Smith Barney Shearson (SBS), Located in New York, NY

DEPARTMENT OF LABOR

[Application Nos. D-9337 and D-9415]

Smith Barney Shearson (SBS), Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemption to modify and replace prohibited

transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers,

Inc. (Shearson Lehman).

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed individual exemption

which, if granted, would replace PTE 92-77 (55 FR 45833, October 5,

1992). PTE 92-77 permits the purchase or redemption of shares by an

employee benefit plan, an individual retirement account (the IRA) or a

retirement plan for a self-employed individual (the Keogh Plan;

collectively the Plans) in the Trust for TRAK Investments (the Trust)

established by Shearson Lehman, in connection with such Plans'

participation in the TRAK Personalized Investment Advisory Service (the

TRAK Program). In addition, PTE 92-77 permits the provision, by the

Consulting Group Division of Shearson Lehman (the Consulting Group), of

investment advisory services to an independent fiduciary of a

participating Plan (the Independent Plan Fiduciary) which may result in

such fiduciary's selection of a portfolio (the Portfolio) in the TRAK

Program for the investment of Plan assets. These transactions are

described in a notice of pendency that was published in the Federal

Register on April 3, 1992 at 57 FR 11514. PTE 92-77 is effective as of

April 3, 1992.

If granted, the proposed exemption would replace PTE 92-77, which

as discussed below, expired by operation of the law. The new proposed

exemption would permit the replacement of Shearson Lehman with a newly-

merged entity known as ``Smith Barney Shearson, Inc.'' It would also

permit the adoption of a daily-traded collective investment fund (the

GIC Fund) for Plans providing for participant directed-investments (the

Section 404(c) Plans). The proposed exemption would provide conditional

relief that is identical to that provided by PTE 92-77. In addition,

the proposed exemption would affect participants and beneficiaries of,

and fiduciaries with respect to, Plans participating in the TRAK

Program.

DATES: Written comments and requests for a public hearing should be

received by the Department on or before the expiration of 60 days from

the publication of this proposed exemption in the Federal Register. If

granted, the proposed exemption will be effective July 31, 1993 for

transactions that are covered by PTE 92-77. With respect to

transactions involving the GIC Fund, the proposed exemption will be

effective as of the date the grant notice is published in the Federal

Register.

ADDRESSES: All written comments and requests for a public hearing

(preferably, three copies) should be sent to the Office of Exemption

Determinations, Pension and Welfare Benefits Administration, Room N-

5649, U.S. Department of Labor, 200 Constitution Avenue, NW.,

Washington, DC 20210, Attention: Application Nos. D-9337 and D-9415.

The applications pertaining to the proposed exemption and the comments

received will be available for public inspection in the Public

Documents Room of the Pension and Welfare Benefits Administration, U.S.

Department of Labor, room N-5507, 200 Constitution Avenue, NW.,

Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption

Determinations, Pension and Welfare Benefits Administration, U.S.

Department of Labor, telephone (202) 219-8881. (This is not a toll-free

number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of a proposed exemption that would replace PTE

92-77. PTE 92-77 provides an exemption from certain prohibited

transaction restrictions of section 406 of the Employee Retirement

Income Security Act of 1974 (the Act) and from the sanctions resulting

from the application of section 4975 of the Internal Revenue Code of

1986 (the Code), as amended, by reason of section 4975(c)(1) of the

Code. The proposed exemption was requested in an application filed by

SBS pursuant to section 408(a) of the Act and section 4975(c)(2) of the

Code, and in accordance with the procedures (the Procedures) set forth

in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Accordingly, this proposed replacement

exemption is being issued solely by the Department.

As stated briefly above, PTE 92-77 allows Shearson Lehman to make

the TRAK Program available to Plans that acquire shares in the Trust

subject to certain conditions. Specifically, PTE 92-77 provides

exemptive relief from section 406(a) of the Act and the sanctions

resulting from the application of section 4975 of the Code, by reason

of section 4975(c)(1) (A) through (D) of the Code, with respect to the

purchase or redemption of shares in the Trust by Plans investing

therein. In addition, PTE 92-77 provides exemptive relief from the

restrictions of section 406 (b)(1) and (b)(2) of the Act and the

sanctions resulting from the application of section 4975 of the Code,

by reason of section 4975(c)(1)(E) of the Code, with respect to the

provision, by the Consulting Group of Shearson Lehman, of investment

advisory services to an Independent Plan Fiduciary of a Plan

participating in the TRAK Program which may result in such fiduciary's

selection of a Portfolio in the TRAK Program for the investment of Plan

assets.

Subsequent to the granting of PTE 92-77, Shearson Lehman informed

the Department that it had signed an asset purchase agreement with

Primerica Corporation (Primerica) and Smith Barney Harris Upham &

Company, Inc. (Smith Barney), an indirect, wholly owned subsidiary. The

terms of the agreement provided for the sale of substantially all of

the assets of Shearson Lehman and its Asset Management Divisions

(collectively, the Shearson Divisions) to Smith Barney.1 The

transaction was completed on July 31, 1993. As a result of the

transaction, most of the assets and business of the Shearson Divisions

were transferred to Smith Barney which, upon merger with Shearson

Lehman, was renamed ``Smith Barney Shearson.'' (Smith Barney Shearson

is denoted herein as SBS.) Shearson Lehman received cash and an

interest-bearing note from SBS. As further consideration for the asset

sale, SBS agreed to pay future contingent amounts based upon the

combined performance of SBS and certain other Shearson Divisions

acquired from Shearson Lehman. Shearson Lehman also assigned to the

American Express Company (American Express) the right to receive 2.5

million shares of certain convertible preferred stock issued by

Primerica and a warrant. As consideration for the assignment, American

Express agreed to pay Shearson Lehman for the stock and the warrant

based on their value as of March 12, 1993, the date of the Asset

Purchase Agreement. At present, SBS offers the TRAK Program to

investors through one or more of its subsidiaries or divisions.

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\1\Shearson Lehman's other primary division, Lehman Brothers,

which is responsible for securities underwriting, financial

advisory, investment and merchant banking services and commodities

trading as a principal and agent, has been retained by Shearson

Lehman. It has been renamed ``Lehman Brothers Inc.''

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Since PTE 92-77 was granted, SBS informed the Department that it

wished to modify the exemption in order to improve the TRAK Program and

make it more responsive to the needs of investors. Specifically, SBS

proposes to add to the Portfolios currently available under the TRAK

Program, the GIC Fund, which is designed to invest primarily in

guaranteed investment contracts (the GICs), synthetic GIC products and/

or units of other GIC collective funds. The GIC Fund will not differ in

any material respects from the Government Money Investments Portfolio

which generally permits daily redemptions of its shares. In addition,

the GIC Fund will operate in a manner that is consistent with the

requirements of PTE 92-77. SBS believes it is important to offer the

GIC Fund to Section 404(c) Plans because these Plans may prefer to

offer participants this type of investment option instead of the

Government Money Investments Portfolio presently offered to such Plans

under the TRAK Program. Therefore, SBS requests exemptive relief in

order that the GIC Fund may be added to the Portfolios that are

available under the Trust.

The proposed GIC Fund will be a collective trust fund established

and maintained by Smith Barney Shearson Trust Company (SBS Trust), a

wholly owned subsidiary of Primerica. The GIC Fund will invest

primarily in a portfolio of GICs with varying maturities issued by

highly-rated insurance companies, and/or units of other collective

funds invested in GICs. The GIC Fund may also invest in asset-backed

investment products designed to offer risk and return characteristics

similar to those of GICs (i.e., synthetic GIC products). In addition,

the GIC Fund may hold short-term, low risk securities where the

investment of all fund assets in GICs and/or units of other GIC

collective funds is not feasible.

SBS Trust will serve as the trustee of the GIC Fund. SBS Trust will

employ a sub-adviser (the Sub-Adviser) which is independent of SBS and

its affiliates to make recommendations on purchases of GICs and/or

units of other GIC collective funds. Currently, SBS Trust employs

Morley Capital Management (Morley Capital) of Lake Oswego, Oregon as

the Sub-Adviser of the GIC Fund. SBS Trust will also employ Boston

Company Investors Services Group (ISG), a business group of The Boston

Company to provide custody and valuation services and The Shareholder

Services Group, Inc. (TSSG), an entity which is indirectly owned by

American Express, as transfer agent. Both ISG and TSSG are not

affiliated with SBS.

SBS represents that the GIC Fund will not pay a management or other

similar fee to it or SBS Trust. (SBS Trust's fees for general trust

services provided to a Section 404(c) Plan is included in such plan's

investment advisory or ``outside'' fee.) A management fee may be paid

to Morley Capital or any other Sub-Adviser which is independent of SBS

and its affiliates. The GIC Fund will pay ISG, as custodian and

provider of fund valuation services, a fee for such services, and TSSG,

as transfer agent, a fee of $8.50 to $9.50 per Section 404(c) Plan,

plus out-of-pocket expenses. With respect to the fees paid to SBS and

its affiliates, the GIC Fund will not differ materially from the

Government Money Investments Portfolio in that it will not pay a

management or other similar fee to SBS or SBS Trust.

SBS will describe the GIC Fund in the prospectus (the Prospectus)

and promotional materials it furnishes to Section 404(c) Plan

participants who are interested in investing in the GIC Fund. Such

disclosures will reflect, in all material respects, the information

discussed above.

Because of the foregoing material changes to the factual

representations supporting PTE 92-77, the Department has determined

that the prior exemption was no longer effective as of July 31, 1993,

the date Shearson Lehman sold the assets described above to SBS. Thus,

the Department is of the view that PTE 92-77 would be unavailable for

use by SBS and its subsidiaries with respect to the subject

transactions.

Accordingly, the Department has decided to publish a new exemption

which, if granted, would replace PTE 92-77. Under the replacement

exemption, all references to Shearson Lehman would be replaced with

references to SBS. In addition, the replacement exemption would

incorporate the new GIC Fund, SBS Trust, ISG and TSSG. Further, the

replacement exemption would have an effective date of July 31, 1993 for

transactions described in PTE 92-77. With respect to transactions

involving the GIC Fund, the replacement exemption would become

effective as of the date of the grant of the notice of pendency.

Notice to Interested Persons

Notice of the proposed exemption will be mailed by first class mail

to each Plan which invests in the TRAK Program. The notice will contain

a copy of the notice of proposed exemption as published in the Federal

Register and an explanation of the rights of interested persons to

comment on and/or request a hearing with respect thereto. Such notice

will be sent to the above-named parties within 30 days of the

publication of the proposed exemption in the Federal Register. Written

comments and hearing request are due within 60 days of the publication

of the proposed exemption in the Federal Register.

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and section 4975(c)(2) of the Code does

not relieve a fiduciary or other party in interest or disqualified

person from certain other provisions of the Act and the Code, including

any prohibited transaction provisions to which the exemption does not

apply and the general fiduciary responsibility provisions of section

404 of the Act, which require, among other things, a fiduciary to

discharge his or her duties respecting the plan solely in the interest

of the participants and beneficiaries of the plan and in a prudent

fashion in accordance with section 404(a)(1)(B) of the Act; nor does it

affect the requirements of section 401(a) of the Code that the plan

operate for the exclusive benefit of the employees of the employer

maintaining the plan and their beneficiaries;

(2) Before an exemption can be granted under section 408(a) of the

Act and section 4975(c)(2) of the Code, the Department must find that

the exemption is administratively feasible, in the interest of the plan

and of its participants and beneficiaries and protective of the rights

of participants and beneficiaries of the plan; and

(3) The proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and the Code,

including statutory or administrative exemptions. Furthermore, the fact

that a transaction is subject to an administrative or statutory

exemption is not dispositive of whether the transaction is in fact a

prohibited transaction.

(4) In addition to transactions involving the GIC Fund, the

proposed exemption, if granted, will be applicable to the transactions

previously described in PTE 92-77 only if the conditions specified

therein are met.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the proposed replacement exemption to the

address above, within the time period set forth above. All comments

will be made a part of the record. Comments and requests for a hearing

should state the reasons for the writer's interest in the proposed

exemption. Comments received will be available for public inspection

with the referenced applications at the address set forth above.

Proposed 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 cited

above, the Department proposes to replace PTE 92-77 as follows:

Section I. Covered Transactions

(a) The restrictions of section 406(a) of the Act and the sanctions

resulting from the application of section 4975 of the Code, by reason

of section 4975(c)(1)(A) through (D) of the Code, shall not apply to

the purchase or redemption of shares by Plans in the SBS-established

Trust in connection with such Plans' participation in the TRAK

Personalized Investment Advisory Service.

(b) The restrictions of section 406(b) of the Act and the sanctions

resulting from the application of section 4975 of the Code by reason of

section 4975(c)(1)(E) and (F) of the Code, shall not apply to the

provision, by the Consulting Group, of investment advisory services to

an Independent Plan Fiduciary of a participating Plan which may result

in such fiduciary's selection of a Portfolio in the TRAK Program for

the investment of Plan assets.

The proposed exemption is subject to the following conditions that

are set forth in Section II.

Section II. General Conditions

(a) The participation of Plans in the TRAK Program will be approved

by an Independent Plan Fiduciary. For purposes of this requirement, an

employee, officer or director of SBS and/or its affiliates covered by

an IRA not subject to Title I of the Act will be considered an

Independent Plan Fiduciary with respect to such IRA.

(b) The total fees paid to the Consulting Group and its affiliates

will constitute no more than reasonable compensation.

(c) No Plan will pay a fee or commission by reason of the

acquisition or redemption of shares in the Trust.

(d) The terms of each purchase or redemption of Trust shares shall

remain at least as favorable to an investing Plan as those obtainable

in an arm's length transaction with an unrelated party.

(e) The Consulting Group will provide written documentation to an

Independent Plan Fiduciary of its recommendations or evaluations based

upon objective criteria.

(f) Any recommendation or evaluation made by the Consulting Group

to an Independent Plan Fiduciary will be implemented only at the

express direction of such independent fiduciary.

(g) The Consulting Group will generally give investment advice in

writing to an Independent Plan Fiduciary with respect to all available

Portfolios. However, in the case of a Section 404(c) Plan, the

Consulting Group will provide investment advice that is limited to the

Portfolios made available under the Plan.

(h) Any Sub-Adviser that acts for the Trust to exercise investment

discretion over a Portfolio will be independent of SBS and its

affiliates.

(i) Immediately following the acquisition by a Portfolio of any

securities that are issued by SBS and/or its affiliates, the percentage

of that Portfolio's net assets invested in such securities will not

exceed one percent.

(j) The quarterly investment advisory fee that is paid by a Plan to

the Consulting Group for investment advisory services rendered to such

Plan will be offset by such amount as is necessary to assure that the

Consulting Group retains no more than 20 basis points from any

Portfolio (with the exception of the Government Money Investments

Portfolio and the GIC Fund Portfolio for which the Consulting Group and

SBS Trust will retain no investment management fee) which contains

investments attributable to the Plan investor.

(k) With respect to its participation in the TRAK Program prior to

purchasing Trust shares,

(1) Each Plan will receive the following written or oral

disclosures from the Consulting Group:

(A) A copy of the Prospectus for the Trust discussing the

investment objectives of the Portfolios comprising the Trust, the

policies employed to achieve these objectives, the corporate

affiliation existing between the Consulting Group, SBS and its

subsidiaries and the compensation paid to such entities.

(B) Upon written or oral request to SBS, a Statement of Additional

Information supplementing the Prospectus which describes the types of

securities and other instruments in which the Portfolios may invest,

the investment policies and strategies that the Portfolios may utilize

and certain risks attendant to those investments, policies and

strategies.

(C) A copy of the investment advisory agreement between the

Consulting Group and such Plan relating to participation in the TRAK

Program.

(D) Upon written request of SBS, a copy of the respective

investment advisory agreement between the Consulting Group and the Sub-

Advisers.

(E) In the case of a section 404(c) Plan, if required by the

arrangement negotiated between the Consulting Group and the Plan, an

explanation by an SBS Financial Consultant (the Financial Consultant)

to eligible participants in such Plan, of the services offered under

the TRAK Program and the operation and objectives of the Portfolios.

(F) Copies of PTE 92-77 and documents pertaining to the proposed

replacement exemption.

(2) If accepted as an investor in the TRAK Program, an Independent

Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in

writing, prior to purchasing Trust shares that such fiduciary has

received copies of the documents described above in subparagraph (k)(1)

of this section.

(3) With respect to a section 404(c) Plan, written acknowledgement

of the receipt of such documents will be provided by the Independent

Plan Fiduciary (i.e., the Plan administrator, trustee or named

fiduciary, as the recordholder of Trust shares). Such Independent Plan

Fiduciary will be required to represent in writing to SBS that such

fiduciary is (a) independent of SBS and its affiliates and (b)

knowledgeable with respect to the Plan in administrative matters and

funding matters related thereto, and able to make an informed decision

concerning participation in the TRAK Program.

(4) With respect to a Plan that is covered under Title I of the

Act, where investment decisions are made by a trustee, investment

manager or a named fiduciary, such Independent Plan Fiduciary is

required to acknowledge, in writing, receipt of such documents and

represent to SBS that such fiduciary is (a) independent of SBS and its

affiliates, (b) capable of making an independent decision regarding the

investment of Plan assets and (c) knowledgeable with respect to the

Plan in administrative matters and funding matters related thereto, and

able to make an informed decision concerning participation in the TRAK

Program.

(l) Subsequent to its participation in the TRAK Program, each Plan

receives the following written or oral disclosures with respect to its

ongoing participation in the TRAK Program:

(1) The Trust's semi-annual and annual report which will include

financial statement for the Trust and investment management fees paid

by each Portfolio.

(2) A written quarterly monitoring statement containing an analysis

and an evaluation of a Plan investor's account to ascertain whether the

Plan's investment objectives have been met and recommending, if

required, changes in Portfolio allocations.

(3) If required by the arrangement negotiated between the

Consulting Group and a section 404(c) Plan, a quarterly, detailed

investment performance monitoring report, in writing, provided to an

Independent Plan Fiduciary of such Plan showing, Plan level asset

allocations, Plan cash flow analysis and annualized risk adjusted rates

of return for Plan investments. In addition, if required by such

arrangement, Financial Consultants will meet periodically with

Independent Plan Fiduciaries of section 404(c) Plans to discuss the

report as well as with eligible participants to review their accounts'

performance.

(4) If required by the arrangement negotiated between the

Consulting Group and a section 404(c) Plan, a quarterly participant

performance monitoring report provided to a Plan participant which

accompanies the participant's benefit statement and describes the

investment performance of the Portfolios, the investment performance of

the participant's individual investment in the TRAK Program, and gives

market commentary and toll-free numbers that will enable the

participant to obtain more information about the TRAK Program or to

amend his or her investment allocations.

(5) On a quarterly and annual basis, written disclosures to all

Plans of the (a) percentage of each Portfolio's brokerage commissions

that are paid to SBS and its affiliates and (b) the average brokerage

commission per share paid by each Portfolio to SBS and its affiliates,

as compared to the average brokerage commission per share paid by the

Trust to brokers other than SBS and its affiliates, both expressed as

cents per share.

(m) SBS shall maintain, for a period of six years, the records

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

section to determine whether the conditions of this exemption have been

met, except that (1) a prohibited transaction will not be considered to

have occurred if, due to circumstances beyond the control of SBS and/or

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

the six year period, and (2) no party in interest other than SBS shall

be subject to the civil penalty that may be assessed under section

502(i) of the Act, or to the taxes imposed by section 4975(a) and (b)

of the Code, if the records are not maintained, or are not available

for examination as required by paragraph (n) below.

(n)(1) Except as provided in section (2) of this paragraph and

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

504 of the Act, the records referred to in paragraph (m) of this

section shall be unconditionally available at their customary location

during normal business hours by:

(A) Any duly authorized employee or representative of the

Department or the Service;

(B) Any fiduciary of a participating Plan or any duly authorized

representative of such fiduciary;

(C) Any contributing employer to any participating Plan or any duly

authorized employee representative of such employer; and

(D) Any participant or beneficiary of any participating Plan, or

any duly authorized representative of such participant or beneficiary.

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

this paragraph (n) shall be authorized to examine the trade secrets of

SBS or commercial or financial information which is privileged or

confidential.

Section III. Definitions

For purposes of this exemption:

(a) An ``affiliate'' of SBS includes--

(1) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with SBS. (For purposes of this subsection, the term ``control'' means

the power to exercise a controlling influence over the management or

policies of a person other than an individual.)

(2) Any officer, director or partner in such person, and

(3) Any corporation or partnership of which such person is an

officer, director or a 5 percent partner or owner.

(b) An ``Independent Plan Fiduciary'' is a Plan fiduciary which is

independent of SBS and its affiliates and is either--

(1) A Plan administrator, sponsor, trustee or named fiduciary, as

the recordholder of Trust shares of a Section 404(c) Plan,

(2) A participant in a Keogh Plan,

(3) An individual covered under a self-directed IRA which invests

in Trust shares, or

(4) A trustee, investment manager or named fiduciary responsible

for investment decisions in the case of a Title I Plan that does not

permit individual direction as contemplated by Section 404(c) of the

Act.

Section IV. Effective Dates

This exemption will be effective as of July 31, 1993, except for

transactions involving the GIC Fund. The exemption will be effective

upon its grant with respect to the inclusion of the GIC Fund in the

TRAK Program.

The availability of this proposed exemption is subject to the

express condition that the material facts and representations contained

in the applications for exemption are true and complete and accurately

describe all material terms of the transactions. In the case of

continuing transactions, if any of the material facts or

representations described in the applications change, the exemption

will cease to apply as of the date of such change. In the event of any

such change, an application for a new exemption must be made to the

Department.

For a more complete statement of the facts and representations

supporting the Department's decision to grant PTE 92-77, refer to the

proposed exemption and grant notice which are cited above.

Signed at Washington, DC, this 23rd day of March, 1994.

Ivan L. Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 94-7271 Filed 3-28-94; 8:45 am]

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