price for the stock is set at the closing price for that

stock on the day of trading; unless the stock was added to or deleted

from an index underlying a Fund (or Funds) after the close of trading,

in which case the price will be the opening price for that stock on the

next business day after the announcement of the addition or deletion.

(c) The transaction takes place within three business days of the

``triggering event'' giving rise to the cross-trade opportunity. A

triggering event is defined as:

(1) A change in the composition or weighting of the index and/or

model underlying a Fund;

(2) A change in the overall level of investment in a Fund as a

result of investments and withdrawals made on the Fund's regularly-

scheduled opening date; or

(3) A declaration by Bank of America (recorded on Bank of America's

records) that a ``triggering event'' has occurred, which will be made

upon an accumulation of cash in a Fund attributable to dividends and/or

tender offers for portfolio securities equal to not less than .05

percent and not more than .5 percent of the Fund's total value;

(d) In the event that a number of shares of a particular stock

which all of the Funds or Large Plans propose to sell on a given day is

less than the number of shares of such stock which all of the Funds or

the Large Plans propose to buy, or vice versa, the direct cross-trade

opportunity must be allocated among potential buyers or sellers on a

pro rata basis.

(e) With respect to transactions involving a Large Plan:

(1) It has assets in excess of $50 million;

(2) Fiduciaries of the Large Plan who are independent of Bank of

America are, prior to any cross-trade transactions, fully informed of

the cross-trade technique and provide advance written approval of such

transactions. Within 45 days of the completion of the Large Plan's

portfolio restructuring program, such fiduciaries shall be fully

appraised in writing of the transaction results. However, if such

program takes longer than three months to complete, interim reports of

the transaction results will be made within 30 days of the end of each

three month period.

(3) Such Large Plan transactions occur only in situations where

Bank of America has been authorized to restructure all or a portion of

the Large Plan's portfolio into an Index or Model-Driven Fund

(including a separate account based on an index or computer model) or

to act as a ``trading adviser'' in carrying out a Large Plan-initiated

liquidation or restructuring of its equity portfolio; and

(f) Bank of America receives no additional direct or indirect

compensation as a result of the cross-trade transaction.

(g) Prior to any proposed cross-trading by a Fund, Bank of America

provides to each employee benefit plan which invests in a Fund

information which describes the existence of the cross-trading program,

the ``triggering events'' which will create cross-trade opportunities,

the pricing mechanism that will be utilized for stocks purchased or

sold by the Funds, and the allocation methods and other procedures

which will be implemented by Bank of America for its cross-trading

practices. Any such employee benefit plan which subsequently invests in

a Fund shall be provided the same information prior to or immediately

after the plan's initial investment in a Fund.

Part II--Exemption for the Acquisition, Holding and Disposition of

BAC Stock

The restrictions of sections 406(a)(1)(D), 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)(D) and (E) of the

Code, shall not apply to the acquisition, holding or disposition of the

common stock of BAC by Index or Model-Driven Funds, if the following

conditions and the General Conditions of Part III are met:

(a) The acquisition or disposition of the BAC stock is for the sole

purpose of maintaining strict quantitative conformity with the relevant

index upon which the Index or Model-Driven Fund is based;

(b) All acquisitions and dispositions, other than through cross-

trade transactions meeting the conditions of Part I, will comply with

Rule 10b-18 of the Securities and Exchange Commission, including the

limitations regarding the price paid or received for such stock;

(c) Aggregate daily purchases of BAC stock, other than cross-trade

purchases meeting the conditions of Part I, will constitute no more

than the greater of: (1) 10 percent of the stock's average daily

trading volume for the previous five days; or (2) 10 percent of the

stock's trading volume on the date of the transaction;

(d) If the necessary number of shares of BAC stock cannot be

acquired within 10 business days from the date of the event which

causes the particular Index or Model-Driven Fund(s) to require BAC

stock, Bank of America will appoint a fiduciary which is independent of

Bank of America and its affiliates to design acquisition procedures and

monitor Bank of America's compliance with such procedures;

(e) All purchases and sales of BAC stock, other than cross-trades

meeting the conditions of Part I, will be executed on the national

exchange on which BAC stock is primarily traded;

(f) No transactions will involve purchases from, or sales to, Bank

of America or any affiliate, officer, director or employee of Bank of

America or any party in interest with respect to a plan which has

invested in an Index or Model-Driven Fund. This requirement does not

preclude purchases and sales of BAC stock in cross-trade transactions

meeting the conditions of Part I;

(g) No more than five (5) percent of the total amount of BAC stock

issued and outstanding at any time shall be held in the aggregate by

the Index and Model-Driven Funds;

(h) BAC stock shall constitute no more than two percent of the

value of any independent third-party index on which the investments of

an Index or Model-Driven Fund are based;

(i) A plan fiduciary independent of Bank of America authorizes the

investment of such plan's assets in an Index or Model-Driven Fund which

purchases and/or holds BAC stock; and

(j) A fiduciary independent of Bank of America and its affiliates

will direct the voting of the BAC stock held by an Index or Model-

Driven Fund on any matter in which shareholders of BAC stock are

required or permitted to vote.

Part III--General Conditions

(a) Bank of America maintains or causes to be maintained for a

period of six years from the date of the transaction the records

necessary to enable the persons described in paragraph (b) of this Part

to determine whether the conditions of the exemption have been met,

except that a prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of Bank of America

or its affiliates, the records are lost or destroyed prior to the end

of the six-year period.

(b)(1) Except as provided in paragraph (2) of this subsection (b)

and notwithstanding any provisions of subsections (a)(2) and (b) of

section 504 of the Act, the records referred to in subsection (a) of

this Part are available at their customary location for examination

during normal business hours by--

(A) Any duly authorized employee or representative of the

Department of Labor or the Internal Revenue Service,

(B) Any fiduciary of a plan participating in an Index or Model-

Driven Fund who has authority to acquire or dispose of the interests of

the plan, or any duly authorized employee or representative of such

fiduciary,

(C) Any contributing employer with respect to any plan

participating in an Index or Model-Driven Fund or any duly authorized

employee or representative of such employer, and

(D) Any participant or beneficiary of any plan participating in an

Index or Model-Driven Fund, or any duly authorized employee or

representative of such participant or beneficiary.

(2) None of the persons described in subparagraphs (B) through (D)

of this subsection (b) shall be authorized to examine trade secrets of

Bank of America, any of its affiliates, or commercial or financial

information which is privileged or confidential.

Part IV--Definitions

(1) Index Fund--Any investment fund, account or portfolio

sponsored, maintained and/or trusteed by Bank of America, or an

affiliate of Bank of America, in which one or more investors invest

which is designed to replicate the capitalization-weighted composition

of a stock index which satisfies the conditions of Part I(a) and Part

II(h).

(2) Model-Driven Fund--Any investment fund, account or portfolio

sponsored, maintained and/or trusteed by Bank of America, or an

affiliate of the Bank of America, in which one or more investors invest

which is based on computer models using prescribed objective criteria

to transform an independent third-party stock index which satisfies the

conditions of Part I(a) and Part II(h).

(3) Opening date--The regularly-scheduled date on which investments

in or withdrawals from an Index or Model-Driven Fund may be made.

(4) Trading adviser--A person whose role is limited to arranging a

Large Plan-initiated liquidation or equity restructuring within a

stated time so as to minimize transaction costs.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption, refer to

the notice of proposed exemption published on April 22, 1994 at 59 FR

19255.

WRITTEN COMMENTS: The Department received one written comment and no

requests for a hearing. The written comment was submitted on behalf of

the Bank of America National Trust and Savings Association (the

Applicant), and it addresses two points which are summarized as

follows:

1. Section 6 in the summary of facts and representations in the

notice of proposed exemption (the Summary) commences with the following

statement: ``The Bank proposes to take advantage of opportunities to

direct the cross-trading of securities directly between the Funds, or

directly with other client accounts for which the Bank is the

investment manager, or with mutual funds or institutional accounts for

which the Bank is the investment advisor.'' However, the Applicant

points out that the proposed exemption does not provide exemptive

relief as broad as that reflected in the statement.

The Department notes that the appearance of the aforementioned

statement in the Summary is an error. The Applicant did not request,

and the Department did not propose, exemptive relief for the Funds'

cross-trade transactions with ``other client accounts for which the

Bank is the investment manager, or with mutual funds or institutional

accounts for which the Bank is the investment advisor.'' Despite the

erroneous appearance of the aforementioned statement in the Summary,

the Department notes that the operative language of the proposed

exemption included only transactions between Index Funds and/or Model

Driven Funds (the Funds), and between the Funds and Large Plans (as

defined in Part I, Section (e) of the proposed exemption), including

the purchase and sale of common stock of BAC. Like the proposed

exemption, the final exemption is restricted to those transactions

defined and identified in Parts I through IV of the exemption, which do

not include transactions with ``other client accounts for which the

Bank is the investment manager, or with mutual funds or institutional

accounts for which the Bank is the investment advisor.''

2. The Applicant notes a typographical error in Section 9 of the

Summary: The reference to rule 10b-189, in the second paragraph, line

10, should read as a reference to SEC Rule 10b-18.

ADDITIONS: In this final exemption the Department has included a new

condition (g) in Part I--Exemption for Cross-Trading Between Certain

Funds, which was inadvertently omitted from the notice of proposed

exemption. Condition (g) requires the Bank of America to provide

certain information regarding its cross-trading program to employee

benefit plans which invest in the Funds.

After consideration of the entire record, including the Applicant's

comment, the Department has determined to grant the exemption.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

telephone (202) 219-8881. (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 to which the exemptions 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) These exemptions are supplemental to and not in derogation of,

any other provisions of the Act and/or the Code, including statutory or

administrative exemptions and transactional 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

(3) The availability of these exemptions is 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 16th day of June 1994.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 94-15005 Filed 6-20-94; 8:45 am]

BILLING CODE 4510-29-P