Rules and Regulations. Grant of individual exemptions

Agency: Pension and Welfare Benefits Administration, Labor
Action: Grant of individual exemptions
Citation: FR Doc. 01-3689

Summary

This document contains exemptions issued by the Department of Labor (the Department) from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 (the Code). Notices were published in the Federal Register of the pendency before the Department of proposals to grant such exemptions. The notices set forth a summary of facts and representations contained in each application for exemption and referred interested persons to the respective applications for a complete statement of the facts and representations. The applications have been available for public inspection at the Department in Washington, DC. The notices also invited interested persons to submit comments on the requested exemptions to the Department. In addition the notices stated that any interested person might submit a written request that a public hearing be held (where appropriate). The applicants have represented that they have complied with the requirements of the notification to interested persons. No public comments and no requests for a hearing, unless otherwise stated, were received by the Department. The notices of proposed exemption were issued and the exemptions are being granted solely by the Department because, effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the Secretary of the Treasury to issue exemptions of the type proposed to the Secretary of Labor. Statutory Findings In accordance with section 408(a) of the Act and/or section 4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon the entire record, the Department makes the following findings: (a) The exemptions are administratively feasible; (b) They are in the interests of the plans and their participants and beneficiaries; and (c) They are protective of the rights of the participants and beneficiaries of the plans. American Express Financial Corporation (AEFC) Located in Minneapolis, MN; Exemption [Prohibited Transaction Exemption 2001-07; Exemption Application No. D-10855] Section I. Exemption for the Acquisition, Holding and Disposition of American Express Company Stock The restrictions of sections 406(a)(1)(D), 406(b)(1) and section 406(b)(2) of the Act, section 8477(c)(2)(A) and (B) of the Federal Employees Retirement System Act, and the sanctions resulting from the application of section 4975 of the Code by reason of section 4975(c)(1)(D) and (E) of the Code, shall not apply to the acquisition, holding and disposition of the common stock of American Express Company or its current and future affiliates (AE Stock) by Index and Model-Driven Funds (collectively, the Funds) that are managed by AEFC and its affiliates [as defined in Section III(g)(1)], provided that the following conditions and the General Conditions of Section II are met: (a) The acquisition or disposition of AE Stock is for the sole purpose of maintaining strict quantitative conformity with the relevant index upon which the Index or Model-Driven Fund is based, and does not involve any agreement, arrangement or understanding regarding the design or operation of the Fund acquiring the AE Stock which is intended to benefit AEFC or any party in which AEFC may have an interest. (b) Whenever AE Stock is initially added to an index on which an Index or Model-Driven Fund is based, or initially added to the portfolio of an Index or Model-Driven Fund, all acquisitions of AE Stock necessary to bring the Fund's holdings of such Stock either to its capitalization-weighted or other specified composition in the relevant index, as determined by the independent organization maintaining such index, or to its correct weighting as determined by the model which has been used to transform the index, occur in the following manner: (1) Purchases are from, or through, only one broker or dealer on a single trading day; (2) Based on the best available information, purchases are not the opening transaction for the trading day; (3) Purchases are not effected in the last half hour before the scheduled close of the trading day; (4) Purchases are at a price that is not higher than the lowest current independent offer quotation, determined on the basis of reasonable inquiry from non-affiliated brokers; (5) Aggregate daily purchases do not exceed 15 percent of the average daily trading volume for the security, as determined by the greater of either (i) the trading volume for the security occurring on the applicable exchange and automated trading system on the date of the transaction, or (ii) an aggregate average daily trading volume for the security occurring on the applicable exchange and automated trading system for the previous five (5) business days, both based on the best information reasonably available at the time of the transaction; (6) All purchases and sales of AE Stock occur either (i) on a recognized U.S. securities exchange (as defined in Section III(j) below), (ii) through an automated trading system (as defined in Section III(i) below) operated by a broker-dealer independent of AEFC that is registered under the Securities Exchange Act of 1934 (the '34 Act), and thereby subject to regulation by the Securities and Exchange Commission (SEC), which provides a mechanism for customer orders to be matched on an anonymous basis without the participation of a broker-dealer, or (iii) through an automated trading system (as defined in Section III(i) below) that is operated by a recognized U.S. securities exchange (as defined in Section III(j) below), pursuant to the applicable securities laws, and provides a mechanism for customer orders to be matched on an anonymous basis without the participation of a broker-dealer; and (7) If the necessary number of shares of AE Stock cannot be acquired within 10 business days from the date of the event which causes the particular Fund to require AE Stock, AEFC appoints a fiduciary which is independent of AEFC to design acquisition procedures and monitor compliance with such procedures. (c) Subsequent to acquisitions necessary to bring a Fund's holdings of AE Stock to its specified weighting in the index or model pursuant to the restrictions described in paragraph (b) above, all aggregate daily purchases of AE Stock by the Funds do not exceed on any particular day the greater of: (1) 15 percent of the average daily trading volume for the AE Stock occurring on the applicable exchange and automated trading system (as defined below) for the previous five (5) business days, or (2) 15 percent of the trading volume for AE Stock occurring on the applicable exchange and automated trading system (as defined below) on the date of the transaction, as determined by the best available information for the trades that occurred on such date. (d) All transactions in AE Stock not otherwise described in paragraph (b) above are either: (i) Entered into on a principal basis in a direct, arms-length transaction with a broker-dealer, in the ordinary course of its business, where such broker-dealer is independent of AEFC and is registered under the '34 Act, and thereby subject to regulation by the SEC, (ii) effected on an automated trading system (as defined in Section III(i) below) operated by a broker-dealer independent of AEFC that is subject to regulation by either the SEC or another applicable regulatory authority, or an automated trading system operated by a recognized U.S. securities exchange (as defined in Section III(j) below) which, in either case, provides a mechanism for customer orders to be matched on an anonymous basis without the participation of a broker-dealer, or (iii) effected through a recognized U.S. securities exchange (as defined in Section III(j) below) so long as the broker is acting on an agency basis. (e) No transactions by a Fund involve purchases from, or sales to, AEFC (including officers, directors, or employees thereof), or any party in interest that is a fiduciary with discretion to invest plan assets into the Fund (unless the transaction by the Fund with such party in interest would otherwise be subject to an exemption). (f) No more than five (5) percent of the total amount of AE Stock, that is issued and outstanding at any time, is held in the aggregate by Index and Model-Driven Funds managed by AEFC. (g) AE Stock constitutes no more than five (5) percent of any independent third party index on which the investments of an Index or Model-Driven Fund are based. (h) A plan fiduciary independent of AEFC authorizes the investment of such plan's assets in an Index or Model-Driven Fund which purchases and/or holds AE Stock, other than in the case of an employee benefit plan sponsored or maintained by AEFC for its own employees (an AEFC Plan), pursuant to the procedures described herein. (i) A fiduciary independent of the AEFC directs the voting of the AE Stock held by an Index or Model-Driven Fund on any matter in which shareholders of AE Stock are required or permitted to vote. (j) No more than ten (10) percent of the assets of any Fund that acquires and holds AE Stock is comprised of any AEFC Plan(s) for which AEFC exercises investment discretion. Section II. General Conditions (a) AEFC maintains or causes to be maintained for a period of six years from the date of the transaction the records necessary to enable the persons described in paragraph (b) of this 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 AEFC, the records are lost or destroyed prior to the end of the six year period, and (2) no party in interest other than AEFC 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) of this Section are unconditionally available at their customary location for examination during normal business hours by — (A) Any duly authorized employee or representative of the Department or the Internal Revenue Service, (B) Any fiduciary of a plan participating in an Index or Model-Driven Fund who has authority to acquire or dispose of the interests of the plan, or any duly authorized employee or representative of such fiduciary, (C) Any contributing employer to any plan participating in an Index or Model-Driven Fund or any duly authorized employee or representative of such employer, and (D) Any participant or beneficiary of any plan participating in an Index or Model-Driven Fund, or a representative of such participant or beneficiary. (2) None of the persons described in subparagraphs (B) through (D) of this paragraph II(b) shall be authorized to examine trade secrets of AEFC or commercial or financial information which is considered confidential. Section III. Definitions (a) The term “Index Fund” means any investment fund, account or portfolio sponsored, maintained, trusteed, or managed by AEFC, in which one or more investors invest, and — (1) Which is designed to track the rate of return, risk profile and other characteristics of an independently maintained securities Index, as described in Section III(c) below, by either (i) replicating the same combination of securities which compose such Index or (ii) sampling the securities which compose such Index based on objective criteria and data; (2) For which AEFC does not use its discretion, or data within its control, to affect the identity or amount of securities to be purchased or sold; (3) That contains “plan assets” subject to the Act, pursuant to the Department's regulations (see 29 CFR 2510.3-101, Definition of “plan assets”—plan investments); and, (4) That involves no agreement, arrangement, or understanding regarding the design or operation of the Fund which is intended to benefit AEFC or any party in which AEFC may have an interest. (b) The term “Model-Driven Fund” means any investment fund, account or portfolio sponsored, maintained, trusteed, or managed by AEFC, in which one or more investors invest, and — (1) Which is composed of securities the identity of which and the amount of which are selected by a computer model that is based on prescribed objective criteria using independent third party data, not within the control of AEFC, to transform an independently maintained Index, as described in Section III(c) below; (2) Which contains “plan assets” subject to the Act, pursuant to the Department's regulations (see 29 CFR 2510.3-101, Definition of “plan assets”—plan investments); and (3) That involves no agreement, arrangement, or understanding regarding the design or operation of the Fund or the utilization of any specific objective criteria which is intended to benefit AEFC or any party in which AEFC may have an interest. (c) The term “Index” means a securities index that represents the investment performance of a specific segment of the public market for equity or debt securities in the United States, but only if — (1) The organization creating and maintaining the index is— (A) Engaged in the business of providing financial information, evaluation, advice or securities brokerage services to institutional clients, (B) A publisher of financial news or information, or (C) A public stock exchange or association of securities dealers; and, (2) The index is created and maintained by an organization independent of AEFC; and, (3) The index is a generally accepted standardized index of securities which is not specifically tailored for the use of AEFC. (d) The term “opening date” means the date on which investments in or withdrawals from an Index or Model-Driven Fund may be made. (e) The term “Buy-up” means an acquisition of AE Stock by an Index or Model-Driven Fund in connection with the initial addition of such Stock to an independently maintained index upon which the Fund is based or the initial investment of a Fund in such Stock. (f) The term “AEFC” refers to American Express Financial Corporation and its affiliates, as defined below in paragraph (g). (g) An “affiliate” of AEFC 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 or relative of such person, or partner of any such person; and (3) Any corporation or partnership of which such person is an officer, director, partner or employee. (h) The term “control” means the power to exercise a controlling influence over the management or policies of a person other than an individual. (i) The term “automated trading system” means an electronic trading system that functions in a manner intended to simulate a securities exchange by electronically matching orders on an agency basis from multiple buyers and sellers, such as an “alternative trading system” within the meaning of the SEC's Reg. ATS [17 CFR part 242.300], as such definition may be amended from time to time, or an “automated quotation system” as described in section 3(a)(51)(A)(ii) of the '34 Act [15 USC 8c(a)(51)(A)(ii)]. (j) The term “recognized U.S. securities exchange” means a U.S. securities exchange that is registered as a “national securities exchange” under Section 6 of the '34 Act (15 USC 78f), as such definition may be amended from time to time, which performs with respect to securities the functions commonly performed by a stock exchange within the meaning of definitions under the applicable securities laws (e.g., 17 CFR part 240.3b-16). For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption, refer to the notice of proposed exemption (the Notice) published on September 19, 2000 at 65 FR 56715. Written Comments The Department received one written comment with respect to the Notice and no requests for a public hearing. The comment, which was submitted by the applicant, AEFC, requests certain modifications to the conditional language and the Summary of Facts and Representations (the Summary) of the Notice. AEFC has requested these changes for purposes of clarification or to correct several typographical errors. Following is a discussion of AEFC's comment and the Department's responses to the areas of concern raised by AEFC. 1. *Investment by the AEFC plans in the funds. * On page 56716 of the Notice, Section I(j) provides that “[n]o more than ten (10) percent of the assets of any Fund that acquires and holds AE Stock is comprised of any AEFC Plan(s) for which AEFC exercises investment discretion.” AEFC assumes that this condition relates to the aggregate interest of all Plans that are sponsored by AEFC and its affiliates. AEFC also assumes that this condition does not restrict Fund investments by any AEFC Plan that is a participant-directed, defined contribution plan, even though AEFC or its affiliates may have used their authority to make such Fund available as a permissible investment under such Plan. In consideration of AEFC's comment, the Department hereby confirms that the 10 percent investment limitation refers to the aggregate interest that all AEFC Plans may have in a Fund. The Department also wishes to confirm that this limitation does not restrict Fund investments by any AEFC Plan, which is a defined contribution, participant-directed plan, even though AEFC or its affiliates may have used their authority to make such Fund available to an AEFC Plan participant as a Plan investment option. In addition to the above, AEFC has requested the Department to clarify that the 10 percent investment limitation would be met if a collective investment fund (in which an AEFC Plan has more than a 10 percent interest) invests in an Index or Model-Driven Fund that holds AE Stock. On a “look-through” basis, AEFC represents that the AEFC Plan would not hold more than a 10 percent interest in the second Fund. In response to this comment, the Department wishes to emphasize that this principle would apply as long as the AEFC Plan's interest in the second Fund does not exceed, on a “look-through” basis, 10 percent of the second Fund. For purposes of illustration, the Department is providing the following example. Assume that Plan A, an AEFC Plan, has invested $30 million in Collective Investment Fund #1 and that Collective Investment Fund #1 has total assets of $100 million. On the basis of the foregoing, Plan A has a 30 percent undivided ownership interest in Collective Investment Fund #1. Assume that Collective Investment Fund #1 invests all of its assets in Index Fund #2 which has $500 million in total assets and invests in AE Stock. Plan A's ownership interest in Index Fund #2 would be determined as follows: $30 million/$100 million + $500 million = 5 percent. Thus, on a “look-through” basis, Plan A would not hold more than a 10 percent interest in Index Fund #2. 2. *Fund transactions. * On page 56716 of the Notice, in Section I(e), and on page 56720 of the Summary, in Representation 14(f), it states that “[n]o transactions by a Fund involve purchases from or sales to, AEFC (including officers, directors, or employees thereof), or any party in interest that is a fiduciary with discretion to invest plan assets into the Fund (unless the transaction by the Fund with such party in interest would be otherwise subject to an exemption).” AEFC has requested that the Department clarify that the foregoing language is meant to cover only transactions that are subject to this exemption. Accordingly, the Department concurs with AEFC's interpretation of the subject language. 3. *Affiliate definition. * On page 56717 of the Notice, Section III(g) of the Definitions provides, in part, that the term “affiliate” means, with respect to AEFC, “an entity which directly or indirectly, through one or more intermediaries, is controlled by AEFC.” AEFC believes that this definition is confusing and duplicative because it implies that only those entities controlled by AEFC are affiliates rather than those which AEFC directly or indirectly controls, is controlled by or is under common control with. Therefore, AEFC suggests that Section III(g) be deleted and that Section III(h), which also defines the term “affiliate,” be redesignated as Section III(g). In response, the Department concurs with AEFC's clarification and has modified Section III(g) of the Notice, accordingly. In addition, the Department has redesignated paragraphs (i) through (k) of Section III as paragraphs (h) through (j) in the final exemption. 4. *Miscellaneous revisions. * On page 56717 of the Notice, Representation 1 of the Summary provides a description of AEFC “together with its subsidiaries.” AEFC has requested that the Department modify this phrase to read “together with its affiliates.” In addition, on page 56718 of the Notice, Representation 2 of the Summary states, in part, that “AEFC acts as investment manager of institutional accounts, including employee benefit plans, with assets totaling approximately $38.3 million.” However, AEFC points out that the “$38.3 million” figure should be revised to read “$38.3 billion.” In response to the foregoing comments, the Department has noted these revisions to the Summary. For further information regarding AEFC's comment letter or other matters discussed herein, interested persons are encouraged to obtain copies of the exemption application file (Exemption Application No. D-10855) the Department is maintaining in this case. The complete application file, as well as all supplemental submissions received by the Department, are made available for public inspection in the Public Documents Room of the Pension and Welfare Benefits Administration, Room N-1513, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210. Accordingly, after giving full consideration to the entire record, including the written comment provided by AEFC, the Department has made the aforementioned changes to the Notice and has decided to grant the exemption subject to the modifications and clarifications described above.