Notice of Proposed Individual Exemption to Amend Prohibited Transaction Exemption (PTE) 94-50 Involving Salomon Smith, Barney Inc. (Salomon Smith Barney) Located in New York, NY

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10574]

Notice of Proposed Individual Exemption to Amend Prohibited

Transaction Exemption (PTE) 94-50 Involving Salomon Smith, Barney Inc.

(Salomon Smith Barney) Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of

Labor.

ACTION: Notice of proposed individual exemption to modify PTE 94-50.

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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 amend PTE 94-50 (59 FR 32024, June 21, 1994),

an exemption granted to Smith Barney, Inc. (Smith Barney), the

predecessor of Salomon Smith Barney. PTE 94-50 relates to the operation

of the TRAK Personalized Investment Advisory Service product (the TRAK

Program) and the Trust for TRAK Investments (subsequently renamed the

Trust for Consulting Group Capital Markets Funds) (the Trust). If

granted, the proposed exemption would affect participants and

beneficiaries of and fiduciaries with respect to employee benefit plans

(the Plans) participating in the TRAK Program.

EFFECTIVE DATE: If granted, the proposed amendments will be effective

as of November 9, 1998.

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

received by the Department on or before December 24, 1998.

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, N.W.,

Washington, D.C. 20210, Attention: Application No. D-10574. The

application 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, N.W.,

Washington, D.C. 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 amend PTE 94-

50. PTE 94-50 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.

Specifically, PTE 94-50 provides exemptive relief from 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, for the purchase or redemption

of shares in the Trust by an employee benefit plan, an individual

retirement account (the IRA), or a retirement plan for a self-employed

individual (the Keogh Plan). PTE 94-50 also provides exemptive relief

from 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, with respect to the

provision, by the Consulting Group of Smith Barney (the Consulting

Group), of investment advisory services to independent fiduciaries of

participating Plans (the Independent Plan Fiduciaries) that might

result in such fiduciary's selection of an investment portfolio (the

Portfolio) under the TRAK Program for the investment of Plan

assets.1

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\1\ On October 5, 1992, the Department granted PTE 92-77 at 55

FR 45833. PTE 92-77 permitted Shearson Lehman Brothers, Inc.

(Shearson Lehman) to make the TRAK Program available to Plans that

acquired shares in the Trust. In this regard, PTE 92-77 permitted

Plans to purchase or redeem shares in the Trust and allowed the

Consulting Group to provide investment advisory services to an

Independent Fiduciary of a Plan which might 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, on July 31, 1993, Smith

Barney acquired certain assets of Shearson Lehman associated with

its retail business, including the TRAK Program, and applied for and

received a new exemption (PTE 94-50) for the ongoing operation of

the TRAK Program. Essentially, PTE 94-50 amended and replaced PTE

92-77. However, because of certain material factual changes to the

representations supporting PTE 92-77, the Department determined that

the exemption was no longer effective for use by Smith Barney and

its subsidiaries as of the date of the asset sale.

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[[Page 60392]]

Besides the transactions described above, PTE 94-50 permitted Smith

Barney to add a daily-traded collective investment fund (the GIC Fund)

to the existing Fund Portfolios and to describe the various entities

operating the GIC Fund. Further, PTE 94-50 replaced references to

Shearson Lehman with references to Smith Barney. PTE 94-50 is effective

as of July 31, 1993 for the transactions described in PTE 92-77 and

effective as of March 29, 1994 with respect to transactions involving

the GIC Fund.

As of December 31, 1997, the TRAK Program held assets that were in

excess of $8.4 billion. Of those assets, approximately $1.7 billion

were held in 540, 401(k) Plan accounts and approximately 57,100

employee benefit plan and IRA/Keogh-type accounts. At present, the

Trust consists of 13 Portfolios that are managed by the Consulting

Group and advised by one or more unaffiliated sub-advisers selected by

Salomon Smith Barney.

Salomon Smith Barney has informed the Department of certain

changes, which are discussed below, to the facts underlying PTE 94-50.

These modifications include (1) corporate mergers that have changed the

names of the parties described in PTE 94-50 and would permit broader

distribution of TRAK-related products, (2) the implementation of a

recordkeeping reimbursement offset system (the Recordkeeping

Reimbursement Offset Procedure) under the TRAK Program, and (3) the

institution of an automated reallocation option (the Automatic

Reallocation Option) under the TRAK Program for which Salomon Smith

Barney has requested administrative exemptive relief from the

Department.

The proposed exemption has been requested in an application filed

on behalf of Salomon Smith Barney pursuant to section 408(a) of the Act

and section 4975(c)(2) of the Code, and in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

August 10, 1990). 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, the proposed exemption is being issued solely by the

Department.

1. The Corporate Mergers. Salomon Smith Barney states that in

November 1997, a subsidiary of the Travelers Group Inc. (the Travelers

Group), the parent of Smith Barney, acquired all of the shares of

Salomon Brothers, Inc. (Salomon). Subsequent to the acquisition,

Salomon and Smith Barney were operated as separately-registered broker-

dealers and as sister corporations with a common parent. On September

1, 1998, Salomon was merged with and into Smith Barney, with Smith

Barney remaining as the surviving corporation. As a result of the

merger, the corporate name of Smith Barney has been changed to

``Salomon Smith Barney Inc.''

Salomon Smith Barney also states that in April 1998, the Travelers

Group and Citicorp Inc. (Citicorp) announced a stock merger whereby

Citicorp would be merged with and into a subsidiary of the Travelers

Group. As a result of the merger, the Travelers Group would become a

bank holding company and change its name to ``Citigroup Inc.''

(Citigroup).

Salomon Smith Barney represents that the purpose of the merger is

to create more distribution channels for TRAK products. In this regard,

registered broker-dealers associated with Citigroup will be permitted

to market the TRAK Program under a different product name. However,

Salomon Smith Barney explains that the terms and conditions of PTE 94-

50 and this amendment will be complied with by the parties involved.

The merger, which occurred on October 8, 1998, required that the

affected parties obtain approval from the Federal Reserve Board under

the Bank Holding Company Act (the BHC Act). Under the BHC Act, the

Federal Reserve Board does not authorize bank holding companies, such

as Citigroup, to be affiliated with companies that organize, sponsor,

control or distribute United States open-end mutual funds. As a bank

holding company, Citigroup is required to engage an independent party

to provide certain distribution services in connection with the

marketing of mutual fund shares) for all United States, publicly-traded

mutual funds for which any subsidiary of the Travelers Group/Citigroup

acts as a distributor. Salomon Smith Barney notes that although the

Funds participating in the TRAK Program will be affected by this

change, no Plan will be required to pay distribution fees to the

independent distributors.

On October 15, 1998, Salomon Smith Barney was merged with and into

Pendex Real Estate Corp. (Pendex), a shell corporation domiciled in New

York. Pendex, the survivor of the merger, was then renamed ``Salomon

Smith Barney Inc.'' Upon completion of this merger, Salomon Smith

Barney became a New York corporation.

2. Recordkeeping Reimbursement Offset Procedure. Salomon Smith

Barney states that the Board of Trustees (the Board) of the Funds

approved, but has not yet implemented, a recordkeeping reimbursement

offset procedure under which a Plan participating in the TRAK Program

would be permitted to reduce its investment fees and expenses. The

reimbursement amount would be paid solely by the Funds as a means of

being competitive with other mutual funds offering similar

reimbursements to investors.

In May 1998, the Board approved a recordkeeping reimbursement

amount of $12.50 for each investment position held by a participant.

(In other words, a participant holding positions in three different

Funds would be eligible to receive a total annual reimbursement of

$37.50). In addition, the Board resolved that after applying such

reimbursement to recordkeeping expenses charged by recordkeepers of the

Plans, any excess reimbursement amount would be applied to reduce other

fees and expenses 2 payable by participating Plans,

including, but not limited to, the Plan-level investment advisory fee

payable to the Consulting Group for asset allocation recommendations

(the Outside Fee), after the appropriate offset has been applied (the

Net Outside Fee).3 If implemented, Salomon Smith Barney

explains that the Funds would pay the appropriate reimbursement amount

directly to the recordkeeper of the Plan. The affected Plan would then

be required to pay only the balance of the fee, which is generally

charged on a quarterly basis, after the excess reimbursement amount has

been deducted.

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\2\ In addition to annual recordkeeping fees (the Annual Fees)

payable by a Plan participating in the TRAK Program, it is

represented that a Plan might be required to pay recordkeeping fees

associated with certain particular services (the Other Fees) such as

initial plan set-up and conversion, preparation of annual filings,

enrollment, special statement preparation and audit.

\3\ Salomon Smith Barney is offsetting, quarterly, against the

Outside Fee, such amount as is necessary to assure that the

Consulting Group retains not more than 20 basis points (as an Inside

Fee) from any Portfolio on investment assets attributable to any

Plan.

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The Recordkeeping Reimbursement Offset Procedure would work as

follows:

Assume that Plan A has $1 million in assets invested in the TRAK

Program and 100 participants. Assume further that Plan A pays its

recordkeeper $20 per participant per year in Annual Fees totaling

$2,000 per year or

[[Page 60393]]

$500 per quarter and $12 per participant per year in Other Fees,

totaling $1,200 per year or $300 per quarter. In addition, Plan A

pays the Consulting Group a total annual net investment advisory fee

(i.e., the Net Outside Fee) of $8,500.

At the end of each calendar quarter, Plan A's recordkeeper will

determine the actual number of Fund positions held by the Plan A

participants and calculate the resulting reimbursement amount. If

Plan A had 300 participant positions at the end of the quarter, the

Plan's total recordkeeping reimbursement amount would be 300 x

$3.125 (the annual amount of $12.50 divided by 4) or $937.50. That

amount would be credited as follows:

Application of Reimbursement to Recordkeeping Fees

Quarterly Portion of Annual Fees........................... $500.00

Quarterly Portion of Other Fees............................ 300.00

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Total Quarterly Recordkeeping Fees......................... 800.00

Credit for Reimbursement................................... (937.50)

Excess Reimbursement....................................... (137.50)

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Because the reimbursement amount exceeds the recordkeeping fees

due for the quarter, the Plan does not owe any recordkeeping fee for

that period. Therefore, the recordkeeper will not bill the Plan.

Application of Excess Reimbursement to the Net Outside Fee

Quarterly Net Outside Fee.................................. $2,125.00

Excess Reimbursement....................................... (137.50)

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Total.................................................. 1,987.50

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The recordkeeper will advise the Consulting Group that it is

entitled to bill the Plan for the $1,987.50 balance of its

investment advisory fee (i.e., the Net Outside Fee).

Upon participation in the TRAK Program, an Independent Plan

Fiduciary selects a recordkeeper for the Plan, from a list of

recordkeepers which maintain computer links to the Funds under the TRAK

Program. Salomon Smith Barney states that of the 23 recordkeepers

currently providing services to TRAK Program investors, only one, Smith

Barney Plan Services, is an affiliate. Because the reimbursement rate

and the timing of the offset of the excess reimbursement amount against

fees will be the same regardless of the identity of the recordkeeper

and the Independent Plan Fiduciary is responsible for the selection of

this particular recordkeeper, Salomon Smith Barney believes its

affiliation with Smith Barney Plan Services does not appear to present

additional potential abuses under section 406(b)(1) or 406(b)(3) of the

Act in its capacity as an investment adviser in recommending investment

in the Funds to Independent Plan Fiduciaries.

Salomon Smith Barney notes that the reasoning in the Frost National

Bank Advisory Opinion (ERISA Advisory Opinion 97-15A, May 22, 1997)

(the Frost Opinion), is relevant to this situation. Therefore, it has

not requested administrative exemptive relief from the Department.

Salomon Smith Barney explains that in the Frost Opinion, the bank

offered a comprehensive program of administrative and investment

services to Plan investors. Under this program, the Department opined

that section 406(b)(1) and 406(b)(3) of the Act would not be violated

if the bank received payments for services from mutual funds while

recommending mutual fund investments to plans provided such payments

were fully disclosed and then offset to reduce other plan expenses,

with any excess payments made to the plans. Salomon Smith Barney

further explains that in the Frost Opinion any benefit from payments

made by the mutual funds benefitted the plans and not the bank.

With respect to the TRAK Program, Salomon Smith Barney represents

that the reimbursement rates adopted by the Funds will be fully

disclosed to Independent Plan Fiduciaries and the offset of the excess

reimbursement amount against a Plan's expenses will be accomplished in

a manner to ensure that the Plans obtain the full benefit of the

reimbursement to reduce their recordkeeping and other Plan expenses.

Salomon Smith Barney submits that the reasoning in the Frost Opinion

would apply equally to the proposed reimbursement of expenses under the

TRAK Program. Therefore, Salomon Smith Barney does not believe any

change in the scope of the exemption is necessary.4

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\4\ In this proposed exemption, the Department expresses no

opinion on whether the Frost Opinion is applicable to the

recordkeeping reimbursement procedure described above. In this

regard, the Department notes that, under the facts presented in the

Frost Opinion, Frost would offset the fees received from the mutual

funds on a dollar-for-dollar basis against the trustee fees that the

plan was otherwise obligated to pay Frost.

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3. The Automatic Reallocation Option. Salomon Smith Barney wishes

to modify the TRAK Program to institute an automated reallocation

feature whereby an Independent Plan Fiduciary could elect to have his

or her current asset allocation adjusted automatically whenever the

Consulting Group changes the recommended asset allocation model (the

Allocation Model) followed by such Plan or participant.5

Therefore, Salomon Smith Barney proposes to amend General Condition

II(f) of PTE 94-50 which requires that any recommendation or evaluation

offered by the Consulting Group be implemented only upon the express

direction of the Independent Plan Fiduciary. With the exception of the

requested changes to General Condition II(f) of PTE 94-50, all of the

existing conditions of PTE 94-50 will continue to apply to the TRAK

Program.

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\5\ Salomon Smith Barney notes that the Automatic Reallocation

Option is to be distinguished from ``rebalancing'' which occurs

after the passage of time from the original allocation decision and

changes a participant's investment mix to bring the actual

allocation among investment alternatives back in line with the

participant's original allocation choices. For example, Salomon

Smith Barney states that a Plan participant receives a written

quarterly review that sets forth information concerning the

participant's investments and includes a chart comparing the

original asset allocation recommendation and the actual percentage

distribution of investments held in the portfolio. Salomon Smith

Barney explains that under the chart is the following legend:

TRAK is a non-discretionary investment advisory service. All

investment decisions rest with you, the participant. Therefore, you

are strongly urged to adhere to the Consulting Group's asset

allocation recommendations. Please call your Financial Consultant

should a change in allocation be warranted due to a significant

difference between the portfolio originally recommended by the

Consulting Group and your allocation or due to a change in your

objectives.

Salomon Smith Barney further explains that the Financial

Consultant is expected to contact participants at least annually to

encourage a comparison of the holdings in the portfolio against the

Consulting Group's original recommendation. Barney proposes to amend

General Condition II(f) of PTE 94-50 which requires that any

recommendation or evaluation offered by the Consulting Group be

implemented only upon the express direction of the Independent Plan

Fiduciary. With the exception of the requested changes to General

Condition II(f) of PTE 94-50, all of the existing conditions of PTE

94-50 will continue to apply to the TRAK Program.

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As noted above, General Condition II(f) of PTE 94-50 provides that

any recommendation or evaluation by the Consulting Group to an

Independent Plan Fiduciary will be implemented only at the express

direction of such fiduciary. Accordingly, under the current exemption,

whenever asset allocation advice is modified by the Consulting Group,

Salomon Smith Barney states that its Financial Consultants are required

to contact the Independent Plan Fiduciary of each Plan who has chosen

the Allocation Model, and obtain such fiduciary's consent to

modification of the asset allocation applied to the Plan's account.

Salomon Smith Barney notes that many TRAK Program investors have

expressly indicated that they expect reallocations to take place in the

ordinary course of the provision of investment advisory services

offered by the Consulting Group. However, these investors do not

understand why they need to be contacted in each instance

[[Page 60394]]

for this purpose. In addition, Salomon Smith Barney explains that the

case-by-case contact and reallocation involves delay in implementing

the change at the client's express direction, putting similarly-

situated investors into the new Allocation Models at different times.

To resolve these problems, Salomon Smith Barney proposes to offer

TRAK Program investors an Automatic Reallocation Option. Because

Salomon Smith Barney recognizes that the Automatic Reallocation Option

is outside the scope of PTE 94-50, it requests a modification of the

existing terms of PTE 94-50 to the extent necessary to allow it to

offer this alternative to investors. If the exemptive relief is

granted, Salomon Smith Barney represents that it will fully disclose

the nature of the Automatic Reallocation Option to the Independent Plan

Fiduciary of each existing client Plan in a written notice (the

Announcement) and permit the fiduciary to elect the Automatic

Reallocation Option by responding in writing. The Announcement will

describe the intended operation of the Automatic Reallocation Option

and how future changes to the Allocation Model selected on behalf of

the Plan will be implemented. In order to implement the Automatic

Reallocation Option for new TRAK Program investors, the Independent

Plan Fiduciary will be required to check a box on the form of

Investment Advisory contract with Salomon Smith Barney (or on a

separate document designed for this purpose for those investors who

have already executed such an agreement with Salomon Smith Barney). By

checking the box, the Independent Plan Fiduciary will indicate its

consent to and authorization of actions to be taken by Salomon Smith

Barney to reallocate automatically the asset allocation in the Plan

account whenever the Consulting Group modifies the particular asset

allocation recommendation which the Plan or participant has chosen.

Such election will continue in effect until revoked or terminated by

the Plan, in writing.

In operation, Salomon Smith Barney represents that the Automatic

Reallocation Option will work as follows:

(a) The Consulting Group will release a modified version of the

Allocation Model for the Plan account based upon its amended

recommendation.

(b) On the day such modification is released, the Consulting Group

will adjust the Plan account to fit the new Allocation Model and to

reflect current market conditions.6 Such adjustments will be

effected through a series of purchases and redemptions of Portfolio

shares to increase or decrease the relative investment in the various

Portfolios by the Plan account.

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\6\ Salomon Smith Barney notes that there are 12 standard

Allocation Models and that two similarly-situated Plan participants

who receive the same recommendation from the Consulting Group will

receive the same reallocation.

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(c) The reallocation of the Plan account will be effected on the

same business day as the release of the new Allocation Model by the

Consulting Group, except to the extent market conditions and orderly

purchase and redemption procedures may delay such processing. For

purposes of calculating the percentage changes in its asset allocation

recommendation underlying the Automatic Reallocation Option for a Plan

investor's account, the Consulting Group will use the net asset values

at the close of business on the preceding trading day. However, the

execution of trades to give effect to the changed percentages will

occur on the next trading day at the then-current net asset values.

(d) Participants in the TRAK Program will receive trade

confirmations of the reallocation transactions. In this regard, for all

Plan investors other than Section 404(c) Plan accounts (i.e., 401(k)

Plan accounts), Salomon Smith Barney will mail trade confirmations the

next business day after the reallocation trades are executed. In the

case of Section 404(c) Plan participants, notification will depend upon

the notification provisions agreed to by the Plan recordkeeper.\7\ For

example, if the recordkeeper notifies Section 404(c) Plan participants

(i.e., Independent Plan Fiduciaries) in writing after each trade, such

participants will be notified of reallocation transactions in this

manner. If, however, the recordkeeper notifies Section 404(c) Plan

participants of trading activity in a quarterly statement, the

reallocation activity would be included there.

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\7\ Under these circumstances, Salomon Smith Barney will advise

the recordkeeper of the proposed reallocation of the account of a

Section 404(c) Plan participant as soon as the Consulting Group has

determined that a change to an asset allocation recommendation is

going to be made. The communication may initially be made orally

because the recordkeeper must then promptly modify its system to

effect the necessary changes to a participant's account on the

effective date of the new recommendation. The oral communication is

customarily followed by a full written description of the changes

within two business days of the verbal update.

As noted above, a Section 404(c) Plan participant who has

elected the Automatic Reallocation Option would receive a trade

confirmation from the recordkeeper of the resulting changes to the

positions in his or her account, if that is the notification

procedure agreed to for the Plan. Also as noted above, transactions

occurring upon automatic reallocation and the underlying

recommendation changes will be disclosed in the ``Participant

Quarterly Review.''

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In addition to the trade confirmations which Salomon Smith Barney

will provide to all Plan investors except Section 404(c) Plans,

disclosure of the reallocation transactions will appear in the next

regular client statement. Such transactions will be reflected as a

series of purchase and redemption transactions that will shift assets

among the Portfolios in accordance with the Allocation Model as

modified by the Consulting Group.

(e) If, however, the reallocation to be made in response to the

Consulting Group's recommendation exceeds an increase or decrease of

more than 10 percent in the absolute percentage allocated to any one

investment medium (e.g., a suggested increase in a 15 percent

allocation to greater than 25 percent or a decrease of such 15 percent

allocation to less than 5 percent), Salomon Smith Barney will not

automatically adjust a Plan account. Under such circumstances, Salomon

Smith Barney will send out a written notice (the Notice) to the

Independent Plan Fiduciary for each affected Plan, describing the

proposed reallocation and the date on which such allocation is to be

instituted (the Effective Date).

(f) The Notice will be mailed with the presumption of delivery

within three business days to permit timely notification and adequate

response time for the Independent Plan Fiduciary. The Notice will

instruct the fiduciary that he or she will need to do nothing if such

fiduciary decides to have his or her Plan account automatically

reallocated on the Effective Date. If, on the other hand, the

Independent Plan Fiduciary does not wish to follow the Consulting

Group's revised asset allocation recommendation, the Notice will

instruct the Independent Plan Fiduciary to inform a Financial

Consultant, in writing, at least 30 calendar days prior to the proposed

Effective Date that the fiduciary wishes to ``opt out'' of the new

Allocation Model.\8\

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\8\ The Notice will be mailed with the presumption of delivery

within three business days so that the 30 day calendar period will

not commence until the third business day following the mailing. In

addition, the Effective Date of the Automatic Reallocation Option

will occur no sooner than the business day following the thirtieth

calendar day. To avoid any misunderstandings or miscalculations by

the Independent Plan Fiduciary, Salomon Smith Barney represents that

it will conspicuously state, in the Notice, the last date for its

receipt of the Independent Plan Fiduciary's written response.

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(g) If the Independent Plan Fiduciary ``opts out,'' his or her Plan

account will not be changed on the Effective Date.

[[Page 60395]]

Under such circumstances, the Allocation Model will remain at its

current level or at such other level as the Independent Plan Fiduciary

designates. However, the Automatic Reallocation Option, will remain in

effect for future changes in such participant's Allocation Model.

(h) The Independent Plan Fiduciary will always have the ability to

elect, terminate or reinstitute the Automatic Reallocation Option or to

otherwise adjust an Allocation Model, in any way, by providing

reasonably prompt notice to a Financial Consultant. Upon request by the

Independent Plan Fiduciary, the Financial Consultant will send the

appropriate form.

Salomon Smith Barney states that it is not possible to predict the

frequency of reallocations because these changes are dictated by the

Consulting Group's analysis of market conditions. However, since

November 1991, Salomon Smith Barney represents that asset allocation

changes of the type that would trigger automatic reallocations have

been instituted by the Consulting Group on ten occasions. Eight of

these changes were of a magnitude of 10 percentage points or less. The

other two changes were 15 percent changes and impacted only

approximately one percent and 3 percent, respectively, of the total

number of clients participating in the TRAK Program at the time.\9\

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\9\ While there is no minimum percentage threshold that will

trigger the Automatic Reallocation Option, other than the historical

ranges specified above, Salomon Smith Barney notes that there may be

future market circumstances that may justify an asset allocation

adjustment of a lesser amount. Because the Consulting Group will

only adjust asset allocation recommendations to reflect current

market conditions, Salomon Smith Barney anticipates that triggers

for the Automatic Reallocation Option will continue to be only

market-related. As is currently the situation, Salomon Smith Barney

represents that a Plan investor may, at any time and for any reason,

contact a Financial Consultant to request a modification of an

existing Allocation Model.

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Salomon Smith Barney also states that the reallocation called for

under the Automatic Reallocation Option will be effected by a dollar-

for-dollar liquidation and purchase of the required amounts in the

respective Plan accounts. Because of the billing of Plan accounts

participating in the TRAK Program is leveled with respect to the

compensation received by Salomon Smith Barney and by the Financial

Consultant involved in an account, Salomon Smith Barney states that the

implementation of the Automatic Reallocation Option will be revenue-

neutral. In addition, Salomon Smith Barney represents that neither the

Plan nor the participants will pay any additional fees for electing to

use the Automatic Reallocation Option.\10\

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\10\ General Condition II(c) of PTE 94-50 as well as this

proposal states that no Plan will pay a fee or commission by reason

of the acquisition or redemption of shares in the Trust. Since the

fees paid to Salomon Smith Barney are based upon net asset values of

investments and not transactions, a change of investment allocations

and the net purchases and redemptions used to effect such changes do

not change the payable fees.

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Thus, on the basis of the foregoing, General Condition II(f) has

been revised to read as follows:

(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 Plan Fiduciary, provided,

however, that--

(1) If such Independent Plan Fiduciary shall have elected in

writing (the Election), on a form designated by Salomon Smith Barney

from time to time for such purpose, to participate in the Automatic

Reallocation Option under the TRAK Program, the affected Plan or

participant account will be automatically reallocated whenever the

Consulting Group modifies the particular asset allocation

recommendation which the Independent Plan Fiduciary has chosen. Such

Election shall continue in effect until revoked or terminated by the

Independent Plan Fiduciary, in writing.

(2) Except as set forth below in paragraph II(f)(3), at the time

of a change in the Consulting Group's asset allocation

recommendation, each account based upon the asset allocation model

(the Allocation Model) affected by such change would be adjusted on

the business day of the release of the new Allocation Model by the

Consulting Group, except to the extent that market conditions, and

order purchase and redemption procedures may delay such processing

through a series of purchase and redemption transactions to shift

assets among the affected Portfolios.

(3) If the change in the Consulting Group's asset allocation

recommendation exceeds an increase or decrease of more than 10

percent in the absolute percentage allocated to any one investment

medium (e.g., a suggested increase in a 15 percent allocation to

greater than 25 percent, or a decrease of such 15 percent allocation

to less than 5 percent), Salomon Smith Barney will send out a

written notice (the Notice) to all Independent Plan Fiduciaries

whose current investment allocation would be affected, describing

the proposed reallocation and the date on which such allocation is

to be instituted (the Effective Date). If the Independent Plan

Fiduciary notifies Salomon Smith Barney, in writing, at least 30

calendar days prior to the proposed Effective Date that such

fiduciary does not wish to follow such revised asset allocation

recommendation, the Allocation Model will remain at the current

level, or at such other level as the Independent Plan Fiduciary then

expressly designates, in writing. If the Independent Plan Fiduciary

does not affirmatively ``opt out'' of the new Consulting Group

recommendation, in writing, prior to the proposed Effective Date,

such new recommendation will be automatically effected by a dollar-

for-dollar liquidation and purchase of the required amounts in the

respective account.

(4) An Independent Plan Fiduciary will receive a trade

confirmation of each reallocation transaction. In this regard, for

all Plan investors other than Section 404(c) Plan accounts (i.e.,

401(k) Plan accounts), Salomon Smith Barney will mail trade

confirmations on the next business day after the reallocation trades

are executed. In the case of Section 404(c) Plan participants,

notification will depend upon the notification provisions agreed to

by the Plan recordkeeper.

Notice to Interested Persons

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

to the Independent Plan Fiduciary Plan of each Plan currently

participating in the TRAK Program, or, in the case of a Section 404(c)

Plan, to the recordholder of Trust shares. Such notice will be given

within 15 days of the publication of the notice of pendency in the

Federal Register. The notice will contain a copy of the notice of

proposed exemption as published in the Federal Register and a

supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2).

The supplemental statement will inform interested persons of their

right to comment on and/or to request a hearing with respect to the

pending exemption. Written comments and hearing requests are due within

45 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) The proposed exemption, if granted, will not extend to

transactions prohibited under section 406(b)(3) of the

[[Page 60396]]

Act and section 4975(c)(1)(F) of the Code;

(3) 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;

(4) This 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; and

(5) This proposed exemption, if granted, is subject to the express

condition that the Summary of Facts and Representations set forth in

the notice of proposed exemption relating to PTE 92-77, as amended by

PTE 94-50 and this notice, accurately describe, where relevant, the

material terms of the transactions to be consummated pursuant to this

exemption.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the pending exemption to the address above,

within the time frame set forth above, after the publication of this

proposed exemption in the Federal Register. All comments will be made a

part of the record. Comments received will be available for public

inspection with the referenced applications at the address set forth

above.

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting the requested

exemption under the authority of section 408(a) of the Act and section

4975(c)(2) of the Code and in accordance with the procedures set forth

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

Section I. Covered Transactions

A. If the exemption is granted, 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 an

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

retirement plan for self-employed individuals (the Keogh Plan) \11\ in

the Trust for Consulting Group Capital Market Funds (the Trust),

established by Salomon Smith Barney, in connection with such Plans'

participation in the TRAK Personalized Investment Advisory Service

product (the TRAK Program).

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\11\ The employee benefit plan, the IRA and the Keogh Plan are

are collectively referred to herein as the Plans.

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B. If the exemption is granted, 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

(1) investment advisory services or (2) an automatic reallocation

option (the Automatic Reallocation Option) 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.

This proposed exemption is subject to the following conditions that

are set forth below 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 Salomon Smith Barney 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 Plan Fiduciary, provided,

however, that--

(1) If such Independent Plan Fiduciary shall have elected in

writing (the Election), on a form designated by Salomon Smith Barney

from time to time for such purpose, to participate in the Automatic

Reallocation Option under the TRAK Program, the affected Plan or

participant account will be automatically reallocated whenever the

Consulting Group modifies the particular asset allocation

recommendation which the Independent Plan Fiduciary has chosen. Such

Election shall continue in effect until revoked or terminated by the

Independent Plan Fiduciary in writing.

(2) Except as set forth below in paragraph II(f)(3), at the time of

a change in the Consulting Group's asset allocation recommendation,

each account based upon the asset allocation model (the Allocation

Model) affected by such change would be adjusted on the business day of

the release of the new Allocation Model by the Consulting Group, except

to the extent that market conditions, and order purchase and redemption

procedures may delay such processing through a series of purchase and

redemption transactions to shift assets among the affected Portfolios.

(3) If the change in the Consulting Group's asset allocation

recommendation exceeds an increase or decrease of more than 10 percent

in the absolute percentage allocated to any one investment medium

(e.g., a suggested increase in a 15 percent allocation to greater than

25 percent, or a decrease of such 15 percent allocation to less than 5

percent), Salomon Smith Barney will send out a written notice (the

Notice) to all Independent Plan Fiduciaries whose current investment

allocation would be affected, describing the proposed reallocation and

the date on which such allocation is to be instituted (the Effective

Date). If the Independent Plan Fiduciary notifies Salomon Smith Barney,

in writing, at least 30 calendar days prior to the proposed Effective

Date that such fiduciary does not wish to follow such revised asset

allocation recommendation, the Allocation Model will remain at the

current level, or at such other level as the Independent Plan Fiduciary

then expressly designates, in writing. If the Independent Plan

Fiduciary does not affirmatively ``opt out'' of the new Consulting

Group recommendation, in writing, prior to the proposed Effective Date,

such new recommendation will be automatically effected by a dollar-for-

dollar liquidation and purchase of the required amounts in the

respective account.

(4) An Independent Plan Fiduciary will receive a trade confirmation

of each reallocation transaction. In this regard, for all Plan

investors other than Section

[[Page 60397]]

404(c) Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney

will mail trade confirmations on the next business day after the

reallocation trades are executed. In the case of Section 404(c) Plan

participants, notification will depend upon the notification provisions

agreed to by the Plan recordkeeper.

(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 Plan providing for participant-

directed investments (the 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 (the Sub-Adviser) that acts for the Trust to

exercise investment discretion over a Portfolio will be independent of

Salomon Smith Barney and its affiliates.

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

securities that are issued by Salomon Smith Barney 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

the 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, Salomon Smith Barney

and its subsidiaries and the compensation paid to such entities.\12\

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\12\ The fact that certain transactions and fee arrangements are

the subject of an administrative exemption does not relieve the

Independent Plan Fiduciary from the general fiduciary responsibility

provisions of section 404 of the Act. In this regard, the Department

expects the Independent Plan Fiduciary to consider carefully the

totality of fees and expenses to be paid by the Plan, including the

fees paid directly to Salomon Smith Barney or to other third parties

and/or indirectly through the Trust to Smith Barney.

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(B) Upon written or oral request to Salomon Smith Barney, 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 and, if applicable, informing Plan investors of the Automatic

Reallocation Option.

(D) Upon written request of Salomon Smith Barney, 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 a Salomon Smith Barney 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) A copy of PTE 94-50 as well as the proposed exemption and the

final exemption pertaining to the exemptive relief described herein.

(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 Salomon Smith

Barney that such fiduciary is (a) independent of Salomon Smith Barney

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 Salomon Smith Barney that such fiduciary is (a)

independent of Salomon Smith Barney 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 Salomon Smith Barney and its affiliates and (b)

[[Page 60398]]

the average brokerage commission per share paid by each Portfolio to

Salomon Smith Barney and its affiliates, as compared to the average

brokerage commission per share paid by the Trust to brokers other than

Salomon Smith Barney and its affiliates, both expressed as cents per

share.

(m) Salomon Smith Barney 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 Salomon Smith Barney 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 Salomon Smith Barney 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 II 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

Salomon Smith Barney or commercial or financial information which is

privileged or confidential.

Section III. Definitions

For purposes of this proposed exemption:

(a) The term ``Salomon Smith Barney'' means Salomon Smith Barney

Inc. and any affiliate of Salomon Smith Barney, as defined in paragraph

(b) of this Section III.

(b) An ``affiliate'' of Salomon Smith Barney includes--

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

intermediaries, controlling, controlled by, or under common control

with Salomon Smith Barney. (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.

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

independent of Salomon Smith Barney and its affiliates and is either--

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

the recordholder of Trust shares under 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;

(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; or

(5) A participant in a Plan, such as a Section 404(c) Plan, who is

permitted under the terms of such Plan to direct, and who elects to

direct the investment of assets of his or her account in such Plan.

Section IV. Effective Dates

If granted, this proposed exemption will be effective as of June

21, 1994 with respect to the transactions described in Section I.A. and

B.(1). With respect to Section I.B.(2) and Section II(f)(1)-(4) of the

General Conditions, this proposed exemption will be effective November

9, 1998.

The availability of this proposed exemption is subject to the

express condition that the material facts and representations contained

in the application 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 PTEs 92-77 and PTE 94-50,

refer to the proposed exemptions and the grant notices which are cited

above.

Signed at Washington, D.C., this 4th day of November, 1998.

Ivan L. Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 98-29964 Filed 11-6-98; 8:45 am]

BILLING CODE 4510-29-P