# Proposed Exemptions; The Bank of California > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-20010 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** August 17, 1994 ## Text DEPARTMENT OF LABOR Pension and Welfare Benefits Administration [Application No. D-9240, et al.] Proposed Exemptions; The Bank of California AGENCY: Pension and Welfare Benefits Administration, Labor. ACTION: Notice of Proposed Exemptions. ----------------------------------------------------------------------- SUMMARY: This document contains notices of pendency before the Department of Labor (the Department) of proposed exemptions from certain of the prohibited transaction restriction of the Employee Retirement Income Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 (the Code). Written Comments and Hearing Requests Unless otherwise stated in the Notice of Proposed Exemption, all interested persons are invited to submit written comments, and with respect to exemptions involving the fiduciary prohibitions of section 406(b) of the Act, requests for hearing within 45 days from the date of publication of this Federal Register Notice. Comments and request for a hearing should state: (1) the name, address, and telephone number of the person making the comment or request, and (2) the nature of the person's interest in the exemption and the manner in which the person would be adversely affected by the exemption. A request for a hearing must also state the issues to be addressed and include a general description of the evidence to be presented at the hearing. A request for a hearing must also state the issues to be addressed and include a general description of the evidence to be presented at the hearing. ADDRESSES: All written comments and request for a hearing (at least three copies) should be sent to the Pension and Welfare Benefits Administration, Office of Exemption Determinations, Room N-5649, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210. Attention: Application No. stated in each Notice of Proposed Exemption. The applications for exemption and the comments received will be available for public inspection in the Public Documents Room of Pension and Welfare Benefits Administration, U.S. Department of Labor, Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210. Notice to Interested Persons Notice of the proposed exemptions will be provided to all interested persons in the manner agreed upon by the applicant and the Department within 15 days of the date of publication in the Federal Register. Such notice shall include a copy of the notice of proposed exemption as published in the Federal Register and shall inform interested persons of their right to comment and to request a hearing (where appropriate). SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in applications filed pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). Effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978) transferred the authority of the Secretary of the Treasury to issue exemptions of the type requested to the Secretary of Labor. Therefore, these notices of proposed exemption are issued solely by the Department. The applications contain representations with regard to the proposed exemptions which are summarized below. Interested persons are referred to the applications on file with the Department for a complete statement of the facts and representations. The Bank of California, N.A., Located in San Francisco, California; Proposed Exemption [Application No. D-9240] Based on the facts and representations set forth in the application, 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 C.F.R. Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).1 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- Section I--Exemption for In-Kind Transfer of Assets If the exemption is granted the restrictions of section 406(a) and section 406(b) of the Act and the sanctions resulting from the application of section 4975 of the Code by reason of section 4975(c)(1)(A) through (F) shall not apply, effective November 12, 1993, to the in-kind transfer to any diversified open-end investment company (the Fund or Funds) registered under the Investment Company Act of 1940 to which the Bank of California, N.A. or any of its affiliates (collectively, the Bank) serves as investment adviser and may provide other services of the assets of various employee benefit plans (the Plan or Plans) that are either held in certain collective investment funds (the CIF or CIFs) maintained by the Bank or otherwise held by the Bank as trustee, investment manager, or in any other capacity as fiduciary on behalf of the Plans, in exchange for shares of such Funds; provided that the following conditions are met: (a) A fiduciary (the Second Fiduciary) who is acting on behalf of each affected Plan and who is independent of and unrelated to the Bank, as defined in paragraph (g) of section III below, receives advance written notice of the in-kind transfer of assets of the Plans or the CIFs in exchange for shares of the Fund and the disclosures described in paragraph (g) of section II below; (b) On the basis of the information described in paragraph (g) of section II below, the Second Fiduciary authorizes in writing the in- kind transfer of assets of the Plans in exchange for shares of the Funds, the investment of such assets in corresponding portfolios of the Funds, and the fees received by the Bank in connection with its services to the Fund. Such authorization by the Second Fiduciary to be consistent with the responsibilities, obligations, and duties imposed on fiduciaries by Part 4 of Title I of the Act; (c) No sales commissions are paid by the Plans in connection with the in-kind transfers of asset of the Plans or the CIFs in exchange for shares of the Funds; (d) All or a pro rata portion of the assets of the Plans held in the CIFs or all or a pro rata portion of the assets of the Plans held by the Bank in any capacities as fiduciary on behalf of such Plans are transferred in-kind to the Funds in exchange for shares of such Funds, (e) The Plans or the CIFs receive shares of the Funds that are equal in value to the assets of the Plans or the CIFs exchanged for such shares; (f) The value of the assets of the Plans or the CIFs to be transferred in-kind and the net asset value of the Funds receiving those assets in exchange for shares is determined in a single valuation performed in the same manner and at the close of business on the same day, in accordance with the procedures set forth in Rule 17a-7(b) (Rule 17a-7) under the Investment Company Act of 1940, as amended from time to time or any successor rule, regulation, or similar pronouncement; (g) Not later than thirty (30) days after completion of each in- kind transfer of assets of the Plans or the CIFs in exchange for shares of the Funds, the Bank sends by regular mail to the Second Fiduciary, who is acting on behalf of each affected Plan and who is independent of and unrelated to the Bank, as defined in paragraph (g) of section III below, a written confirmation that contains the following information: (1) the identity of each of the assets that was valued for purposes of the transaction in accordance with Rule 17a-7(b)(4) under the Investment Company Act of 1940; (2) the price of each of the assets involved in the transaction; and (3) the identity of each pricing service or market maker consulted in determining the value of such assets; and (h) For all conversion transactions that occur after the date of this proposed exemption, the Bank, no later than ninety (90) days after completion of each in-kind transfer of assets of the Plans or the CIFs in exchange for shares of the Funds, will send by regular mail to the Second Fiduciary, who is acting on behalf of each affected Plan and who is independent of and unrelated to the Bank, as defined in paragraph (g) of section III below, a written confirmation that contains the following information: (1) the number of CIF units held by each affected Plan immediately before the conversion (and the related per unit value or the aggregate dollar value of the units transferred); and (2) the number of shares in the Funds that are held by each affected Plan following the conversion (and the related per share net asset value or the aggregate dollar value of the shares received). (i) The conditions set forth in paragraphs (d), (e), (f), (o), (p), (q) and (r) of section II below are satisfied; Section II--Exemption for Receipt of Fees From Funds If the exemption is granted, effective November 12, 1993, the restrictions of section 406(a) and section 406(b) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(D) through (F) of the Code shall not apply to the receipt of fees by the Bank from the Funds for acting as the investment adviser, custodian, sub-administrator, and other service provider for the Funds in connection with the investment in the Funds by the Plans for which the Bank acts as a fiduciary provided that: (a) No sales commissions are paid by the Plans in connection with purchases or sales of shares of the Funds and no redemption fees are paid in connection with the sale of such shares by the Plans to the Funds; (b) The price paid or received by the Plans for shares in the Funds is the net asset value per share, as defined in paragraph (e) of section III, at the time of the transaction and is the same price which would have been paid or received for the shares by any other investor at that time; (c) The Bank, its affiliates, and officers or directors have not and will not purchase from or sell to any of the Plans shares of any of the Funds; (d) The combined total of all fees received by the Bank for the provision of services to the Plans, and in connection with the provision of services to any of the Funds in which the Plans may invest, are not in excess of ``reasonable compensation'' within the meaning of section 408(b)(2) of the Act; (e) The Bank does not receive any fees payable, pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the 12b-1 Fees) in connection with the transactions; (f) The Plans are not sponsored by the Bank; (g) A Second Fiduciary who is acting on behalf of a Plan and who is independent of and unrelated to the Bank, as defined in paragraph (g) of section III below, receives in advance of the investment by a Plan in any of the Funds a full and detailed written disclosure of information concerning such Fund including, but not limited to: (1) a current prospectus for each portfolio of each of the Funds in which such Plan is considering investing, (2) a statement describing the fees for investment management, investment advisory, or other similar services, any fees for secondary services (Secondary Services), as defined in paragraph (h) of section III below, and all other fees to be charged to or paid by the Plan and by such Funds to the Bank, including the nature and extent of any differential between the rates of such fees, (3) the reasons why the Bank may consider such investment to be appropriate for the Plan, (4) a statement describing whether there are any limitations applicable to the Bank with respect to which assets of a Plan may be invested in the Funds, and, if so, the nature of such limitations; and (5) upon request of the Second Fiduciary, a copy of the proposed exemption and/or a copy of the final exemption, if granted. (h) On the basis of the information described in paragraph (g) of this section II, the Second Fiduciary authorizes in writing: (1) the investment of assets of the Plans in shares of the Fund, in connection with the transaction set forth in section II; (2) the investment portfolios of the Funds in which the assets of the Plans may be invested; and (3) the fees received by the Bank in connection with its services to the Funds; such authorization by the Second Fiduciary to be consistent with the responsibilities obligations, and duties imposed on fiduciaries by Part 4 of Title I of the Act; (i) The authorization, described in paragraph (h) of this section II, is terminable at will by the Second Fiduciary of a Plan, without penalty to such Plan. Such termination will be effected by the Bank selling the shares of the Fund held by the affected Plan within one business day following receipt by the Bank, either by mail, hand delivery, facsimile, or other available means at the option of the Second Fiduciary, of the termination form (the Termination Form), as defined in paragraph (i) of section III below, or any other written notice of termination; provided that if, due to circumstances beyond the control of the Bank, the sale cannot be executed within one business day, the Bank shall have one additional business day to complete such sale; (j) Plans do not pay any plan-level investment management fees, investment advisory fees, or similar fees to the Bank with respect to any of the assets of such Plans which are invested in shares of any of the Funds. This condition does not preclude the payment of investment advisory fees or similar fees by the Funds to the Bank under the terms of an investment advisory agreement adopted in accordance with section 15 of the Investment Company Act of 1940 or other agreement between the Bank and the Funds; (k) In the event of an increase in the rate of any fees paid by the Funds to the Bank regarding any investment management services, investment advisory services, or fees for similar services that the Bank provides to the Funds over an existing rate for such services that had been authorized by a Second Fiduciary, in accordance with paragraph (h) of this section II, the Bank will, at least thirty (30) days in advance of the implementation of such increase, provide a written notice (which may take the form of a proxy statement, letter, or similar communication that is separate from the prospectus of the Fund and which explains the nature and amount of the increase in fees) to the Second Fiduciary of each of the Plans invested in a Fund which is increasing such fees. Such notice shall be accompanied by the Termination Form, as defined in paragraph (i) of section III below; (l) In the event of an addition of a Secondary Service, as defined in paragraph (h) of section III below, provided by the Bank to the Fund for which a fee is charged or an increase in the rate of any fee paid by the Funds to the Bank for any Secondary Service, as defined in paragraph (h) of section III below, that results either from an increase in the rate of such fee or from the decrease in the number or kind of services performed by the Bank for such fee over an existing rate for such Secondary Service which had been authorized by the Second Fiduciary of a Plan, in accordance with paragraph (h) of this section II, the Bank will at least thirty (30) days in advance of the implementation of such additional service for which a fee is charged or fee increase, provide a written notice (which may take the form of a proxy statement, letter, or similar communication that is separate from the prospectus of the Fund and which explains the nature and amount of the additional service for which a fee is charged or the nature and amount of the increase in fees) to the Second Fiduciary of each of the Plans invested in a Fund which is adding a service or increasing fees. Such notice shall be accompanied by the Termination Form, as defined in paragraph (i) of section III below. (m) The Second Fiduciary is supplied with a Termination Form at the times specified in paragraphs (k), (l), and (n) of this section II, which expressly provides an election to terminate the authorization, described above in paragraph (h) of this section II, with instructions regarding the use of such Termination Form including statements that: (1) the authorization is terminable at will by any of the Plans, without penalty to such Plans. Such termination will be effected by the Bank selling the shares of the Fund held by the Plans requesting termination within one business day following receipt by the Bank, either by mail, hand delivery, facsimile, or other available means at the option of the Second Fiduciary, of the Termination Form or any other written notice of termination; provided that if, due to circumstances beyond the control of the Bank, the sale of shares of such Plans cannot be executed within one business day, the Bank shall have one additional business day to complete such sale; and (2) failure by the Second Fiduciary to return the Termination Form on behalf of a Plan will be deemed to be an approval of the additional Secondary Service for which a fee is charged or increase in the rate of any fees, if such Termination Form is supplied pursuant to paragraphs (k) and (l) of this section II, and will result in the continuation of the authorization, as described in paragraph (h) of this section II, of the Bank to engage in the transactions on behalf of such Plan; (n) The Second Fiduciary is supplied with a Termination Form, annually during the first quarter of each calendar year, beginning with the first quarter of the calendar year that begins after the date the grant of this proposed exemption is published in the Federal Register and continuing for each calendar year thereafter; provided that the Termination Form need not be supplied to the Second Fiduciary, pursuant to paragraph (n) of this section II, sooner than six months after such Termination Form is supplied pursuant to paragraphs (k) and (l) of this section II, except to the extent required by said paragraphs (k) and (l) of this section II to disclose an additional Secondary Service for which a fee is charged or an increase in fees; (o)(1) With respect to each of the Funds in which a Plan invests, the Bank will provide the Second Fiduciary of such Plan: (A) at least annually with a copy of an updated prospectus of such Fund; (B) upon the request of such Second Fiduciary, with a report or statement (which may take the form of the most recent financial report, the current statement of additional information, or some other written statement) which contains a description of all fees paid by the Fund to the Bank; and (2) With respect to each of the Funds in which a Plan invests, in the event such Fund places brokerage transactions with the Bank, the Bank will provide the Second Fiduciary of such Plan at least annually with a statement specifying: (A) the total, expressed in dollars, brokerage commissions of each Fund's investment portfolio that are paid to the Bank by such Fund; (B) the total, expressed in dollars, of brokerage commissions of each Fund's investment portfolio that are paid by such Fund to brokerage firms unrelated to the Bank; (C) the average brokerage commissions per share, expressed as cents per share, paid to the Bank by each portfolio of a Fund; and (D) the average brokerage commissions per share, expressed as cents per share, paid by each portfolio of a Fund to brokerage firms unrelated to the Bank; (p) All dealings between the Plans and any of the Funds are on a basis no less favorable to such Plans than dealings between the Funds and other shareholders holding the same class of shares as the Plans; (q) The Bank maintains for a period of six (6) years the records necessary to enable the persons, as described in paragraph (r) of section II below, to determine whether the conditions of this proposed exemption have been met, except that: (1) a prohibited transaction will not be considered to have occurred if, due to circumstances beyond the control of the Bank, the records are lost or destroyed prior to the end of the six (6) year period, and (2) no party in interest, other than the Bank, shall be subject to the civil penalty that may be assessed under section 502(i) of the Act, or to the taxes imposed by section 4975 (a) and (b) of the Code, if the records are not maintained, or are not available for examination as required by paragraph (r) of section II below; (r)(1) Except as provided in paragraph (r)(2) of this section II and notwithstanding any provisions of subsection (a)(2) and (b) of section 504 of the Act, the records referred to in paragraph (q) of section II above 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 each of the Plans who has authority to acquire or dispose of shares of any of the Funds owned by such a Plan, or any duly authorized employee or representative of such fiduciary; and (iii) Any participant or beneficiary of the Plans or duly authorized employee or representative of such participant or beneficiary; (2) None of the persons described in paragraph (r)(1)(ii) and (r)(1)(iii) of section II shall be authorized to examine trade secrets of the Bank, or commercial or financial information which is privileged or confidential. Section III--Definitions For purposes of this proposed exemption, (a) The term ``Bank'' means The Bank of California, N.A. and any affiliate of the Bank, as defined in paragraph (b) of this section III. (b) An ``affiliate'' of a person includes: (1) Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the person; (2) any officer, director, employee, relative, or partner in any such person; and (3) Any corporation or partnership of which such person is an officer, director, partner, or employee. (c) The term ``control'' means the power to exercise a controlling influence over the management or policies of a person other than an individual; (d) The term ``Fund or Funds'' means any diversified open-end investment company or companies registered under the Investment Company Act of 1940 for which the Bank serves as investment adviser, and may also provide custodial or other services as approved by such Funds; (e) The term, ``net asset value'' means the amount for purposes of pricing all purchases and sales calculated by dividing the value of all securities, determined by a method as set forth in a Fund's prospectus and statement of additional information, and other assets belonging to each of the portfolios in such Fund, less the liabilities charged to each portfolio, by the number of outstanding shares. (f) The term, ``relative,'' means a ``relative'' as that term is defined in section 3(15) of the Act (or a ``member of the family'' as that term is defined in section 4975(e)(6) of the Code), or a brother, a sister, or a spouse of a brother or a sister. (g) The term, ``Second Fiduciary,'' means a fiduciary of a plan who is independent of and unrelated to the Bank. For purposes of this exemption, the Second Fiduciary will not be deemed to be independent of and unrelated to the Bank if: (1) Such Second Fiduciary directly or indirectly controls, is controlled by, or is under common control with the Bank; (2) Such Second Fiduciary, or any officer, director, partner, employee, or relative of such Second Fiduciary is an officer, director, partner, or employee of the Bank (or is a relative of such persons); (3) Such Second Fiduciary directly or indirectly receives any compensation or other consideration for his or her own personal account in connection with any transaction described in this proposed exemption. If an officer, director, partner, or employee of the Bank (or a relative of such persons), is a director of such Second Fiduciary, and if he or she abstains from participation in (i) the choice of the Plan's investment manager/advisor, (ii) the approval of any purchase or sale by the Plan of shares of the Funds, and (iii) the approval of any change of fees charged to or paid by the Plan, in connection with any of the transactions described in sections I and II above, then paragraph (g)(2) of section III above, shall not apply. (h) The term, ``Secondary Service,'' means a service, other than an investment management, investment advisory, or similar service, which is provided by the Bank to the Funds, including but not limited to custodial, accounting, brokerage, administrative, or any other service. (i) The term, ``Termination Form,'' means the form supplied to the Second Fiduciary, at the times specified in paragraphs (k), (l), and (n) of section II above, which expressly provides an election to the Second Fiduciary to terminate on behalf of the Plans the authorization, described in paragraph (h) of section II. Such Termination Form may be used at will by the Second Fiduciary to terminate such authorization without penalty to the Plans and to notify the Bank in writing to effect such termination by selling the shares of the Fund held by the Plans requesting termination within one business day following receipt by the Bank, either by mail, hand delivery, facsimile, or other available means at the option of the Second Fiduciary, of written notice of such request for termination; provided that if, due to circumstances beyond the control of the Bank, the sale cannot be executed within one business day, the Bank shall have one additional business day to complete such sale. EFFECTIVE DATE: If the proposed exemption is granted, the exemption will be effective retroactively, as of November 12, 1993. Summary of Facts and Representations 1. The Bank is a national banking association having its principal office at 400 California Street, San Francisco, California. The Bank offers a wide range of banking services to its clients in California, Oregon, Washington, and around the world. The Mitsubishi Bank Limited, a Japanese bank with principal offices in Tokyo, owns either directly or indirectly through its wholly owned subsidiary, BanCal Tri-State Corporation, all of the outstanding stock of the Bank. The Bank has total trust and non-trust assets of approximately $19.5 billion and $8.4 billion, respectively. Merus Capital Management (MERUS), a division of the Bank, belongs to the Bank's Trust and Investment Management Group which manages approximately $5.5 billion of the assets held in trust by the Bank. 2. The Plans involved in the transactions for which the Bank requests exemptive relief are numerous Plans for which the Bank has acted or will act as fiduciary and has exercised or will exercise investment discretion with respect to all or a portion of the assets of such Plans.2 For this reason, certain specific information relating to each individual involved Plan does not appear in the application. However, it is anticipated that the Plans include or will include various employee benefit plans, as defined by section 3(3) of the Act, and certain plans or trusts, as described in section 4975(e)(1) of the Code. These Plans are sponsored or maintained by parties unrelated to the Bank.3 Such Plans include, among others: (1) pension, profit sharing, stock bonus, and other retirement plans which are qualified for tax purposes under section 401(a) of the Code, (2) voluntary employees' beneficiary associations and other welfare benefit plans, and (3) individual retirement accounts and simplified employee pension plans, as described in section 408 of the Code. The Bank serves as fiduciary to these Plans through the management of the CIFs in which the Plans invest or through providing individual management or advice to the Plans. --------------------------------------------------------------------------- \2\The Department herein is not proposing relief for transactions afforded relief by Section 404(c) of the Act. \3\The Department, herein, is not proposing relief for transactions involving any plan sponsored by the Bank or its affiliates. --------------------------------------------------------------------------- It is represented that the Bank, as of October 23, 1992, had under management approximately $760 million in assets from approximately 400 Plans. The Bank receives compensation for serving as fiduciary with respect to these Plans in accordance with standard published fee schedules or as otherwise agreed upon by the Bank and the sponsors of such Plans.4 --------------------------------------------------------------------------- \4\The Department expresses no opinion as to whether the provision of services by the Bank or its affiliates to the Plans satisfies the requirements for statutory exemption, as set forth in section 408(b)(2) of the Act and 29 CFR 2550.408(b)(2) of the Department's regulation. To the extent that such provision of services to the Plan by the Bank or its affiliates does not satisfy the requirements of section 408(b)(2) of the Act, the Department, herein, is offering no relief. --------------------------------------------------------------------------- 3. The Bank or its affiliates also provide services to numerous Funds. The Funds are open-end investment companies registered under the Investment Company Act of 1940. Because the Bank would like the exemption to apply prospectively to any Fund to which the Bank or any of its affiliates may provide services, the Bank represents that it cannot supply detailed information on each such future Fund. However, the Bank has provided a detailed description with respect to a certain Fund, the HighMark Group (HighMark), which is currently operating and to which it provides services. The Bank represents that all future Funds will assume similar structures and Plan investments therein will be subject to the terms and conditions of this exemption. The structure of HighMark is summarized in paragraph 4 below. To the extent Plans for which the Bank serves as fiduciary are currently invested in HighMark, the Bank represents that such investments were made in compliance with Prohibited Transaction Class Exemption 77-4 (PTCE 77-4).5 --------------------------------------------------------------------------- \5\PTCE 77-4 was granted April 8, 1977, at 42 FR 732 and was proposed November 16, 1976, at 41 FR 50516. --------------------------------------------------------------------------- 4. HighMark, a Massachusetts business trust organized on March 10, 1987, is registered under the Investment Company Act of 1940 as a diversified, open-end, management investment company. HighMark is governed by a board of trustees (the HighMark Trustees), all of whom are independent of the Bank. MERUS, a division of the Bank, acts as investment adviser to HighMark. In the context of registered investment companies, the term ``investment adviser'' generally refers to the entity that has investment management authority with respect to the assets of the investment company. In this regard, subject to the general supervision of the HighMark Trustees, MERUS manages each of the separate investment portfolios within HighMark in accordance with the investment objectives, and policies of each portfolio, makes decisions with respect to and places orders for all purchases and sales of securities, and maintains records with respect thereto. In addition, the Bank serves as custodian, sub-administrator, sub-transfer agent, and sub-accountant to HighMark. It is represented that the Bank may in the future seek to serve in additional capacities for and to provide additional services to HighMark. HighMark consists of separate investment portfolios with combined total net assets of approximately $1 billion. It is represented that currently there are eight (8) portfolios in HighMark. Three of these portfolios are invested in money market instruments (the Money Market Portfolios), and three are invested primarily in non-money market debt or equity securities (the Non-Money Market Portfolios). The remaining two portfolios of HighMark are the California Tax-Free Fund, and the Tax-Free Fund.6 In addition to these portfolios, HighMark is in the process of establishing two additional portfolios, the Balanced Fund and the Growth Fund, and may establish other portfolios. --------------------------------------------------------------------------- \6\It is represented that the Tax-Free Fund has been the subject of an inquiry by the Securities and Exchange Commission (SEC) concerning a municipal bond backed by Mutual Benefit Life Insurance Company held in the Tax-Free Fund. In July 1991, when Mutual Benefit Life Insurance Company was seized by its regulator, the Bank was serving as accountant for the Tax-Free Fund. It is represented that due to a clerical data entry error and the failure of an employee to follow established procedures, the impact of the seizure on the value of the bond was not brought to the attention of the management of the Bank until August 1991. At that time, the Bank represents that it informed the SEC, purchased the bond from the Tax-Free Fund at par plus accrued interest, and informed shareholders by mailing to them a special prospectus, dated September 5, 1991. As the situation was corrected promptly, the Bank believes that this should not affect the merits of the application or the availability of the Tax-Free Fund for investment by the Plan, if deemed appropriate under the circumstances as authorized by the Second Fibuciary, and if based on criteria set forth in section 404 of the Act. --------------------------------------------------------------------------- In the future HighMark may modify, reorganize, or terminate any or all of its portfolios. All existing portfolios and any portfolios established or modified in the future will be available for investment by the Plans, if deemed appropriate under the circumstances, as authorized by the Second Fiduciary, and if based on criteria set forth in section 404 of the Act. However, it is represented that the Bank does not expect the Plans ordinarily to be invested in tax-free funds. Winsbury Company (Winsbury), located in Columbus, Ohio, serves as the general manager, administrator, and principal underwriter of HighMark. For these administrative services, Winsbury receives fees computed daily at .20% of the average net assets of each portfolio of HighMark. Winsbury also receives fees from HighMark for serving as the distributor of shares in HighMark. Pursuant to a plan of distribution implemented only with respect to the Class A shares for the Money Market Portfolios, HighMark pays out of the assets attributable to such shares monthly fees to Winsbury in accordance with Rule 12b-1 of the Investment Company Act of 1940 (the 12b-1 Fees) equal to .25% of the average daily net assets attributable to such shares.7 An affiliate of Winsbury, the Winsbury Service Corporation (Winsbury Service), is the transfer agent, accountant, and shareholder servicing agent of HighMark. Winsbury and Winsbury Service are unrelated to the Bank. --------------------------------------------------------------------------- \7\It is represented that the Plans currently are invested only in shares of HighMark that are not subject to 12b-1 Fees and that there is no present intention to change this arrangement. The Department notes that proposed relief is limited to the transactions described herein, and no relief has been provided in connection with the payment of distribution expenses, pursuant to Rule 12b-1 under the Investment Company Act. --------------------------------------------------------------------------- 5. Because the Bank recognizes that (1) in-kind transfers to Funds that the Bank services or advises of all or a pro rata portion of Plan assets in the CIFs or all or a pro rata portion of Plan assets that the Bank otherwise manages, and (2) the approval process for additional services for which a fee is charged and fee increases by the Bank for these services may be outside the scope of PTCE 77-4, the Bank has requested relief for the transactions described in section I and II. Each of these transactions is discussed more fully in paragraphs 6, 7, 8, and 9 below. The exemption for each of the transactions involving HighMark is conditioned on the satisfaction of certain requirements and compliance with various general conditions which are also discussed below. It is the Bank's expressed intention that the description of these transactions and the conditions of the requested exemption with respect to such transactions were and will be applicable uniformly to HighMark and to any of the other Funds for which the Bank serves as the investment advisor and in which the Plans invest. In-Kind Transfers to Funds 6. It is represented that the Bank has maintained CIFs in which the Plans have invested in accordance with Regulation 9 promulgated by the Comptroller of the Currency and the Internal Revenue Service. The Bank has decided to terminate certain CIFs and to offer to the Plans participating in such CIFs appropriate interests in certain Funds as alternative investments. Because interests in CIFs generally must be liquidated or withdrawn to effect distributions, the Bank believes that the interests of the Plans invested in CIFs would be better served by investment in shares of the Funds which can be distributed in-kind. Also, the Bank believes that the Funds offer the Plans numerous advantages as pooled investment vehicles. In this regard, the Plans, as shareholders of a Fund, have the opportunity to exercise voting and other shareholder rights. The Plans, as shareholders of the Funds, as mandated by the SEC, periodically receive certain disclosures concerning the Funds: (1) a copy of the prospectus which is updated annually; (2) an annual report containing audited financial statements of the Funds and information regarding such Funds performance (unless such performance information is included in the prospectus of such Funds); (3) a semi-annual report containing unaudited financial statements; and (4) at the option of the Funds other pertinent information. With respect to the Plans, the Bank reports all transactions in shares of the Funds in periodic account statements provided the Second Fiduciary of each of the Plans. Further, the Bank maintains that the investment performance of the portfolios of the Funds can be monitored daily from information available in newspapers of general circulation. In order to avoid the potentially large brokerage expenses that would otherwise be incurred, the Bank proposes that from time to time assets of the CIFs be transferred in-kind to corresponding portfolios of the Funds in exchange for shares of such Funds. In this regard, some Funds may, as in the case of HighMark, be in existence and operating at the time of the in-kind transfer of such assets. Some Funds may be created to assume the assets of the terminating CIF. Similarly, the Bank proposes that from time to time it may be appropriate for an individual Plan for which the Bank serves as fiduciary to transfer all or a pro rata share of its assets in-kind to any of the Funds in exchange for shares of such Funds. In this regard, for example, in the case of an in-kind exchange between an individual Plan whose portfolio consists of common stock, money market securities, and real estate, and a Fund that, under its investment policy, invests only in common stock and money market securities, the exchange would involve all or a pro rata share of the common stock and money market securities held by the Plan, if such stock and securities are eligible for purchase by the Fund,\8\ and would not involve the transfer or exchange of the real estate holdings of such Plan. No brokerage commission or other fees or expenses (other than customary transfer charges paid to parties other than the Bank or its affiliates) have been or will be charged to the Plans or the CIFs in connection with the in-kind transfers of assets into the Funds and the acquisition of shares of the Funds by the Plans or the CIFs. Thus, in addition to retroactive relief, the Bank has requested prospective relief for transactions which would involve: (1) the in-kind transfer by the CIFs of all or a pro rata portion of the assets of any of the Plans held in such CIFs to the Funds in exchange for shares of the Fund which subsequently are distributed to the Plans; or (2) the in-kind transfer of all or a pro rata portion of the assets of any of the Plans held by the Bank in any capacity as fiduciary on behalf of such Plans to the Funds in exchange for shares of such Funds; provided that conditions described in section I above are satisfied. --------------------------------------------------------------------------- \8\It is represented that a Fund's eligible investments are described under ``Investment Policies and Fund Portfolio'' of its prospectus. --------------------------------------------------------------------------- The Bank maintains that the transfers in-kind of assets in exchange for shares of the Funds are ministerial transactions performed in accordance with pre-established objective procedures which are approved by the board of trustees of each Fund. Such procedures require that assets transferred to a Fund: (1) are consistent with the investment objectives, policies, and restrictions of the corresponding portfolios of such Fund, (2) satisfy the applicable requirements of the Investment Company Act of 1940 and the Code, (3) have a readily ascertainable market, (4) are liquid, and (5) are not subject to restrictions on resale. It is represented that assets which do not meet these requirements will be sold in the open market through an unaffiliated brokerage firm prior to any transfer in-kind. Further, as described in section I, prior to entering into an in-kind transfer each affected Plan receives certain disclosures from the Bank and approves such transaction in writing. The Bank represents that valuation of assets transferred in-kind to the Funds will be established by reference to independent sources. In this regard, for purposes of the transaction, it is represented that all assets transferred in-kind are valued in accordance with the valuation procedures described in Rule 17a-7(b) under the Investment Company Act of 1940, as amended from time to time or any successor rule, regulation, or similar pronouncement. Further, the Bank represents that within thirty (30) days of the completion of a transfer in-kind, it will provide to Plans written confirmation of the identity of each security valued under Rule 17a-7(b)(4), the price of each security, and the identity of each pricing service or market maker consulted in determining the value of the assets transferred. The securities subject to valuation under Rule 17(a)-7(b)(4) include all securities other than ``reported securities,'' as the term is defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the 1934 Act), or those quoted on the NASDAQ system or for which the principal market is an exchange. It is represented that the value of the assets transferred in-kind will be equal to the aggregate value of the corresponding portfolios shares of the Fund at the close of business on the date of the transaction. In this regard, it is represented that for all conversion transactions that occur after the date of this proposed exemption, the Bank, no later than ninety (90) days after completion of each in-kind transfer of assets of the Plans or the CIFs in exchange for shares of the Funds, will mail to the Second Fiduciary a written confirmation of the number of CIF units held by each affected Plan immediately before the conversion (and the related per unit value or the aggregate dollar value of the units transferred), and the number of shares in the Funds that are held by each affected Plan following the conversion (and the related per share net asset value or the aggregate dollar value of the shares received). 7. The Bank has requested retroactive relief, for the in-kind transfer to HighMark that occurred over the weekend of November 12, 1993. It is represented that on the weekend of November 12, 1993, all of the assets of five CIFs\9\, which were maintained by the Bank and in which the Plans held interests, were transferred to HighMark in exchange for an appropriate number of shares of certain portfolios of HighMark which have investment objectives and policies substantially identical to those of the CIFs. At the same time, the five CIFs were terminated and the assets of each, then consisting of shares in portfolios of HighMark, were distributed in-kind to the Plans participating in such CIFs based on each Plan's pro rata share of the assets of the CIFs on the date of the transaction. --------------------------------------------------------------------------- \9\It is represented that the CIFs maintained by the Bank which engaged in the transfer in-kind on November 12, 1993, were the Balanced Fund, the Flexible Bond Fund A, the Government Fund, the Income and Growth Equity Fund, and the Income Equity Fund A. --------------------------------------------------------------------------- The Bank provided to the Second Fiduciary for each affected Plan disclosures that announced the termination of the CIFs, summarized the transaction, and otherwise complied with provisions of Section I. It is represented that based on these disclosures, the Second Fiduciary from each affected Plan approved in writing the transfer of the CIFs assets to the corresponding portfolios of HighMark, the investment of the assets of the Plans in shares of HighMark, and the receipt by the Bank of fees for services to HighMark and to the Plans. It is represented that the assets of Plans that did not approve investment in HighMark were withdrawn from the CIFs and held or invested in appropriate alternative investments in accordance with the terms of such Plans. Prior to the transaction, the assets of the five CIFs were reviewed to confirm that such were appropriate investments for the corresponding portfolios of HighMark into which such assets were transferred. If any of the assets of the five CIFs were not appropriate for HighMark, it is represented that the Bank sold such assets in the open market through an unaffiliated brokerage firm prior to the transfer. It is represented that the assets transferred by the five CIFs to HighMark consisted entirely of cash and marketable securities. For purposes of the transfer in-kind, the value of the securities in each of the five CIFs were determined based on market values as of the close of business on November 12, 1993, the last business date prior to the transfer. It is represented that the values were determined in a single valuation using the valuation procedures described in Rule 17a-7 under the Investment Company Act of 1940. In this regard, it is represented that the ``current market price'' for specific types of CIF securities involved in the transaction was determined as follows: (1) If the security was a ``reported security'' as the term is defined in Rule 11Aa3-1 under the 1934 Act, the last sale price with respect to such security reported in the consolidated transaction reporting system (the Consolidated System) for November 12, 1993; or if there were no reported transactions in the Consolidated System that day, the average of the highest independent bid and the lowest independent offer for such security (reported pursuant to Rule 11Ac1-1 under the 1934 Act), as of the close of business on November 12, 1993; or (2) If the security was not a reported security, and the principal market for such security was an exchange, then the last sale on such exchange on November 12, 1993; or if there were no reported transactions on such exchange that day, the average of the highest independent bid and lowest independent offer on such exchange as of the close of business on November 12, 1993; or (3) If the security was not a reported security and was quoted in the NASDAQ system, then the average of the highest independent bid and lowest independent offer reported on Level 1 of NASDAQ as of the close of business on November 12, 1993; or (4) For all other securities, the average of the highest independent bid and lowest independent offer as of the close of business on November 12, 1993, determined on the basis of reasonable inquiry. For securities in this category, the Bank represents that it obtained quotations from at least three sources that were either broker-dealers or pricing services independent of and unrelated to the Bank and, where more than one valid quotation was available, used the average of the quotations to value the securities, in conformance with interpretations by the SEC and practice under Rule 17a-7. It is represented that the securities received by the corresponding portfolio of HighMark were valued by such portfolio for purposes of the transfer in the same manner and on the same day as such securities were valued by the CIFs. The per share value of the shares of each portfolio of HighMark issued to the CIFs were based on the corresponding portfolio's then current net asset value. It is represented that the aggregate value of the shares of the corresponding portfolio of HighMark issued to the CIFs were equal to the value of the assets (cash and marketable securities) transferred to such portfolio as of the close of business on November 12, 1993. It is also represented that the value of a Plan's investment in shares of a corresponding portfolio of HighMark as of the opening of business on the first business day after the transaction (November 15, 1993) was equal to the value of such Plan's investment in the CIF as of the close of business on the last business day prior to the transaction (November 12, 1993). It is represented that not later than thirty (30) days after completion of the transaction (December 15, 1993), the Bank sent by regular mail a written confirmation of the transaction to each affected Plan. Such confirmation contained: (1) the identity of each security that was valued in accordance with Rule 17a7(b)(4), as described in the paragraph 7(4) above; (2) the price of each such security for purposes of the transaction; and (3) the identity of each pricing service or market maker consulted in determining the value of such securities. To reiterate the above discussion, and in accordance with the conditions under section I, similar procedures will occur upon any future in-kind exchanges between CIFs maintained by the Bank, Plans, and the Funds. Receipt of Fees From Funds 8. It is represented that the Bank currently invests assets of the Plans it manages in shares of the Funds in accordance with the conditions set forth in PTCE 77-4. Under certain conditions, PTCE 77-4 permits the Bank to receive fees from the Funds under either of two circumstances: (a) where a Plan does not pay any investment management, investment advisory, or similar fees with respect to the assets of such Plan invested in shares of a Fund for the entire period of such investment; or (b) where a Plan pays investment management, investment advisory, or similar fees to the Bank based on the total assets of such Plan from which a credit has been subtracted representing such Plan's pro rata share of such investment advisory fees paid to the Bank by the Fund. As such, it is represented that there are two levels of fees-- those fees which the Bank charges to the Plans for serving as trustee with investment discretion or as investment manager (the Plan-level fees); and those fees the Bank charges to the Funds (the Fund-level fees) for serving as investment advisor, custodian, or service provider. It is represented that at present the vast majority of Plans for which the Bank acts as a fiduciary do not pay any separate Plan-level investment management, investment advisory, or similar fees with respect to the assets of such Plans invested in shares of the Funds. A few Plans, however, continue to pay Plan-level investment management, investment advisory, and similar fees and receive credits which represent each of the Plans pro rata share of investment advisory fees paid to the Bank by the Funds. The Bank represents that Plan-level fees currently charged are paid monthly and are calculated as a percentage of the market value of the assets of a Plan with respect to which the Bank provides services. It is represented that Plan-level investment management, investment advisory or similar fees for all of the services provided by the Bank, including services in connection with the automated cash ``sweep'' arrangement, are charged in the form of a single asset-based fee. It is represented that Plan-level fees are subject to annual minimums for administration and management expressed as flat dollar amounts and are subject to the application of certain ``break points.'' In addition to the Plan-level fees for investment management, investment advisory, or similar services, a one-time fee (also a flat dollar amount) may be charged in connection with the establishment of an account for a Plan, and separate transaction fees may be charged for various administrative transactions, such as for example, a participant loan. It is represented that depending on the terms of the governing documents of the Plan, Plan-level fees are paid to the Bank either by the sponsor of the Plan or from the assets of the Plan. As mentioned above, the Bank also receives Fund-level fees. Such Fund-level fees can be divided into: (1) fees paid to the Bank by a Fund for investment management, investment advisory, or similar services provided to such Fund, and (2) fees paid to the Bank for administrative, custodial, transfer, accounting, and other Secondary Services provided either to such Fund or to the distributor of shares of such Funds and its affiliates. For example, with respect to investment management/advisory services and Secondary Services, the current fee arrangements between the Bank and HighMark provide for: (1) MERUS, a division of the Bank, to receive fees from HighMark for acting as investment advisor, (2) the Bank to receive custodian fees from HighMark, (3) the Bank to receive fees from Winsbury for serving as sub-administrator to HighMark, and (4) the Bank to receive fees from Winsbury Services for services as sub-accountant and sub-transfer agent provided to HighMark. It is represented that this compensation paid to the Bank for investment advisory services and Secondary Services is in accordance with various agreements between Winsbury, Winsbury Service, HighMark, and the Bank. In this regard, it is represented that the HighMark Trustees and the shareholders of HighMark approve the compensation that the Bank receives from HighMark. Also, the HighMark Trustees approve any changes in the compensation paid to the Bank for services rendered to HighMark. It is represented that the Fund-level fees from HighMark are computed daily and billed monthly. The Bank represents that at the end of each month and promptly upon receipt of the Fund-level fees from HighMark, for those Plans which pay to the Bank Plan-level investment management, investment advisory, or similar fees, the Bank currently credits to each Plan its pro rata share of all investment management, investment advisory, or similar fees charged by the Bank to HighMark. 9. Under the fee structure proposed in this exemption, it is represented that the arrangement for Plan-level fees where assets of the Plans managed by the Bank are invested in the Funds is different in several respects from that described in paragraph 8 above. In this regard, a separate Plan-level fee will be charged to the Plans for basic administrative services not including investment management.\10\ Such administrative services would include, among others, the Bank's acting as custodian of the assets of a Plan, maintaining the records of a Plan, preparing periodic reports concerning the status of the Plan and its assets, and accounting for contributions, benefit distributions, and other receipts and disbursements. It is represented that these functions performed by the Bank on the Plan-level are separate and distinct from those performed on the Fund-level by the Bank, by Winsbury, and by Winsbury Services. --------------------------------------------------------------------------- \10\The fact that certain transactions and fee arrangements are the subject of an administrative exemption does not relieve the fiduciaries of the Plans from the general fiduciary responsibility provisions of section 404 of the Act. Thus, the Department cautions the fiduciaries of the Plans investing in the Funds that they have an ongoing duty under section 404 of the Act to monitor the services provided to the Plans to assure that the fees paid by the Plans for such services are reasonable in relation to the value of the services provided. Such responsibilities would include determinations that the services provided are not duplicative and that the fees are reasonable in light of the level of services provided. In addition, the Department notes that the combined total of all fees received by the Bank directly or indirectly from the Plan for the provision of services to the Plan and/or to the Fund should not be in excess of ``reasonable compensation'' within the meaning of section 408(b)(2) of the Act. --------------------------------------------------------------------------- It is represented that the Bank will continue to receive compensation from the Plans for investment management services provided with respect to assets of the Plans not invested in shares of any of the Funds. However, under the proposed fee structure, the Bank will no longer credit to any of the Plans their pro rata share of the investment advisory fees, as described in paragraph 8 above, because the Plans will no longer pay Plan-level fees to the Bank for investment advisory services with respect to any of the assets of the Plans invested in shares of any of the Funds. Instead, the compensation received by the Bank for investment advisory services will be that which is paid by the Funds to the Bank for such services rendered to such Funds. In addition, the Bank will continue to retain fees for providing Secondary Services to the Funds. The applicant maintains that this proposed fee arrangement complies with PTCE 77-4. However, there is one difference from PTCE 77-4 requested by the Bank for which an exemption is required. In this regard, one of the requirements of PTCE 77-4 has been that any change in any of the rates of fees would require prior written approval by the Second Fiduciary of the Plans participating in the Funds. The applicant maintains that where many Plans participate in a Fund, the addition of a service or any good faith increase in fees could not be implemented until written approval of such change is obtained from every Second Fiduciary. The applicant proposes an alternative which the Bank maintains provides the basic safeguards for the Plans and is more efficient, cost effective, and administratively feasible than those contained in PTCE 77-4. It is represented that in the event of an increase in the rate of any investment management fees, investment advisory fees, or similar fees, the addition of a Secondary Service for which a fee is charged, or an increase in the fees for Secondary Services paid by the Funds to the Bank over an existing rate that had been authorized by the Second Fiduciary, the Bank will provide, at least thirty (30) days in advance of the implementation of such additional service or fee increase, to the Second Fiduciary of all the Plans invested in such Fund a written notice of such additional service or fee increase, (which may take the form of a proxy statement, letter, or similar communication that is separate from the prospectus of the Fund and which explains the nature and amount of the additional service or the nature and amount of the increase in fees). In this regard, such increase in fees for Secondary Services can result either from an increase in the rate of such fee or from the decrease in the number or kind of services performed by the Bank for such fee over that which had been authorized by the Second Fiduciary of a Plan. It is represented that providing notice in this way will give the Second Fiduciary of each of the Plans adequate opportunity to decide whether or not to continue the authorization of a Plan's investment in any of the portfolios of the Funds in light of the increase in investment management fees, investment advisory fees, or similar fees, the additional Secondary Service for which a fee is charged, or the increase in fees for any Secondary Services. In addition, the Bank represents that such fee increase will be disclosed to the Secondary Fiduciaries in a supplement to the Fund's prospectus in the case of an increase in fees for investment management, investment advisory, or similar services and in the Fund's Statement of Additional Information in the case of an additional Secondary Service for which a fee is charged or an increase in the fees for Secondary Services. 10. It is represented that the written notice of an additional service for which a fee is charged or a fee increase, as described in paragraph 9 above, will be accompanied by a Termination Form, as defined in paragraph (i) of section III, and by instructions on the use of such form, as described in paragraph (m) of section II, which expressly provide an election to the Second Fiduciaries to terminate at will any prior authorizations without penalty to the Plans. In addition, it is represented that the Second Fiduciary will be supplied with a Termination Form annually during the first quarter of each calendar year, beginning with the first quarter of the calendar year that begins after the date the grant of this proposed exemption is published in the Federal Register and continuing for each calendar year thereafter, regardless of whether there have been any changes in the fees payable to the Bank or changes in other matters in connection with services rendered to the Funds. However, if the Termination Form has been provided to the Second Fiduciary in the event of an increase in the rate of any investment management fees, investment advisory fees, or similar fees, an addition of a Secondary Service for which a fee is charged, or an increase in any fees for Secondary Services paid by the Fund to the Bank, then such Termination Form need not be provided again to the Second Fiduciary until at least six months have elapsed, unless such Termination Form is required to be sent sooner as a result of another increase in any investment management fees, investment advisory fees, or similar fees, the addition of a Secondary Service for which a fee is charged, or an increase in any fees for Secondary Services. The Termination Form will contain instructions regarding its use which will state expressly that the authorization is terminable at will by a Second Fiduciary, without penalty to any Plan, and that failure to return the form will be deemed to be an approval of the additional Secondary Service or the increase in the rate of any fees and will result in the continuation of all authorizations previously given by such Second Fiduciary. It is represented that termination by any Plan of authorization to invest in the Funds will be effected by the Bank selling the shares of the Fund held by the affected Plan within one business day following receipt by the Bank, either by mail, hand delivery, facsimile, or other available means at the option of the Second Fiduciary, of the Termination Form or any other written notice of termination. If, due to circumstances beyond the control of the Bank, the sale cannot be executed within one business day, the Bank shall have one additional business day to complete such sale. 11. It is represented that the rates paid by each of the portfolios of the Funds to the Bank for services rendered may differ depending on the fee schedule for each portfolio and on the daily net assets in each portfolio. The investment advisory fees paid to the Bank by the Funds will be based on the different fee rates of each of the portfolios into which the assets of the Plans are allocated. For example, for services provided to the Money Market Portfolios, the California Tax Free Fund, and the Tax Free Fund, the Bank receives the following fees from HighMark based on each portfolio's average daily net assets: (a) .40% of the first $500 million; (b) .35% of the next $500 million; and (c) .30% of the remaining average daily net assets. For services provided to the Non-Money Market Portfolios, the Bank receives the following fees from HighMark based on each portfolio's average daily net assets: (a) 1.00% of the first $40 million; and (b) .60% on the remaining average daily net assets. It is represented that the Bank currently allocates investments by the Plans among the portfolios offered by HighMark, and proposes to continue to allocate the assets of the Plans among the portfolios of HighMark and/or any of the Funds under the terms of this proposed exemption. It is represented that the impact of the change in fee structures, described in paragraph 9 above, on aggregate fees received by the Bank is difficult to determine, because various factors and variables are unique to each Plan. These factors include the size of the Plan, the extent to which Plan assets are invested in the Funds, and the application of certain ``break points'' in the schedule of Plan-level fees. Further, Fund size and the application of certain ``break points'' in the rate schedule of Fund-level fees, the identity of the particular investment portfolio of the Fund into which the Plan assets are allocated, and voluntary waivers by the Bank of Fund-level fees are likely to be different in each situation and may affect the aggregate amount of fees received by the Bank. In this regard, it is represented that the combined total of all Plan-level and Fund-level fees received by the Bank for the provision of services to the Plans and to the Funds, respectively, are not in excess of ``reasonable compensation'' within the meaning of section 408(b)(2) of the Act. 12. The exemption is subject to satisfaction of certain general conditions. Chief among such conditions is the requirement that the proposed transactions are subject to the prior authorization of a Second Fiduciary, acting on behalf of each of the Plans, who has been provided with full written disclosure by the Bank. It is represented that the Second Fiduciary will generally be the administrator, sponsor, or a committee appointed by the sponsor to act as a named fiduciary for a Plan. With respect to disclosure, the Second Fiduciary of such Plan will receive in writing in advance of the investment by a Plan in any of the Funds: (1) a current prospectus for each portfolio of each of the Funds in which such Plan may invest, (2) a statement describing the investment management fees, investment advisory fees, or similar fees, any fees for Secondary Services, and all other fees to be charged to or paid by the Plan and by such Funds to the Bank, including the nature and extent of any differential between the rates of such fees, (3) the reasons why the Bank may consider such investment(s) to be appropriate for the Plan, (4) a statement describing whether there are any limitations applicable to the Bank with respect to which assets of a Plan may be invested in the Funds, and, if so, the nature of such limitations, and (5) upon request of the Second Fiduciary a copy of the proposed exemption and/or the final exemption, if granted. In addition to the disclosures provided to the Plan prior to investment in any of the Funds, the Bank represents that it will routinely provide at least annually to the Second Fiduciary updated prospectuses of the Funds in accordance with the requirements of the Investment Company Act of 1940 and the SEC rules promulgated thereunder. Further, the Second Fiduciary will be supplied, upon request, with a report or statement (which may take the form of the most recent financial report of such Funds, the current statement of additional information, or some other written statement) which contains a description of all fees paid by the Fund. It is represented that the Bank does not now execute nor in the future intend to execute securities brokerage transactions for the investment portfolios of any of the Funds, except as and to the extent permitted by the Investment Company Act of 1940 and applicable rules of the Securities and Exchange Commission. In the event the Bank ever performs brokerage services for which a fee is paid to the Bank by the investment portfolio of any of the Funds, the Bank represents that it will at least thirty (30) days in advance of the implementation of such additional service provide a written notice which explains the nature of such additional brokerage service and the amount of the fees. Further, the Bank represents that it will provide at least annually to the Second fiduciary of any Plan that invests in such Funds with a written disclosure indicating (a) the total, expressed in dollars, of brokerage commissions of each Fund's investment portfolio that are paid to the Bank by such Fund; (b) the total, expressed in dollars, of brokerage commissions of each Fund's investment portfolio that are paid by such Fund to brokerage firms unrelated to the Bank; (c) the average brokerage commissions per share, expressed as cents per share, paid to the Bank by each portfolio of a Fund; and (d) the average brokerage commissions per share, expressed as cents per share, paid by each portfolio of a Fund to brokerage firms unrelated to the Bank. On the basis of the information disclosed, it is represented that the Second Fiduciary will authorize in writing (i) the investment of assets of the Plans in shares of the Fund in connection with the transactions set forth herein; (ii) the investment portfolios of the Funds in which the assets of the Plans may be invested; and (iii) the compensation received by the Bank in connection with its services to the Funds. It is represented that written authorization will extend to only those investment portfolios of the Funds with respect to which the Second Fiduciary has received the written disclosures referred to above and which are specifically mentioned in such authorization. Having obtained the authorization of the Second Fiduciary, the Bank will be permitted to invest the assets of a Plan among the portfolios and in the manner covered by the authorization, subject to satisfaction of the other terms and conditions of this proposed exemption. However, the Bank will not be permitted to invest assets of a Plan in any portfolio not specifically mentioned in the written authorization. For example, if the written authorization of the Second Fiduciary covered only three of six portfolios then existing, the Bank could only invest the assets of such Plans in those three portfolios specifically authorized. Further, if a new portfolio were established under any of the Funds, the Bank could invest assets of a Plan in such new portfolio only after providing the required disclosures and obtaining from the Second Fiduciary a separate written authorization which specifically mentions the new portfolio. 13. The receipt of fees, as described above, are generated in connection with the investment in the Funds by the Plans. These investments are the result of purchases of shares in the Funds and exchanges of assets of the Plans, including those in CIFs, for shares in the Funds. It is represented: (1) that Plans and other investors will purchases or sell shares in the Funds in accordance with standard procedures described in the prospectus for each portfolio of the Funds; (2) that the Plans will pay no sales commissions or redemption fees in connection with purchase or sales of shares in the Funds by the Plans; (3) that the Bank will not purchase from or sell to any of the Plans shares of any of the Funds; and (4) the price paid or received by the Plans for shares of the Funds will be the net asset value per share at the time of such purchase or sale and will be the same price as any other investor would have paid or received at that time.11 --------------------------------------------------------------------------- \1\1In this regard, it is represented that the value of HighMark's shares and the value of each of HighMark's portfolios are determined on a daily basis. In the case of the Non-Money Market Portfolios, assets are valued at fair or market value, as required by Rule 2a-4 under the Investment Company Act. In the case of the Money Market Portfolios, the assets are valued based on the amortized cost method authorized by SEC Rule 2a-7, in order to maintain net asset value at $1.00 per share. Both the Money Market Portfolios and the Non-Money Market Portfolios determine the net asset value per share for purposes of pricing purchases and sales by dividing the value of all securities, determined by a method as set forth in the prospectus for each HighMark portfolio, and other assets belonging to each of the portfolios, less the liabilities charged to each portfolio, by the number of each portfolio's outstanding shares. --------------------------------------------------------------------------- 14. Purchases and sales of shares in any of the Funds by the Plans may also occur in connection with daily automated cash ``sweep'' arrangements. However, agreement to such arrangement is not a condition for the Plan otherwise choosing to invest in shares of the Fund, nor will the reverse be required. It is represented that at the time the application was filed, all of the Plans served by the Bank had elected to participate in automated cash ``sweep'' arrangements with HighMark. Further, it is represented that the ``sweep'' procedures, as described below with respect to HighMark, will remain in effect under the proposed exemption for any of the Funds. Under the automated cash ``sweep'' arrangement, a Plan may participate in the ``sweep'' program only with the initial written approval of the Second Fiduciary and only after certain disclosures have been provided by the Bank. If such approval is given, cash balances of the Plan held from time to time thereafter pending other investment or distribution are invested automatically in shares of one or more of HighMark's Money Market Portfolios selected by the Second Fiduciary on behalf of a Plan at the time of the initial authorization. It is represented that the automated cash ``sweep'' arrangement would not involve shares of HighMark's Non-Money Market Portfolios. After the Money Market Portfolios have been selected by the Second Fiduciary on behalf of the Plan, otherwise uninvested cash down to the last $1.00 balance of the Plans may be invested automatically on a nightly basis. It is represented that the Bank has no discretion with respect to the timing of the ``sweep'' either into or out of HighMark. Under the automated cash ``sweep'' arrangement, the Bank's computerized cash management system automatically scans the accounts of the Plans, as of the end of each business day to determine whether such accounts have positive or negative net cash balances. Based on this information the system automatically invests the cash of the Plans having positive balances in shares of the selected Money Market Portfolios. In the case of a Plan having a negative cash balance, the system automatically liquidates HighMark shares as necessary to eliminate such negative balance. It is represented that Plans may terminate their participation in the automated cash ``sweep'' arrangement and withdraw at any time by notifying the Bank. Such termination will be affected by the Bank selling the shares of HighMark held by the Plan requesting termination within one business day following receipt by the Bank, either by mail, hand delivery, facsimile, or other available means at the option of the Second Fiduciary, of the Termination Form or any other written notice of termination. However, if due to circumstances beyond the control of the Bank, the sale of shares of such Plan cannot be executed within one business day, the Bank shall have one additional business day to complete such sale. It is represented that no fee, charge, or penalty of any kind is charged in connections with a termination by a Plan of participation in the automated cash ``sweep arrangement'' in HighMark or in any of the Funds. It is further represented that the Bank does not charge separate or additional fees to Plans in order to participate in the daily automated cash ``sweep'' arrangement, nor is such additional compensation contemplated by the proposed exemption.12 --------------------------------------------------------------------------- \1\2The Department in a letter, dated August 1, 1986, to Robert S. Plotkin, Assistant Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, addressed the application of section 408(b)(2) of the Act to arrangements involving ``sweep services.'' In that letter the Department set forth several examples to illustrate various circumstances under which violations of section 406(b) of the Act would arise with respect to such arrangements. Conversely, the letter provided that, if a bank provides ``sweep'' services without the receipt of additional compensation or other consideration (other than reimbursement of direct expenses properly and actually incurred in the performance of such services), then the provision of ``sweep'' services by the bank would not, in itself, constitute a violation of section 406(b) of the Act. Moreover, including ``sweep'' services under a single fee arrangement for investment management services which is calculated as a percentage of the market value of the total assets under management would not, in itself, constitute an act described in section 406(b)(1), because the bank would not be exercising its fiduciary authority or control to cause a plan to pay an additional fee. In addition, the letter also discusses the applicability of the statutory exemptions under section 408(b)(6) fees for ``ancillary services'' and under section 408(b)(8) for collective trust funds maintained by such bank of the Act to such ``sweep'' service arrangements. --------------------------------------------------------------------------- 15. In summary, the Bank represents that the proposed transactions meet the statutory criteria of section 408(a) of the Act because: (a) Neither the Plans nor the CIFs have paid or will pay sales commissions or redemption fees in connection with the in-kind transfer of assets to the Funds in exchange for shares of the Funds or in connection with purchases or sales by the Plans of shares of the Funds, including purchases and sales handled through daily automated cash ``sweep'' arrangements; (b) The Plans or the CIFs have received and will receive shares of the Funds that are equal in value to the assets of the Plans or the CIFs exchanged for such shares, as determined in a single valuation performed in the same manner and at the close of business on the same day in accordance with the procedures set forth in Rule 17a-7 under the Investment Company Act of 1940, as amended from time to time or any successor rule, regulation, or similar pronouncement; (c) Not later than thirty (30) days after completion of each in- kind transfer of assets in exchange for share of the Funds, the Second Fiduciaries for affected Plans have received and will receive written confirmation of the assets involved in the exchange, the price of such assets, and the identity of the pricing service or market maker consulted; (d) For all conversion transactions that occur after the date of this proposed exemption, the Bank, no later than ninety (90) days after completion of each in-kind transfer of assets of the Plans or the CIFs in exchange for shares of the Funds, will mail to the Second Fiduciary a written confirmation of the number of CIF units held by each affected Plan immediately before the conversion (and the related per unit value or the aggregate dollar value of the units transferred), and the number of shares in the Funds that are held by each affected Plan following the conversion (and the related per share net asset value or the aggregate dollar value of the shares received); (e) The price that has been or will be paid or received by the Plans for shares in the Funds is the net asset value per share at the time of the transaction and is the same price for the shares which would have been paid or received by any other investor at that time; (f) The Bank, its affiliates, and officers or directors have not and will not purchase from or sell to any of the Plans shares of any of the Funds; (g) The combined total of all fees received by the Bank for the provision of services to the Plans, and in connection with the provision of services to any of the Funds in which the Plans may invest, has not been and will not be in excess of ``reasonable compensation'' within the meaning of section 408(b)(2) of the Act; (h) The Bank has not and will not receive any 12b-1 Fees in connection with the transactions; (i) Prior to investment by a Plan in any of the Funds, in connection with transactions, the Second Fiduciary has received and will receive a full and detailed written disclosure of information concerning such Fund; (j) subsequent to the investment by a Plan in any of the Funds, the Bank will provide the Second Fiduciary of such Plan, among other information, at least annually with an updated copy of the prospectus for each of the Funds in which the Plan invests; (k) in the event such Fund places brokerage transactions with the Bank, the Bank will provide the Second Fiduciary of such Plan at least annually with a statement specifying the total, expressed in dollars, of brokerage commissions of each Fund's investment portfolio that are paid by such Fund to the Bank and to unrelated brokerage firms and the average brokerage commissions per share, expressed as cents per share, by each portfolio of a Fund paid to the Bank and to brokerage firms unrelated to the Bank; (l) On the basis of the disclosures, the Second Fiduciary has authorized and will authorize the transactions; (m) The authorization by the Second Fiduciary has been and will be terminable at will without penalty to such Plans, and has been and will be effected within one business day following receipt by the Bank, either by mail, hand delivery, facsimile, or other available means at the option of the Second Fiduciary, of the Termination Form or any other written notice of termination, unless circumstances beyond the control of the Bank delay execution for no more than one additional business day; (n) The Plans do not pay any investment management, investment advisory, or similar fees to the Bank with respect to any of the assets of such Plans which are invested in shares of any of the Funds; (o) the Second Fiduciary has received and will receive a written notice accompanied by a Termination Form with instructions regarding the use of such form, at least thirty (30) days in advance of the implementation of any increase in the rate of any fees for investment management, investment advisory, or similar fees, any additional Secondary Service for which a fee is charged, or any increase in fees for Secondary Services that the Bank provides to the Funds; and (p) All dealings between the Plans and any of the Funds have been and will on a basis no less favorable to such Plans than dealings between the Funds and other shareholders holding the same class of shares as the Plans. Notice to Interested Persons Those persons who may be interested in the pendency of the requested exemption include the fiduciaries of Plans which have invested, as of the effective date of this exemption, in HighMark and/ or in any of the Funds, where the Bank served as investment adviser to such Funds and also served in any capacity as fiduciary for such Plans. In addition, it is represented that many other Plans for which the Bank serves in any capacity as a fiduciary may from time to time invest in HighMark and/or in any of the Funds to which the Bank may serve as investment adviser in the future. For this reason, the Bank does not know the number of Plans which may therefore be affected by this proposed exemption. Accordingly, the Department has determined that the only practical form of providing notice to interested persons is the distribution by the Bank by first class mail of a copy of the notice of pendency of this proposed exemption (the Notice) within thirty (30) days of the date of the publication of such Notice in the Federal Register to the fiduciaries of any of the Plans which are invested, on the date of the publication of the Notice in the Federal Register, in HighMark and/or any the Funds to which the Bank serves as investment adviser. Such distribution to interested persons shall include a copy of the Notice, as published in the Federal Register, plus a copy of the supplemental statement, as required, pursuant to 29 CFR 2570.43(b)(2), which shall inform such interested persons of their right to comment and to request a hearing. The Bank also represents that it will provide a copy of the proposed exemption and/or a copy of the final exemption, if granted, to any Second Fiduciary of a Plan upon request. FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the Department, telephone (202) 219-8883 (this is not a toll-free number.) Marshall & Ilsley Trust Company Located in Milwaukee, Wisconsin; Proposed Exemption [Application No. D-9257] 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 In-Kind Transfer of CIF Assets If the exemption is granted, the restrictions of section 406(a) and 406(b) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (F) of the Code, shall not apply, as of November 20, 1992, to the in- kind transfer of assets of plans for which Marshall & Ilsley Trust Company or an affiliate (collectively, M&I) serves as a fiduciary (the Client Plans), other than plans established and maintained by M&I, that are held in certain collective investment funds maintained by M&I (the CIFs), in exchange for shares of the Marshall Funds, Inc. (the Funds), an open-end investment company registered under the Investment Company Act of 1940 (the 1940 Act), for which M&I acts as investment adviser, custodian, and/or shareholder servicing agent, in connection with the termination of such CIFs, provided that the following conditions and the general conditions of Section III below are met: (a) No sales commissions or other fees are paid by the Client Plans in connection with the purchase of Fund shares through the in-kind transfer of CIF assets and no redemption fees are paid in connection with the sale of such shares by the Client Plans to the Funds. (b) Each Client Plan receives shares of a Fund which have a total net asset value that is equal to the value of the Client Plan's pro rata share of the assets of the CIF on the date of the transfer, based on the current market value of the CIF's assets, as determined in a single valuation performed in the same manner at the close of the same business day, using independent sources in accordance with Rule 17a- 7(b) of the Securities and Exchange Commission under the 1940 Act and the procedures established by the Funds for the valuation of such assets. Such procedures must require that all securities for which a current market price cannot be obtained by reference to the last sale price for transactions reported on a recognized securities exchange or NASDAQ be valued based on an average of the highest current independent bid and lowest current independent offer, as of the close of business on the Friday preceding the weekend of the CIF transfers, determined on the basis of reasonable inquiry from at least three sources that are broker-dealers or pricing services independent of M&I. (c) A second fiduciary who is independent of and unrelated to M&I (the Second Fiduciary) receives advance written notice of the in-kind transfer of assets of the CIFs and full written disclosure of information concerning the Funds (including a current prospectus for each of the Funds and a statement describing the fee structure) and, on the basis of such information, authorizes in writing the in-kind transfer of the Client Plan's CIF assets to a corresponding Fund in exchange for shares of the Fund. (d) For all subsequent transfers of CIF assets to a Fund following the publication of this proposed exemption in the Federal Register, M&I sends by regular mail to each affected Client Plan a written confirmation, not later than 30 days after completion of the transaction, containing the following information: (1) The identity of each security that was valued for purposes of the transaction in accordance with Rule 17a-7(b)(4); (2) The price of each such security involved in the transaction; and (3) The identity of each pricing service or market maker consulted in determining the value of such securities. (e) For all subsequent transfers of CIF assets to a Fund following the publication of this proposed exemption in the Federal Register, M&I sends by regular mail to the Second Fiduciary no later than 90 days after completion of each transfer a written confirmation that contains the following information: (1) The number of CIF units held by the Client Plan immediately before the transfer, the related per unit value, and the total dollar amount of such CIF units; and (2) The number of shares in the Funds that are held by the Client Plan following the transfer, the related per share net asset value, and the total dollar amount of such shares. (f) The conditions set forth in paragraphs (e), (f) and (l) of Section II below are satisfied. Section II--Exemption for Receipt of Fees If the exemption is granted, the restrictions of sections 406(a) and 406(b) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1) (A) through (F) of the Code, shall not apply as of November 20, 1992, to: (1) The receipt of fees by M&I from the Funds for acting as an investment adviser to the Funds in connection with the investment by the Client Plans in shares of the Funds; and (2) the receipt and proposed retention of fees by M&I from the Funds for acting as custodian and shareholder servicing agent to the Funds as well as for any other services to the Funds which are not investment advisory services (i.e. ``secondary services'') in connection with the investment by the Client Plans in shares of the Funds, provided that the following conditions and the general conditions of Section III are met: (a) No sales commissions are paid by the Client Plans in connection with the purchase or sale of shares of the Funds and no redemption fees are paid in connection with the sale of shares by the Client Plans to the Funds. (b) The price paid or received by a Client Plan for shares in a Fund is the net asset value per share at the time of the transaction, as defined in Section IV(e), and is the same price which would have been paid or received for the shares by any other investor at that time. (c) Neither M&I nor an affiliate, including any officer or director of M&I, purchases or sells shares of the Funds to any Client Plan. (d) Each Client Plan receives a credit, either through cash or the purchase of additional shares of the Funds pursuant to an annual election made by the Client Plan, of such Plan's proportionate share of all fees charged to the Funds by M&I for investment advisory services, within no more than one business day of the receipt of such fees by M&I. (e) The combined total of all fees received by M&I for the provision of services to a Client Plan, and in connection with the provision of services to the Funds in which the Client Plan may invest, are not in excess of ``reasonable compensation'' within the meaning of section 408(b)(2) of the Act. (f) M&I does not receive any fees payable pursuant to Rule 12b-1 under the 1940 Act in connection with the transactions. (g) The Client Plans are not employee benefit plans sponsored or maintained by M&I. (h) The Second Fiduciary receives full and detailed written disclosure of information concerning the Funds (including a current prospectus for each of the Funds and statement describing the fee structure) in advance of any investment by the Client Plan in a Fund. (i) On the basis of the information described above in paragraph (h), the Second Fiduciary authorizes in writing the investment of assets of the Client Plan in each particular Fund, the fees to be paid by such Funds to M&I, and the purchase of additional shares of a Fund by the Client Plan with the fees credited to the Client Plan by M&I. (j) All authorizations made by a Second Fiduciary regarding investments in a Fund and the fees paid to M&I are subject to an annual reauthorization wherein any such prior authorization referred to in paragraph (i) shall be terminable at will by the Client Plan, without penalty to the Client Plan, upon receipt by M&I of written notice of termination. A form expressly providing an election to terminate the authorization described in paragraph (i) above (the Termination Form) with instructions on the use of the form must be supplied to the Second Fiduciary no less than annually. The instructions for the Termination Form must include the following information: (1) The authorization is terminable at will by the Client Plan, without penalty to the Client Plan, upon receipt by M&I of written notice from the Second Fiduciary; and (2) Failure to return the Termination Form will result in continued authorization of M&I to engage in the transactions described in paragraph (i) on behalf of the Client Plan. (k) The Second Fiduciary of each Client Plan invested in a particular Fund receives full written disclosure, in a statement separate from the Fund prospectus, of any proposed increases in the rates of fees charged by M&I to the Funds for secondary services (as defined in Section IV(h) below) at least 30 days prior to the effective date of such increase, accompanied by a copy of the Termination Form, and receives full written disclosure in a Fund prospectus or otherwise of any increases in the rates of fees charged by M&I to the Funds for investment advisory services even though such fees will be credited as required by paragraph (d) above. (l) All dealings between the Client Plans and the Funds are on a basis no less favorable to the Client Plans than dealings with other shareholders of the Funds. Section III--General Conditions (a) M&I maintains for a period of six years the records necessary to enable the persons described below in paragraph (b) to determine whether the conditions of this exemption have been met, except that: (1) a prohibited transaction will not be considered to have occurred if, due to circumstances beyond the control of M&I, the records are lost or destroyed prior to the end of the six-year period, and (2) no party in interest other than M&I shall be subject to the civil penalty that may be assessed under section 502(i) of the Act or to the taxes imposed by section 4975 (a) and (b) of the Code if the records are not maintained or are not available for examination as required by paragraph (b) below. (b) (1) Except as provided in paragraph (b)(2) and notwithstanding any provisions of section 504 (a)(2) and (b) of the Act, the records referred to in paragraph (a) are unconditionally available at their customary location for examination during normal business hours by-- (i) Any duly authorized employee or representative of the Department or the Internal Revenue Service, (ii) Any fiduciary of the Client Plans who has authority to acquire or dispose of shares of the Funds owned by the Client Plans, or any duly authorized employee or representative of such fiduciary, and (iii) Any participant or beneficiary of the Client Plans or duly authorized employee or representative of such participant or beneficiary; (2) None of the persons described in paragraph (b)(1)(ii) and (iii) shall be authorized to examine trade secrets of M&I, or commercial or financial information which is privileged or confidential. Section IV--Definitions For purposes of this proposed exemption: (a) The term ``M&I'' means the Marshall & Ilsley Trust Company and any affiliate thereof as defined below in paragraph (b) of this section. (b) An ``affiliate'' of a person includes: (1) Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the person; (2) Any officer, director, employee, relative, or partner in any such person; and (3) Any corporation or partnership of which such person is an officer, director, partner, or employee. (c) The term ``control'' means the power to exercise a controlling influence over the management or policies of a person other than an individual. (d) The term ``Fund'' or ``Funds'' shall include the Marshall Funds, Inc., or any other diversified open-end investment company or companies registered under the 1940 Act for which M&I serves as an investment adviser and may also serve as a custodian, shareholder servicing agent, transfer agent or provide some other ``secondary service'' (as defined below in paragraph (h) of this Section) which has been approved by such Funds. (e) The term ``net asset value'' means the amount for purposes of pricing all purchases and sales calculated by dividing the value of all securities, determined by a method as set forth in the Fund's prospectus and statement of additional information, and other assets belonging to the Fund or portfolio of the Fund, less the liabilities charged to each such portfolio or Fund, by the number of outstanding shares. (f) The term ``relative'' means a ``relative'' as that term is defined in section 3(15) of the Act (or a ``member of the family'' as that term is defined in section 4975(e)(6) of the Code), or a brother, a sister, or a spouse of a brother or a sister. (g) The term ``Second Fiduciary'' means a fiduciary of a Client Plan who is independent of and unrelated to M&I. For purposes of this exemption, the Second Fiduciary will not be deemed to be independent of and unrelated to M&I if: (1) Such fiduciary directly or indirectly controls, is controlled by, or is under common control with M&I; (2) Such fiduciary, or any officer, director, partner, employee, or relative of the fiduciary is an officer, director, partner or employee of M&I (or is a relative of such persons); (3) Such fiduciary directly or indirectly receives any compensation or other consideration for his or her own personal account in connection with any transaction described in this exemption. If an officer, director, partner or employee of M&I (or relative of such persons), is a director of such Second Fiduciary, and if her or she abstains from participation in: (i) The choice of the Client Plan's investment adviser, (ii) the approval of any such purchase or sale between the Client Plan and the Funds, and (iii) the approval of any change in fees charged to or paid by the Client Plan in connection with any of the transactions described in Sections I and II above, then paragraph (g)(2) of this section shall not apply. (h) The term ``secondary service'' means a service other than an investment management, investment advisory, or similar service, which is provided by M&I to the Funds. However, for purposes of this exemption, the term ``secondary service'' will not include any brokerage services provided to the Funds by M&I for the execution of securities transactions engaged in by the Funds. (i) The term ``Termination Form'' means the form supplied to the Second Fiduciary which expressly provides an election to the Second Fiduciary to terminate on behalf of a Client Plan the authorization described in paragraph (j) of Section II. Such Termination Form may be used at will by the Second Fiduciary to terminate an authorization without penalty to the Client Plan and to notify M&I in writing to effect a termination by selling the shares of the Funds held by the Client Plan requesting such termination within one business day following receipt by M&I of the form; provided that if, due to circumstances beyond the control of M&I, the sale cannot be executed within one business day, M&I shall have one additional business day to complete such sale. EFFECTIVE DATE: If the proposed exemption is granted, the exemption will be effective November 20, 1992. Summary of Facts and Representations 1. Marshall & Ilsley Trust Company (M&I Trust) is a Wisconsin corporation with its principal offices located at 770 North Water Street, Milwaukee, Wisconsin, and is a subsidiary of Marshall & Ilsley Corporation (M&I Corp.), a bank holding company. M&I Corp. and various affiliates (referred to herein as ``M&I''), serve as trustee, directed trustee, investment manager, or custodian for approximately 1,163 employee benefit plans. As of September 30, 1992, M&I had total assets of approximately $25.3 million and total assets under management of approximately $4.86 billion. M&I represents that its status as a fiduciary with investment discretion for a Client Plan arises out of its relationship as a trustee or investment manager for such Plan, but does not result from the rendering of any investment advice to a Plan fiduciary that has investment discretion for the Client Plan. As a custodian or directed trustee of a Client Plan, M&I has custody of Plan assets, collects all income, performs bookkeeping and accounting services, generates periodic statements of account activity and other reports, and makes payments or distributions from the account as directed. However, M&I has no duty as custodian or directed trustee to review investments or make recommendations, acting only as directed by an authorized Second Fiduciary. The Client Plans include various pension, profit sharing, and stock bonus plans as well as voluntary employees' beneficiary associations, supplemental unemployment benefit plans, simplified employee benefit plans, retirement plans for self-employed individuals (i.e., Keogh plans), and individual retirement accounts (IRAs).13 M&I, in its capacity as a fiduciary of the Client Plans, may exercise investment discretion for all or a portion of he assets of such Client Plans. --------------------------------------------------------------------------- \1\3M&I states that only pension, profit sharing and Keogh plans were invested in the CIFs at the time of the transfers of assets from the CIFs to the Funds. --------------------------------------------------------------------------- 2. M&I requests an exemption for investments in a Fund which occur through an in-kind transfer of a Client Plan's pro rata share of assets from a terminating CIF to a corresponding Fund in exchange for shares of such Fund.14 M&I also requests an exemption for the receipt of fees from the Funds in connection with the investment of assets of a Client Plan (including any assets of a Client Plan which were held in a terminating CIF) for which it acts as a trustee, directed trustee, investment manager, or custodian, in shares of the Funds in instances where M&I is an investment adviser, custodian, and shareholder servicing agent for the Funds. The exemption would include Client Plans for which M&I exercises investment discretion as well as Client Plans where investment decisions are directed by a Second Fiduciary. --------------------------------------------------------------------------- \1\4M&I is not requesting an exemption for any investment in the Funds by the M&I Plans. M&I represents that the M&I Plans may acquire or sell shares of the Funds pursuant to Prohibited Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734, April 8, 1977). PTE 77-3 permits the acquisition or sale of shares of a registered, open-end investment company by an employee benefit plan covering only employees of such investment company, employees of the investment adviser or principal underwriter for such investment company, or employees of any affiliated person (as defined therein) of such investment adviser or principal underwriter, provided certain conditions are met. The Department is expressing no opinion in this proposed exemption regarding whether any transactions with the Funds by the M&I Plans would be covered by PTE 77-3. --------------------------------------------------------------------------- The Client Plans' pro rata share of fees paid by the Funds to M&I for investment advisory services are credited to the Client Plans, in accordance with the conditions of the proposed exemption (as discussed in Item 7 below), with respect to the assets of the Client Plans involved in Fund investments. Any amounts received by M&I for serving as a custodian and shareholder servicing agent of the Funds are also currently credited to the Client Plans to the extent that such amounts exceed M&I's direct expenses for providing the service to the Funds. However, M&I proposes to retain such fees in the future. All investments in the Funds are made by M&I pursuant to an initial written authorization and an annual reauthorization of the investment by the Second Fiduciary. M&I invests assets of a Client Plan in any of the Funds for which it has received prior written authorization for such investment from the Second Fiduciary during the period that the authorization is effective. 3. The Funds are a Wisconsin corporation organized as an open-end investment company registered under the 1940 Act. The Funds currently consist of five Funds or ``portfolios'', each having a separate prospectus and representing a distinct investment vehicle. The shares of each Fund represent a proportionate interest in the assets of that Fund. The existing Funds include the Marshall Money Market Fund, the Marshall Government Income Fund, the Marshall Intermediate Bond Fund, the Marshall Short-Term Income Fund, and the Marshall Stock Fund. M&I states that additional Funds may be established in the future. Shares of the Funds are offered and sold to eligible investors. Certain shares, identified by each prospectus as Trust Shares, are offered to trust accounts of M&I as a means of acquiring an interest in a diversified porfolio of investments. M&I states that the Trust Shares are offered to M&I's trust customers, including the Client Plans, under terms and conditions which are at least as favorable to such customers as the terms and conditions involved in any other class of Fund shares. If the proposed exemption is granted, the exemption would cover only investments by Client Plans in Trust Shares. Thus, all references herein to the transactions involving the Client Plans refer only to the Trust Shares described by the prospectus for each Fund. Investments of Client Plan assets in the Funds occur either through a transfer of assets from a terminating CIF, the direct purchase of shares of the Funds for a Client Plan by M&I, the transfer by M&I of Client Plan assets from one Fund to another Fund, or a daily automated sweep of uninvested cash of a Client Plan by M&I into one or more Funds previously designated by the Client Plan for sweeping such cash.15 All such investments for the Client Plans are made pursuant to the Second Fiduciary's prior written authorization and annual reauthorization to M&I (as described in Item 8 below). --------------------------------------------------------------------------- \1\5M&I states that an automated sweep of uninvested cash is currently available as a means of investment by the Client Plans into either the Marshall Money Market Fund, the Marshall Government Income Fund, and the Marshall Short-Term Income Fund. --------------------------------------------------------------------------- 4. Federated Securities Corporation (FSC) is the principal distributor for all shares of the Funds including Trust Shares which are sold to the Client Plans.16 There are no fees for distribution expenses, pursuant to Rule 12b-1 under the 1940 Act, paid to FSC with respect to the Trust Shares. In addition, M&I does not and will not receive fees payable pursuant to Rule 12b-1 in connection with transactions involving any shares of the Funds. The Trust Shares are charged for certain administrative expenses of the Funds. FSC is a subsidiary of Federated Investors (Federated) which, through other subsidiaries, acts as the transfer and dividend disbursing agent for the Funds and provides certain personnel and administrative services for the Funds. Federated and its subsidiaries are unrelated to M&I. However, M&I Trust is the custodian for the securities and cash of the Funds and Marshall Funds Investor Services (MFIS), another affiliate of M&I Corp., is the shareholder servicing agent for the Funds. --------------------------------------------------------------------------- \1\6According to the Fund prospectuses, investors may purchase shares of the Funds through M&I Brokerage Services, Inc. (M&I Brokerage Services), an affiliate of M&I Corp. However, the involvement of M&I Brokerage Services in selling Fund shares is limited to transactions through M&I ``retail'' accounts--i.e., accounts other than those accounts handled by M&I Trust or other M&I affiliated trust companies. M&I represents that purchases and sales of Fund shares for all M&I trust accounts, including the Client Plans, are handled by M&I trust officers dealing directly with Federated, the Funds' distributor. In addition, M&I Brokerage Services does not provide portfolio execution services for the Funds. M&I states that securities transactions for a Fund's portfolio are executed by broker-dealers unrelated to M&I and do not generate commissions or other fees to M&I Brokerage Services or any affiliate. The Department notes that for purposes of this exemption the term ``secondary service'' does not include any brokerage services provided to the Funds by M&I for the execution of securities transactions engaged in by the Funds (see Section IV(h) above). --------------------------------------------------------------------------- 5. M&I Investment Management Corp. (M&I Management), a wholly-owned subsidiary of M&I Corp., serves as the investment adviser for the Funds pursuant to investment advisory agreements with the Funds (the Agreements) which allow M&I Management to receive monthly investment advisory fees based on a percentage of the average daily net assets of each of the Funds. The Agreements and the fees received by M&I Management are approved by the Board of Directors of the Funds (the Funds' Directors), in accordance with the applicable provisions of the 1940 Act. Any changes in the fees are approved by the Funds' Directors. All of the Funds' Directors are independent of M&I. 6. Prior to November 20, 1992, M&I generally invested assets of Client Plans for which it acted as a trustee with investment discretion in a series of CIFs. In addition, certain Client Plans where investment decisions are directed by a Second Fiduciary generally used an M&I CIF as an investment option for individual accounts in the Client Plans. However, on Friday, November 20, 1992, M&I terminated three of its CIFs--the M&I Employee Benefit Money Market Fund, the M&I Employee Benefit Bond Fund, and the M&I Employee Benefit Stock Fund. The assets in these CIFs were transferred to the Marshall Money Market Fund, the Marshall Intermediate Bond Fund, and the Marshall Stock Fund, respectively. Each CIF transferred its assets to the corresponding Fund in exchange for Trust Shares of that Fund at the then current market value of the CIF assets, in accordance with Rule 17a-7 under the 1940 Act (as discussed below).17 The CIFs were liquidated and the Trust Shares were distributed to the Client Plans, subject to the prior written consent of the Second Fiduciary for the Client Plan. Any Client Plan that had not provided prior written approval for the transfer of its CIF assets to the Funds, by the deadline set for such approvals, received a cash distribution of its pro rata share of the CIF assets no later than Friday, November 20, 1992, preceding the transfers. --------------------------------------------------------------------------- \1\7Rule 17a-7 permits transactions between investment funds that use the same investment adviser, subject to certain conditions. Rule 17a-7 requires, among other things, that such transactions be effected at the ``independent current market price'' for each security, involve only securities for which market quotations are readily available, involve no brokerage commissions or other remuneration, and comply with valuation procedures adopted by the board of directors of the investment company to ensure that all requirements of the Rule are satisfied. --------------------------------------------------------------------------- The assets of the CIFs were reviewed by M&I Management as investment adviser to the Funds, in coordination with Federated Administrative Services (FAS), the Funds' third party administrator, to determine that the assets were appropriate investments for the corresponding Funds. FAS created a portfolio accounting system to track the securities to be acquired by the Funds. Prior to the transfer of CIF assets to the Funds, the Funds did not hold any securities or other assets except cash or, as in the case of the Marshall Money Market Fund, U.S. Treasury Bills. The transfer transactions occurred using market values as of the close of business on Friday, November 20, 1992. The securities transferred from the CIFs were the same as the securities received by the Funds. The applicant states that the value of the securities was determined in a single valuation by M&I as investment adviser for the Funds, in accordance with the requirement of Rule 17a-7(b) that transactions be effected at the ``independent current market price'' of the securities. The valuation of the securities was performed in the same manner for both the CIF and the corresponding Fund at the close of the same business day. Specifically, as required by the Rule, securities listed on exchanges were valued at their closing prices on Friday, November 20, and unlisted securities were valued based on the average of bid and ask quotations at the close of the market on Friday, November 20, obtained from three brokers independent of M&I. Any fees charged by the independent brokers for the bid and ask prices were paid by M&I. Each Client Plan that approved the CIF asset transfers to the Funds received account statements describing the asset transfers either in mid-December 1992, if such Plans were on a monthly account statement schedule, or mid-January 1993, if such Plans were on a quarterly account statement schedule. The statements showed the disposition of the CIF units from the Client Plan account and the acquisition by the account of Fund shares, both posted as of Monday, November 23, 1992.\18\ This information provided the affected Client Plans with written confirmation of the number of CIF units held by the Client Plan immediately before the transfer, the related per unit value and the total dollar amount of such CIF units as well as the number of shares of the Funds held by the Client Plan following the transfer, the related per share net asset value, and the total dollar amount of such shares. --------------------------------------------------------------------------- \1\8The applicant has provided the following example: Assume a Client Plan held 12,506 units of the M&I Employee Benefit Stock Fund prior to the asset transfers. The account statement showed a disposition of 12,506 units of M&I Employee Benefit Stock Fund, at a value of $72.08 per unit, on November 23, 1992, with total proceeds of $901,432.18. The statement also showed a purchase on that same date of 90,143.218 shares of the Marshall Stock Fund, the Fund corresponding to the M&I Employee Benefit Stock Fund, at $10 per share, at a total cost of $901,432.18, the same amount as the proceeds of the disposition from the M&I Employee Benefit Stock Fund. --------------------------------------------------------------------------- Thus, the applicant represents that as of November 23, 1992, Client Plans that were formerly invested in the terminated CIFs held Trust Shares of the corresponding Funds which were of the same value, based on the Client Plans' pro rata share of the underlying market value of the securities transferred to the Funds, as their assets in the CIF as of the close of business on Friday, November 20, 1992. M&I represents that the other CIFs may be terminated in the future and that all such terminations and subsequent transfers of CIF assets for Trust Shares of the Funds will comply with Rule 17a-7 as described above and the conditions of this proposed exemption.19 --------------------------------------------------------------------------- \1\9On Friday, October 1, 1993, M&I terminated the M&I Dividend Fund and transferred its assets upon written approval from the investors to a new Marshall Fund, the Marshall Equity Income Fund. The transfer of assets occurred in the same manner as the asset transfers which occurred on November 20, 1992. --------------------------------------------------------------------------- M&I states that for all subsequent transfers of CIF assets to a Fund following the publication of this proposed exemption in the Federal Register, M&I will send by regular mail to each affected Client Plan a written confirmation, not later than 30 days after completion of the transaction, containing the following information: (1) The identity of each security that was valued for purposes of the transaction in accordance with Rule 17a-7(b)(4); (2) The price of each such security involved in the transaction; and (3) The identity of each pricing service or market maker consulted in determining the value of such securities. Securities which are valued in accordance with Rule 17a-7(b)(4) are securities for which the current market price cannot be obtained by reference to the last sale price for transactions reported on a recognized securities exchange or the NASDAQ system. M&I states that such securities are valued based on an average of the highest current independent bid and lowest current independent offer, as of the close of business on the Friday preceding the weekend of the CIF transfers, determined on the basis of reasonable inquiry from at least three sources that are broker-dealers or pricing services independent of M&I. In addition, for all in-kind transfers of CIF assets to a Fund that occur after the date this proposed exemption is published in the Federal Register, M&I will send by regular mail to the Second Fiduciary no later than 90 days after completion of each transfer a written confirmation that contains the following information: (1) The number of CIF units held by the Client Plan immediately before the transfer, the related per unit value, and the total dollar amount of such CIF units; and (2) The number of shares in the Funds that are held by th [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-20010. Public record. Not legal advice.