[Federal Register Volume 82, Number 148 (Thursday, August 3, 2017)]
[Notices]
[Pages 36214-36235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16295]
[[Page 36213]]
Vol. 82
Thursday,
No. 148
August 3, 2017
Part II
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
Federal Register / Vol. 82 , No. 148 / Thursday, August 3, 2017 /
Notices
[[Page 36214]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction
Restrictions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code). If granted, these proposed
exemptions allow designated parties to engage in transactions that
would otherwise be prohibited provided the conditions stated there in
are met. This notice includes the following proposed exemptions: D-
11869, Liberty Mutual Insurance Company; and D-11916, Russell
Investment Management, LLC (RIM), Russell Investments Capital, LLC
(RICap), and their Affiliates.
DATES: All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice.
ADDRESSES: Comments and requests for a hearing should state: (1) The
name, address, and telephone number of the person making the comment or
request, and (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
All written comments and requests for a hearing (at least three
copies) should be sent via mail to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, U.S.
Department of Labor, 200 Constitution Avenue NW., Suite 400,
Washington, DC 20210. Attention: Application No. ___, stated in each
Notice of Proposed Exemption or via private delivery service or courier
to the Employee Benefits Security Administration (EBSA), Office of
Exemption Determinations, U.S. Department of Labor, 122 C St. NW.,
Suite 400, Washington, DC 20001. Attention: Application No. ___, stated
in each Notice of Proposed Exemption. Interested persons are also
invited to submit comments and/or hearing requests to EBSA via email or
FAX. Any such comments or requests should be sent either by email to:
[email protected], by FAX to (202) 693-8474, or online through http://www.regulations.gov by the end of the scheduled comment period. The
applications for exemption and the comments received will be available
for public inspection in the Public Documents Room of the Employee
Benefits Security Administration, U.S. Department of Labor, Room N-
1515, 200 Constitution Avenue NW., Washington, DC 20210.
Warning: All comments will be made available to the public. Do not
include any personally identifiable information (such as Social
Security number, name, address, or other contact information) or
confidential business information that you do not want publicly
disclosed. All comments may be posted on the Internet and can be
retrieved by most Internet search engines.
SUPPLEMENTARY INFORMATION:
Notice To Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
The proposed exemptions were requested in applications filed
pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the
Code, and in accordance with procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, 66644, October 27, 2011).\1\ 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 requested to the Secretary of
Labor. Therefore, these notices of proposed exemption are issued solely
by the Department.
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\1\ The Department has considered exemption applications
received prior to December 27, 2011 under the exemption procedures
set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August
10, 1990).
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The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Liberty Mutual Insurance Company
(Liberty Mutual or the Applicant)
Located in Boston, MA
[Application No. D-11869]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 29 U.S.C. 1108 (section 408(a) of the Employee Retirement
Income Security Act of 1974, as amended (ERISA or the Act)) and 26
U.S.C. 4975(c)(2) (section 4975(c)(2) of the Internal Revenue Code of
1986, as amended (the Code)), and in accordance with the procedures set
forth in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).\2\ 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
requested to the Secretary of Labor. Therefore, this notice of proposed
exemption is issued solely by the Department. If the proposed exemption
is granted, the restrictions of sections 406(a)(1)(A), 406(a)(1)(B),
and 406(a)(1)(D) of ERISA and the sanctions resulting from the
application of sections 4975(a) and 4975(b) of the Code, by reason of
sections 4975(c)(1)(A), 4975(c)(1)(B), and 4975(c)(1)(D) of the Code,
shall not apply to a transaction between a party in interest with
respect to an employee benefit plan sponsored by Liberty Mutual or its
affiliates (the Liberty Mutual Plan) and such Liberty Mutual Plan, as
described in Part I of Prohibited Transaction Exemption 96-23 (PTE 96-
23),\3\ provided that the in-house asset manager (INHAM) for the
Liberty Mutual Plan has discretionary control with respect to plan
assets involved in the transaction, and certain conditions are
satisfied.
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\2\ For purposes of this proposed exemption, references to the
provisions of section 406 of Title I of ERISA, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
\3\ 61 FR 15975 (April 10, 1996), as amended at 76 FR 18255
(April 1, 2011).
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Summary of Facts and Representations \4\
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\4\ The Summary of Facts and Representations is based on the
Applicant's representations and does not reflect the views of the
Department, unless indicated otherwise.
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Background
1. Liberty Mutual is an insurance company domiciled in the
[[Page 36215]]
Commonwealth of Massachusetts, engaged primarily in the provision of
property and casualty insurance. Liberty Mutual is a wholly-owned
subsidiary of Liberty Mutual Holding Company Inc. (Liberty Mutual
Group), which, together with its subsidiaries and affiliates, is a
diversified global insurer. Liberty Mutual Group is based in Boston,
Massachusetts and currently operates in 30 countries, with
approximately 900 offices worldwide and over 50,000 employees.
2. Liberty Mutual Group established the Liberty Mutual Retirement
Benefit Plan (the Retirement Plan) in 1951 in a consolidation of the
Employees' Retirement Annuity Plan of Liberty Mutual, Liberty Mutual
Fire and the Liberty Mutual Supplementary Pension Plan. Liberty Mutual
represents that the Retirement Plan is a defined benefit plan providing
benefits based on a cash balance formula and a final average pay
formula. Liberty Mutual states that, as of December 31, 2014, the
Retirement Plan had assets valued at $6.24 billion with 77,244
participants and beneficiaries covered. Liberty Mutual represents that,
prior to the enactment of ERISA, the Retirement Plan was funded under,
and its assets were invested pursuant to, a group annuity contract.
Liberty Mutual represents that the Retirement Plan continued to be
funded and managed through the use of a group annuity contract, until
2011, when the assets of the Retirement Plan were transferred to a
trust, the Liberty Mutual Retirement Plan Master Trust (the Trust).\5\
According to Liberty Mutual, in 2011, Liberty Mutual established a
separate investment management subsidiary, Liberty Mutual Group Asset
Management Inc. (LMGAMI), described in more detail below, which was
appointed as the Retirement Plan's investment manager. The Bank of New
York Mellon became the Retirement Plan's trustee.
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\5\ According to the Retirement Plan's Investment Policy
Statement, effective October 24, 2014, a small portion of the
Retirement Plan's legacy assets remain in the group annuity contract
issued by Liberty Life Assurance Company of Boston. The Retirement
Plan intends to transition all of its assets from the group annuity
contract to the Trust.
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LMGAMI
3. Liberty Mutual represents that LMGAMI became a registered
investment adviser (an RIA) under the Investment Advisers Act of 1940,
as amended (the Advisers Act) in May 2011. According to Liberty Mutual,
there were several unrelated business objectives that motivated the
decision to register LMGAMI as an RIA. First, Liberty Mutual owns a
number of entities operating in, and incorporated under the laws of,
non-U.S. jurisdictions. Liberty Mutual represents that, as with its
U.S. operations, Liberty Mutual's preference is for LMGAMI to manage
its assets internally in conjunction with the assets of other Liberty
Mutual affiliates. Liberty Mutual states further that, at the time the
decision was made to register LMGAMI as an RIA, the benefits derived
from being able to internally manage more of Liberty Mutual's foreign
operations, as well as the fees associated with managing institutional
third party money, was expected to offset the financial, administrative
and regulatory burdens associated with LMGAMI being an RIA.
Furthermore, Liberty Mutual states that LMGAMI's registration as an
RIA provided the collateral opportunity to transfer the assets of the
Retirement Plan to a trust and to appoint LMGAMI as the Retirement
Plan's discretionary investment manager, as permitted under ERISA.
Liberty Mutual states that investing the assets of the Retirement Plan
through an independent trust could provide the Retirement Plan access
to investments that were otherwise not permitted or practical under the
terms of a group annuity contract. When LMGAMI became an RIA, the
assets of the Retirement Plan were transferred to the Trust and LMGAMI
was appointed as the investment manager of the Retirement Plan and any
other employee benefit plan maintained for the benefit of the employees
of Liberty Mutual and its affiliated entities that is subject to the
fiduciary responsibility provisions of Part IV of Title I of ERISA
(collectively with the Retirement Plan, the Liberty Mutual Plans).
4. The Department notes that the rules set forth in section 406 of
ERISA proscribe certain ``prohibited transactions'' between plans and
related parties with respect to those plans, known as ``parties in
interest.'' Under section 3(14) of ERISA, parties in interest with
respect to a plan include, among others, service providers with respect
to the plan, and certain of their affiliates. The prohibited
transaction provisions under section 406(a) of ERISA prohibit, in
relevant part, sales, leases, loans or the provision of services
between a party in interest and a plan (or an entity whose assets are
deemed to constitute the assets of a plan), as well as the use of plan
assets by or for the benefit of, or a transfer of plan assets to, a
party in interest.\6\ Under the authority of ERISA section 408(a) and
Code section 4975(c)(2), the Department has the authority to grant
exemptions from such ``prohibited transactions'' in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).
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\6\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under section 406(b) of ERISA,
which do not necessitate a transaction between a plan and a party in
interest. These include transactions involving fiduciary self-
dealing, fiduciary conflicts of interest, and kickbacks to
fiduciaries.
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5. Liberty Mutual states that PTE 96-23 provides broad exemptive
relief for transactions entered into on behalf of a plan at the
direction of an ``in-house asset manager'' (i.e., an INHAM), an
investment manager that manages assets for related employee benefit
plans, upon meeting certain requirements. The principal part of the
exemption is relief for transactions between an INHAM and persons who
are parties in interest to the plan solely by reason of providing
services to the plan or by reason of a relationship to such a service
provider; and certain ``co-joint venturers'' with the plan's sponsoring
employer. Among other things, in order to rely on the relief, the INHAM
must adopt written policies and procedures designed to ensure
compliance with the conditions of the exemption, and a qualified,
independent auditor must annually conduct an audit of compliance with
the policies and procedures and certain conditions of the exemption.\7\
Moreover, Liberty Mutual states that relief under PTE 96-23 is only
available to entities that register as RIAs. Specifically, Part
IV(a)(2) of PTE 96-23 defines an INHAM, in relevant part, as ``an
investment adviser registered under the [Advisers Act.]'' The
requirement that an INHAM be registered under the Advisers Act as an
RIA was included, in addition to others, to ``help to ensure that the
INHAM is an entity that has developed an appropriate level of expertise
in financial and business matters.'' \8\ Liberty Mutual's
representations regarding its experience and expertise are described in
paragraph 27 below.
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\7\ See 67 FR 18257, 18258 (April 1, 2011).
\8\ See 60 FR 15600 (March 24, 1995).
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Decision To Withdraw RIA Status
6. According to Liberty Mutual, LMGAMI determined that maintaining
its RIA status was more burdensome than originally anticipated and
would not further Liberty Mutual's business strategy. The Applicant
states that, in its insurance business, Liberty Mutual invests
significant amounts of capital in long-term investment vehicles (such
as private capital transactions). The Applicant states that LMGAMI's
[[Page 36216]]
registration as an RIA was required to create strategic partnerships
with a small number of large institutional investors with like
objectives. By doing so, Liberty Mutual could enhance its ability to
invest in such assets and provide additional diversification through
such investments.
7. Liberty Mutual represents that: Legislative changes such as
those enacted under the Dodd-Frank Wall Street Reform and Consumer
Protection Act; \9\ regulatory changes that substantially discounted
the value of long-term illiquid investments for purposes of satisfying
the capital requirements applicable to insurance companies and other
financial services companies; and adverse changes in the capital
treatment of such investments by credit rating agencies; combined to
substantially diminish the appetite for such investments, among large
institutions, and essentially derailed this business objective. As a
result, the Applicant states, Liberty Mutual had no unaffiliated third
party assets under management, and had no intention to seek to manage
any such assets.
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\9\ Public Law 111-203, 124 Stat. 1376 (2010).
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8. Without any third-party assets under its management, the
Applicant states that the rules and regulations pertaining to
investments made by RIAs are inapplicable to Liberty Mutual's business
model. Liberty Mutual represents that a significant part of its
business is the investment of assets that belong to the insurance
company. Thus, the efficient investment of substantial sums of its
assets is critical to its ongoing operations. As a regulated insurance
company, it must maintain certain statutory reserves and meet minimum
standards of risk-based capital. Liberty Mutual is subject to
regulation by state authorities that monitor its ongoing solvency and
establish certain rules and procedures that must be followed with
respect to the investments of its assets.
9. Similarly, Liberty Mutual states the Advisers Act contains other
rules and prohibitions intended to protect a third party investor from
the adviser over-promoting its recommendations. The Applicant states
that while such restrictions may be appropriate for protecting the
interests of third-party investors, these conditions added substantial
burdens for an entity managing billions of dollars of assets for an
integrated group of affiliated financial services companies and did not
provide any useful protection when LMGAMI was communicating with the
sophisticated and financially astute officers of Liberty Mutual and its
other affiliates.\10\
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\10\ The Department notes that it is not expressing a view
whether certain rules under the Advisers Act may be unduly
burdensome or inappropriate in protecting Liberty Mutual's
interests.
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10. Liberty Mutual states that the Advisers Act imposes the
safeguards and limitations contained therein because many of a given
RIA's clients are individuals without significant sophistication and/or
bargaining power and without any other statutory regime to protect them
against any potential adviser misconduct. However, the only ``client''
money under Liberty Mutual's management is that of its own Retirement
Plan. As such, the Applicant states that Liberty Mutual and LMGAMI are
already legally compelled as fiduciaries to act in the Retirement
Plan's best interests under provisions of section 404 of ERISA. Liberty
Mutual and LMGAMI are expressly precluded from acting to the detriment
of the Retirement Plan, and any action undertaken to benefit itself or
any of its affiliates would be precluded by the provisions of section
406 of ERISA (among others). Moreover, the Applicant states that
Liberty Mutual has an economic interest in the performance of the
Retirement Plan's assets, as ERISA and the Code make the company
responsible for any shortfalls in the Retirement Plan's funding. Thus,
Liberty Mutual states that it and the Retirement Plan have a
commonality of interests when it comes to the success of the Retirement
Plan's investments that is not typically present between an RIA and its
client.\11\
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\11\ The Department notes that this exemption does not provide
relief for LMGAMI or any other Liberty Mutual entity to receive a
fee in connection with any transaction described herein.
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11. Thus, Liberty Mutual represents that while LMGAMI's status as
an RIA afforded the benefits available under PTE 96-23 and the ability
to manage the Retirement Plan's assets in a trusteed arrangement, the
burdens for the business and its operations made continuing such status
unacceptable. Liberty Mutual represents that LMGAMI filed a Form ADV-W
with the Securities and Exchange Commission on October 27, 2014, to
effect the withdrawal of its RIA status. As such, Liberty Mutual
states, LMGAMI no longer qualifies to serve as an INHAM pursuant to PTE
96-23.
12. Upon LMGAMI discontinuing its RIA registration, Liberty Mutual,
as an investment manager under section 3(38) of ERISA, assumed
management responsibilities over the assets of the Retirement Plan
under an investment management agreement with an effective date of
October 27, 2014 (the IMA). LMGAMI continues to provide investment
services to the Retirement Plan as a sub-adviser to Liberty Mutual, at
no cost, pursuant to a sub-adviser agreement between Liberty Mutual and
LMGAMI, effective October 27, 2014 (the SAA). Liberty Mutual submitted
the IMA and the SAA to the Massachusetts Department of Insurance
(Department of Insurance) on October 10, 2014, and the Department of
Insurance approved the IMA and SAA on October 24, 2014.
Exemptive Relief Requested
13. Liberty Mutual requests an individual exemption from sections
406(a)(1)(A), 406(a)(1)(B), and 406(a)(1)(D) of ERISA with regard to
the management by Liberty Mutual and its asset manager affiliates
(collectively, the Liberty Mutual Asset Managers) of the plan assets of
the Liberty Mutual Plans. In this regard, Liberty Mutual requests
exemptive relief for certain party-in-interest transactions with
respect to which the Liberty Mutual Asset Managers would engage in on
behalf of a Liberty Mutual Plan if PTE 96-23 were available. Such
transactions include arm's-length sales or exchanges of property, the
provision of necessary services, and various commercially appropriate
extensions of credit. According to Liberty Mutual, the requested relief
includes transactions for which no other statutory or administrative
exemptions are available, including, hedges of currency risks
associated with investments denominated in foreign currencies, as well
as transactions with regard to assets for which there is not an
established market, such as real estate transactions, secondary
investments in private equity vehicles, and certain private debt
offerings of reliable borrowers.
14. Liberty Mutual states that sections 3(14)(A) and 3(14)(B) of
ERISA define the term ``party in interest'' to include, respectively,
any fiduciary of a plan and any person providing services to a plan.
Numerous entities currently provide, and will in the future continue to
provide services to the Liberty Mutual Plans, including as brokers,
custodians, investment advisers, consultants, actuaries or trustees,
and therefore constitute parties in interest with respect to the
Liberty Mutual Plans. Furthermore, section 3(14)(I) of ERISA defines
the term ``party in interest'' to include certain entities (co-joint
venturers) owning at least 10% of a joint venture in which an employer
of employees participating in the plan (or its parent) has at least a
50% interest.
[[Page 36217]]
15. Liberty Mutual represents that section 406(a)(1)(A) of ERISA
prohibits the sale or exchange, or leasing, of property between a plan
and a party in interest. Liberty Mutual states that, to the extent that
any service provider, such as a broker that provides brokerage services
to a Liberty Mutual Plan or any co-joint venturer, sells any security
(including a debt instrument) or other property to, or purchases a
security or other property from, a Liberty Mutual Plan as a principal,
a prohibited transaction would occur under section 406(a)(1)(A) of
ERISA.
16. Liberty Mutual represents that section 406(a)(1)(B) of ERISA
prohibits the lending of money or other extension of credit between a
plan and a party in interest. Thus, Liberty Mutual states, to the
extent that any service provider to a Liberty Mutual Plan or a co-joint
venturer of Liberty Mutual, such as a bank, holds a mortgage on real
property that a Liberty Mutual Plan owns, or a broker extends credit to
a Liberty Mutual Plan to effect a securities transaction, or a Liberty
Mutual Plan purchases a debt obligation of any person that is also a
service provider to such Liberty Mutual Plan or a co-joint venture of
Liberty Mutual, a prohibited transaction would occur under section
406(a)(1)(B) of ERISA.
17. Liberty Mutual further states that section 406(a)(1)(D) of
ERISA prohibits a fiduciary with respect to a plan from causing such
plan to engage in a transaction, if such fiduciary knows or should know
that such transaction constitutes a transfer to, or use by or for the
benefit of, a party in interest, of any assets of such plan. As such,
Liberty Mutual states, to the extent that any Liberty Mutual Asset
Manager acting in a fiduciary capacity on behalf of any Liberty Mutual
Plan were to allow such Liberty Mutual Plan to engage in a transaction
with a service provider, such as the manager of an investment fund that
is treated as plan assets under ERISA; or a co-joint venturer of
Liberty Mutual; such transaction would involve the use or transfer to
by such entity of the assets of the Liberty Mutual Plan, in violation
of section 406(a)(1)(D) of ERISA.
Statutory Findings--In The Interest of Liberty Mutual Plans
18. Liberty Mutual represents that the proposed exemption, if
granted, would facilitate an efficient execution of the Liberty Mutual
Plans' investment strategy, by permitting the Liberty Mutual Plans to
engage in a series of commercially common, beneficial transactions with
counterparties that may constitute ``parties in interest'' because of
their status as service providers under section 3(14)(B) of ERISA.
19. Liberty Mutual represents that, while section 408(b)(17) of
ERISA generally permits the sale or exchange of property or the
extension of credit between a plan and a person that is a service
provider to such plan, there are certain transactions beneficial to the
Retirement Plan, such as hedges of currency risks associated with
investments denominated in foreign currencies, which cannot be effected
in reliance on the available statutory exemptions. Liberty Mutual
states that the Retirement Plan incorporates into its investment
strategy investments covering a wide array of investment classes,
including alternative investments. Liberty Mutual states that
sophisticated counterparties to the Retirement Plan usually insist on
representations and warranties that no prohibited transaction will
occur as a result of a transaction.
20. Furthermore, Liberty Mutual represents that, for common
commercial transactions involving assets for which there is not an
established market, such as real estate transactions, secondary
investments in private equity vehicles, and certain private debt
offerings of reliable borrowers, the requisite data to assure
compliance with the statutory exemptions, such as demonstrating
``adequate consideration'' with regard to transactions relying upon
section 408(b)(17) of ERISA, may not be available or timely available.
Without the availability of such market references, the availability of
the statutory exemption under section 408(b)(l7) of ERISA is dependent
on the judgment of the fiduciary acting on behalf of the investing
plan. The Applicant represents that counterparties are sometimes
unwilling to rely on a fiduciary's subjective determination of value,
which often leads to additional time and expense (such as may arise
from having to obtain additional independent appraisals of the value of
the underlying assets from independent valuation firms at the expense
of the plan) to complete an investment. The Applicant represents that
counterparties may not wish to delay the consummation of the
transaction in order to assure that such a valuation can be obtained,
particularly if other investors are available that can rely on a
statutory exemption such as PTE 96-23. Liberty Mutual states that,
therefore, the requested exemption would facilitate the Retirement
Plan's ability to properly diversify its investments and make it more
competitive in procuring such assets for its own account.
21. Liberty Mutual represents further that it requires relief for
transactions between the plan and co-joint venturers, or entities that
own at least 10% of a joint venture in which an employer of employees
participating in the plan (or its parent) has at least a 50% interest
and are described in section 3(14)(I) of ERISA. Liberty Mutual
represents that its investment arm invests in assets through comingled
investment vehicles as a part of its business model. For instance, the
investment arm of Liberty mutual may invest in real estate with a joint
venture partner and the joint venturer would own 10% and manage the
real estate and Liberty Mutual would own the remaining interest in the
real estate investment through its general account. Liberty Mutual
states that it engages in such transactions with other investment
vehicles also where they invest with a partnership or joint venture and
Liberty owns least 50%. According to the Applicant, it is
administratively burdensome to monitor every joint venture in which an
employer participates in order to ensure that a plan maintained by such
employer does not engage in commercially common, low-risk transactions
with such entities.
Liberty Mutual represents that, given the magnitude of the assets
that it manages in the ordinary course of its business, Liberty Mutual
makes numerous investments, including significant investments in real
estate, private equity and other types of alternative investments.
Liberty Mutual represents that, in the context of real estate
investments, it is common for the developer of the property to hold a
substantial minority interest in the investment, while the investor
that finances the development of the property holds the majority
interest. However, the developer, which has the expertise to develop
the property effectively, would retain operational control over the
management and development of the property. On the other hand, Liberty
Mutual represents, in private equity investments, Liberty Mutual will
often take a direct substantial ownership position or be a significant
investor in an investment fund established to make investments in
portfolio companies. To this end, it would not be uncommon for Liberty
Mutual to have ownership of more than 10% and less than 50% in such
private equity investments. Operational control over the portfolio
companies will usually be vested in the sponsor of the fund or the lead
investor in a direct investment. The Applicant represents that other
kinds of alternative
[[Page 36218]]
investments are frequently structured in a similar fashion, where
Liberty Mutual is a significant minority holder, but not a controlling
investor and does not have any operational control over the investment
or the investment vehicle managing the assets. As such, in the ordinary
course of business, Liberty Mutual owns substantial passive interests
in a very large number of investments where other partners in the
investment, who have unique expertise in the particular investment
category, have the control over the management of the underlying
investments.
Liberty Mutual represents that, compared to other employers, which
generally engage in joint ventures only as part of their core business,
Liberty Mutual most often engages in such relationships in its capacity
as an investor. To this end, the Applicant represents that Liberty
Mutual is a passive joint venture partner with a multitude of entities
that ordinarily operate the applicable ventures independently from
Liberty Mutual. If any Liberty Mutual Plan engaged in any transaction
with such an entity, the counterparty representing the venture will
conduct itself like any other independent, third party engaging in a
commercial transaction. The Applicant represents that, to the extent
that Liberty Mutual directs any investment on behalf of any Liberty
Mutual Plan, it will be subject to ERISA's fiduciary responsibility
provisions, both as a matter of law and as a condition of the
exemption. Moreover, the Liberty Mutual Plan investors will often be
investing side by side with the general account in those investments
that are appropriate for the Plans. Thus, with regard to any such
investment, the interests of Liberty Mutual and any Liberty Mutual Plan
investor would be aligned.
22. Liberty Mutual states that it has not charged, and will not
charge in the future, the Retirement Plan fees for the investment
management services that it provides, and does not seek reimbursement
for the expenses it incurs in providing the services of its employees
to manage the assets of the Retirement Plan. Liberty Mutual represents
that, were the Liberty Mutual Plans to retain the services of similarly
qualified third party investment managers, the operating expenses of
the Liberty Mutual Plans would increase significantly. Liberty Mutual
states that, absent exemptive relief, even if only alternative assets
were turned over to third-party managers, the incremental annual cost
to the Liberty Mutual Plans would be approximately $15 million.
23. Liberty Mutual represents that, aside from the increased cost
in fees, retaining third party managers is not the optimal approach for
the investment of the Retirement Plan's assets. In this regard, Liberty
Mutual states that having control over the Retirement Plan's assets
provides it with the ability to increase investment returns in a manner
that could not be achieved if multiple unaffiliated managers were
retained to invest the Retirement Plan's assets.
Liberty Mutual further represents that having control over the
entire portfolio allows for efficiencies that can improve the ability
to maximize returns and control investment risks by affording greater
integration in the asset/liability management process. For example,
with respect to managing interest rate risks, having multiple
individual asset managers hedge their interest rate risk to a target
(relative to liabilities) can result in inefficient trading. Some
managers will be buying, while others will be selling. The Applicant
represents that the net impact of having separate managers each manage
the risk associated with the portion of the portfolio under their
management can result in unnecessary transaction costs for the Liberty
Mutual Plan.
The Applicant states that having current oversight of the entire
asset base allows for more efficient risk control. Setting investment
criteria relative to benchmark levels is not a static process, as index
weights adjust on a daily basis. The Applicant represents that, if the
Liberty Mutual Plan wants to set an absolute aggregate (across stocks
and bonds) energy exposure to 10% of assets under management, the
various investment management agreements or guidelines with multiple
managers would need to be adjusted more frequently than is practical.
24. The Applicant states that as a matter of policy, certain
counterparties will not engage in hedging transactions with plans in
reliance on the service provider exemption under section 408(b)(l7) of
ERISA. Others may do so only with regard to currencies that are widely
traded and do not fluctuate significantly in value. Thus, according to
Liberty Mutual, there have been and may in the future be occasions
where it would be advantageous (and a normal precaution) for the
Retirement Plan to put in place a currency hedge, or perhaps an
interest rate hedge, as a secondary protection for an appropriate and
attractive primary investment opportunity that cannot be effected
without the benefit of the requested exemption. In such circumstances,
the fiduciaries on behalf of the Retirement Plan would have to
determine whether to forego the perceived beneficial investment
opportunity or make the investment and assume the exposure to the risk
that could otherwise be hedged.
Liberty Mutual represents that counterparties are reluctant, or may
refuse, to engage in transactions with plan investors relying on other
potentially available exemptions that are dependent on fact specific
considerations that can vary from transaction to transaction, such as
is the case with regard to the relief provided under the ``service
provider'' exemption set forth in section 408(b)(17) of ERISA.
25. Liberty Mutual states that, if the exemption is granted, the
continued absence of RIA status will not affect in any way the manner
in which Liberty Mutual or LMGAMI manages the assets of Liberty Mutual
Plans. Liberty Mutual represents that the fact that neither Liberty
Mutual nor LMGAMI is an RIA does not preclude the Liberty Mutual Plans
from any services or any transactions that Liberty Mutual or LMGAMI
offers.
26. Liberty Mutual represents that it has over 80 years of
experience managing insurance company assets and it conducts extensive
compliance training of investment personnel, including ERISA fiduciary
training. Liberty Mutual and LMGAMI collectively employ approximately
85 investment professionals dedicated to the investment of the assets
under Liberty Mutual's management and control, with investment teams
dedicated to distinct asset classes. Liberty Mutual states that its
Chief Investment Officer has over 30 years of experience in the
investment industry. Furthermore, Liberty Mutual states an investment
compliance team monitors portfolio compliance in real time employing
sophisticated software.
Statutory Findings--Protective of the Rights of Participants
27. Liberty Mutual represents that state insurance laws regulate
Liberty Mutual's financial condition and reporting requirements, the
diversification of Liberty Mutual's investment portfolio, and types of
investments that Liberty Mutual can undertake. Liberty Mutual states
that it files audited annual financial statements and unaudited
quarterly financial statements with the insurance authorities in all 50
states, and is subject to robust, risk-focused inspections by state
insurance regulators every three to five years. Liberty Mutual states
that these inspections include extensive audits of its control systems
and reviews of its operating procedures, investments and other
transactions.
[[Page 36219]]
28. Furthermore, the exemption will be subject to a suite of
robust, protective conditions. The terms of transactions entered into
in reliance of this exemption will be negotiated on behalf of the
Liberty Mutual Plan by, or under the authority and general direction
of, the Liberty Mutual Asset Manager, and either the Liberty Mutual
Asset Manager or, so long as the Liberty Mutual Asset Manager retains
full fiduciary responsibility with respect to the transaction, a sub-
adviser acting in accordance with written guidelines established and
administered by the Liberty Mutual Asset Manager, makes the decision on
behalf of the plan to enter into the transaction. Furthermore, the
party in interest engaging in the transaction with the Liberty Mutual
Plan may not have discretionary authority or control with respect to
the investment of the Liberty Mutual Plan assets involved in the
transaction and may not render investment advice (within the meaning of
29 CFR 2510.3-21(c)) with respect to those assets.
29. Liberty Mutual represents that, notwithstanding the withdrawal
of its registration as an RIA under the Advisers Act, the exemption
requires the Liberty Mutual Asset Manager to adopt, maintain, and
follow policies and procedures (Policies) designed to ensure compliance
with the conditions of this exemption, reinforce the Liberty Mutual
Asset Manager's fiduciary duties, ensuring that the Liberty Mutual
Asset Manager and its personnel operate within an impartial conduct
standard in accordance with a duty of loyalty and prudence pursuant to
section 404 of the Act with respect to the Liberty Mutual Plan when
condu0cting business with, or on behalf of, the applicable Liberty
Mutual Plan, and avoid conflicts of interest or risk exposure,
including an investment allocation policy and best execution policy.
30. Liberty Mutual represents that its control systems are tested
three times per year, with regular internal and external audits.
Nevertheless, the Department views a robust independent audit
requirement as an essential condition for exemptive relief hereunder.
Therefore, the exemption requires that the Liberty Mutual Asset Manager
must submit to an audit conducted annually by an independent auditor.
The audit must cover a consecutive twelve-month period beginning on the
effective date of the exemption.
31. The auditor must issue a written report (the Audit Report) to
Liberty Mutual and the Liberty Mutual Asset Manager with respect to
each audit that describes the procedures performed by the auditor
during the course of its examination, to be completed within six months
following the end of the 12-month period to which the audit relates.
The Audit Report must include, among other things, the auditor's
specific determinations regarding the compliance with the conditions
for the exemption; the adequacy of, and compliance with, the Policies;
the auditor's recommendations (if any) with respect to strengthening
such Policies; and any instances of noncompliance with the conditions
for the exemption or the Policies.
32. The Liberty Mutual Asset Manager will make its Audit Report
unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any participant in a Liberty Mutual Plan.
33. The Liberty Mutual Asset Managers will prepare and make
available to all participants of, and beneficiaries entitled to receive
benefits under, the Liberty Mutual Plans (the Eligible Recipients) a
plain English, narrative brochure (the Brochure) that contains
information comparable to that required by Part 2A of Form ADV filed
under the Investment Advisers Act of 1940,\12\ modified such that the
disclosure is relevant to Eligible Recipients with respect to the
management of the applicable Liberty Mutual Plan. Liberty Mutual must
also provide an annual update to the Brochure (the Updated Brochure),
containing or accompanied by a summary of material changes.
---------------------------------------------------------------------------
\12\ The Department understands that Form ADV is the uniform
form used by investment advisers to register with both the
Securities and Exchange Commission (SEC) and state securities
authorities. The form consists of two parts. Part 2 requires
investment advisers to prepare narrative brochures written in plain
English that contain information such as the types of advisory
services offered, the adviser's fee schedule, disciplinary
information, conflicts of interest, and the educational and business
background of management and key advisory personnel of the adviser.
The brochure is the primary disclosure document that investment
advisers provide to their clients.
---------------------------------------------------------------------------
34. As an additional condition of the exemption, each Liberty
Mutual Asset Manager must establish an internal compliance program that
addresses the Liberty Mutual Asset Manager's performance of its
fiduciary and substantive obligations under ERISA (the Compliance
Program). Each Liberty Mutual Asset Manager must designate a chief
compliance officer (the CCO), who must be knowledgeable about ERISA and
have the authority to develop and enforce appropriate compliance
policies and procedures for the Liberty Mutual Asset Manager. Also, as
part of the Compliance Program, each Liberty Mutual Asset Manager must
adopt and enforce a written code of ethics that, among other things,
will reflect the Liberty Mutual Asset Manager's fiduciary duties to the
Liberty Mutual Plans.
35. Finally, the Liberty Mutual Asset Manager must act in the Best
Interest of the Liberty Mutual Plan at the time of the transaction.
Furthermore, the Liberty Mutual Asset Manager's statements about
material conflicts of interest and any other matters relevant to the
Liberty Mutual Asset Manager's relationship with the Liberty Mutual
Plan, must not be materially misleading at the time they are made.
Statutory Findings--Administratively Feasible
36. Liberty Mutual represents that the proposed exemption is
administratively feasible. Liberty Mutual represents that it maintains
substantial internal control systems regulating its financial reporting
and related functions, including portfolio management, that are tested
three times per year, with regular internal audits. Furthermore, as
described above, the Liberty Mutual Asset Manager will be subject to
robust annual audits to be conducted by an independent auditor. The
Liberty Mutual Asset Manager must then make its Audit Report
unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any participant in a Liberty Mutual Plan.
Summary
37. In summary, provided that the conditions described above are
satisfied, the Department has tentatively determined that the relief
sought by the Applicant satisfies the statutory requirements for an
exemption under section 408(a) of ERISA.
Proposed Exemption Operative Language
Section I. Covered Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(A), 406(a)(1)(B), and 406(a)(1)(D) of ERISA and the sanctions
resulting from the application of sections 4975(a) and 4975(b) of the
Code, by reason of sections 4975(c)(1)(A), 4975(c)(1)(B), and
4975(c)(1)(D) of the Code, shall not apply to a transaction between a
party in interest with respect to a Liberty Mutual Plan (as defined in
Section II(h)) and such Liberty Mutual Plan, provided that the Liberty
Mutual Asset Manager
[[Page 36220]]
(as defined in Section II(a)) has discretionary authority or control
with respect to the assets of the Liberty Mutual Plan involved in the
transaction and the following conditions are satisfied:
(a) The terms of the transaction are negotiated on behalf of the
Liberty Mutual Plan by, or under the authority and general direction
of, the Liberty Mutual Asset Manager, and either the Liberty Mutual
Asset Manager or, so long as the Liberty Mutual Asset Manager retains
full fiduciary responsibility with respect to the transaction, a sub-
adviser acting in accordance with written guidelines established and
administered by the Liberty Mutual Asset Manager, makes the decision on
behalf of the Plan to enter into the transaction;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 2006-16 (71 FR 63786, October
31, 2006) (relating to securities lending arrangements) (as amended or
superseded);
(2) Prohibited Transaction Exemption 83-1 (48 FR 895, January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools) (as amended or superseded); or
(3) Prohibited Transaction Exemption 88-59 (53 FR 24811, June 30,
1988) (relating to certain mortgage financing arrangements) (as amended
or superseded);
(c) The transaction is not part of an arrangement, agreement, or
understanding designed to violate or evade compliance with ERISA or the
Code;
(d) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the Liberty Mutual Asset Manager, the terms of the
transaction are at least as favorable to the Liberty Mutual Plan as the
terms generally available in arm's length transactions between
unrelated parties;
(e) The party in interest dealing with the Liberty Mutual Plan:
(1) Is a party in interest with respect to the Liberty Mutual Plan
(including a fiduciary); either
(A) Solely by reason of providing services to the Liberty Mutual
Plan, or solely by reason of a relationship to a service provider
described in section 3(14)(F), (G), (H) or (I) of ERISA; or
(B) Solely by reason of being a 10-percent or more shareholder,
partner or joint venturer, in a person, which is 50 percent or more
owned by an employer of employees covered by the Liberty Mutual Plan
(directly or indirectly in capital or profits), or the parent company
of such an employer, provided that such person is not controlled by,
controlling, or under common control with such employer; or
(C) By reason of both (A) and (B) only; and
(2) Does not have discretionary authority or control with respect
to the investment of the Liberty Mutual Plan assets involved in the
transaction and does not render investment advice (within the meaning
of 29 CFR 2510.3-21(c)) with respect to those assets;
(f) The party in interest dealing with the Liberty Mutual Plan is
neither the Liberty Mutual Asset Manager nor a person related to the
Liberty Mutual Asset Manager (within the meaning of Section II(d));
(g) The Liberty Mutual Asset Manager adopts, maintains, and follows
written policies and procedures (the Policies) that:
(1) Are designed to assure compliance with the conditions of the
exemption and its fiduciary responsibilities and avoid any conflicts of
interest or risk exposure, including an investment allocation policy
and best execution policy, and ensure that the Liberty Mutual Asset
Manager and its personnel operate within an impartial conduct standard
in accordance with a duty of loyalty and prudence pursuant to section
404 of the Act with respect to the Liberty Mutual Plan when conducting
business with, or on behalf of, the applicable Liberty Mutual Plan;
(2) Describe the objective requirements of the exemption, and
describe the steps adopted by the Liberty Mutual Asset Manager to
assure compliance with each of these requirements:
(A) The requirements of Section I of the exemption, including
Section I(a) regarding the discretionary authority or control of the
Liberty Mutual Asset Manager with respect to the plan assets involved
in the transaction, in negotiating the terms of the transaction, and
with regard to the decision on behalf of the Liberty Mutual Plan to
enter into the transaction;
(B) That any procedure for approval or veto of the transaction
meets the requirements of Section I(a);
(C) For a transaction described in Section I:
(i) That the transaction is not entered into with any person who is
excluded from relief under Section I(e)(1), Section I(e)(2), or Section
I(f); and
(ii) That the transaction is not described in any of the class
exemptions listed in Section I(b);
(3) Are reasonably designed to prevent the Liberty Mutual Asset
Manager or its personnel from violating ERISA or other federal or state
laws or regulations applicable with respect to the investment of the
assets of the applicable Liberty Mutual Plan (Applicable Law);
(4) Cover, at a minimum, the following areas to the extent
applicable to the Liberty Mutual Asset Manager:
(A) Portfolio management processes, including allocation of
investment opportunities among any Liberty Mutual Plan and Liberty
Mutual's proprietary investments, taking into account the investment
objectives of the applicable Liberty Mutual Plan and any restrictions
under Applicable Law;
(B) Trading practices, including procedures by which the Liberty
Mutual Asset Manager satisfies its best execution obligation, and
allocates aggregated trades among all Liberty Mutual Plans and/or
Liberty Mutual proprietary accounts for which it provides investment
management services;
(C) Personal trading activities of any employee of Liberty Mutual
and its subsidiaries who has personal involvement and responsibility
for investment decisions regarding the investment of the assets of the
applicable Liberty Mutual Plan (an LM Advisory Employee);
(D) The Liberty Mutual Asset Manager's policies regulating
conflicts of interest;
(E) The accuracy of disclosures, including account statements, made
to the trustee(s) or fiduciaries of any Liberty Mutual Plan or to any
regulators;
(F) Safeguarding of Liberty Mutual Plan assets from conversion or
inappropriate use by any LM Advisory Employee;
(G) The accurate creation of required records and their maintenance
in a manner that secures them from unauthorized alteration or use and
protects them from untimely destruction;
(H) Processes to value holdings of any Liberty Mutual Plan, to the
extent, if any, that such valuation is within the control of the
Liberty Mutual Asset Manager;
(I) Safeguards for the privacy protection of records and
information pertaining to each Liberty Mutual Plan; and
(J) Business continuity plans; and
(5) Any violations of or failure to comply with items (1) through
(4) above are corrected promptly upon discovery and any such violations
or compliance failures not promptly corrected are reported, upon
discovering the failure to promptly correct, in writing to appropriate
corporate officers, the Chief
[[Page 36221]]
Compliance Officer (as described below in Section I(j)) of the Liberty
Mutual Asset Manager, and the independent auditor described in Section
I(h) below, and a fiduciary of the relevant Liberty Mutual Plan; the
Liberty Mutual Asset Manager will not be treated as having failed to
adopt, maintain, or follow the Policies, provided that it corrects any
instances of noncompliance promptly when discovered or when they
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this item (5);
(h)(1) The Liberty Mutual Asset Manager submits to an audit
conducted annually by an independent auditor, who has been prudently
selected and who has the appropriate technical training or experience
and proficiency with ERISA's fiduciary responsibility provisions and
applicable securities laws to evaluate the adequacy of, and compliance
with, the Policies described herein, and compliance with the
requirements of the exemption, and so represents in writing. Upon the
Department's request, the auditor must demonstrate its qualifications
as required by this paragraph and its independence from Liberty Mutual.
The audit must be incorporated into the Policies and cover a
consecutive twelve-month period beginning on the effective date of the
exemption. Each annual audit must be completed within six months
following the end of the twelve-month period to which the audit
relates;
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, the Liberty Mutual Asset
Manager and, if applicable, Liberty Mutual, will grant the auditor
unconditional access to its business, including, but not limited to:
its computer systems, business records, transactional data, workplace
locations, training materials, and personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether the Liberty Mutual Asset Manager has complied with
the conditions for the exemption, including the requirement to adopt,
maintain, and follow Policies in Section I(g);
(4) The auditor's engagement shall specifically require the auditor
to test the Liberty Mutual Asset Manager's operational compliance with
the exemption, including the Policies in Section I(g). In this regard,
the auditor must test a sample of the Liberty Mutual Asset Manager's
transactions involving the Liberty Mutual Plan sufficient in size and
nature to afford the auditor a reasonable basis to determine the
operational compliance with the Policies;
(5) For each audit, the auditor shall issue a written report (the
Audit Report) to Liberty Mutual and the Liberty Mutual Asset Manager
that describes the procedures performed by the auditor during the
course of its examination, to be completed within six months following
the end of the twelve-month period to which the audit relates. The
Audit Report shall include the auditor's specific determinations
regarding the compliance with the conditions for the exemption; the
adequacy of, and compliance with, the Policies; the auditor's
recommendations (if any) with respect to strengthening such Policies;
and any instances of noncompliance with the conditions for the
exemption or the Policies described in paragraph (g) above. Any
determinations made by the auditor regarding the adequacy of the
Policies and the auditor's recommendations (if any) with respect to
strengthening the Policies shall be promptly addressed by the Liberty
Mutual Asset Manager, and any actions taken by the Liberty Mutual Asset
Manager to address such recommendations shall be included in an
addendum to the Audit Report. Any determinations by the auditor that
the Liberty Mutual Asset Manager has adopted, maintained, and followed
sufficient Policies shall not be based solely or in substantial part on
an absence of evidence indicating noncompliance. In this last regard,
any finding that the Liberty Mutual Asset Manager has complied with the
requirements under this subsection must be based on evidence that
demonstrates the Liberty Mutual Asset Manager has actually adopted,
maintained, and followed the Policies required by this exemption;
(6) The auditor shall notify the Liberty Mutual Asset Manager and
Liberty Mutual of any instances of noncompliance with the conditions
for the exemption or the Policies identified by the auditor within five
(5) business days after such noncompliance is identified by the
auditor, regardless of whether the audit has been completed as of that
date;
(7) With respect to each Audit Report, the General Counsel or the
Chief Compliance Officer (described in Section I(j)) of the Liberty
Mutual Asset Manager certifies in writing, under penalty of perjury,
that the officer has reviewed the Audit Report and this exemption;
addressed, corrected, or remedied any inadequacies identified in the
Audit Report; and determined that the Policies in effect at the time of
signing are adequate to ensure compliance with the conditions of this
exemption and with the applicable provisions of ERISA and the Code;
(8) A senior executive officer with a direct reporting line to the
highest ranking compliance officer of Liberty Mutual reviews the Audit
Report and certifies in writing, under penalty of perjury, that such
officer has reviewed each Audit Report; and
(9) The Liberty Mutual Asset Manager makes its Audit Report
unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any participant in a Liberty Mutual Plan;
(i) The Liberty Mutual Asset Manager will prepare and make
available to all participants of, and beneficiaries entitled to receive
benefits under, the Liberty Mutual Plans (the Eligible Recipients) a
plain English, narrative brochure (the Brochure) that contains all
substantive information, comparable to that required by Part 2A of Form
ADV filed under the Investment Advisers Act of 1940, but modified such
that the disclosure is relevant to Eligible Recipients with respect to
the management of the applicable Liberty Mutual Plan;
(1) The Brochure shall include, among other things:
(A) The Liberty Mutual Asset Manager's investment strategy with
respect to the applicable Liberty Mutual Plan;
(B) The Liberty Mutual Asset Manager's policies regarding conflicts
of interest;
(C) Any disciplinary information related to employees of the
Liberty Mutual Asset Manager; and
(D) A prominent statement that the Eligible Recipients may request
a copy of the Policies, with instructions on how to make such request
and receive such copy;
(2) The Liberty Mutual Asset Manager must make the Brochure
available to the Eligible Recipients: (1) with respect to any Liberty
Mutual Plan for which Liberty Mutual or its affiliate is then acting as
an investment manager, within 90 days of the effective date of this
exemption; and (2) with respect to any other Liberty Mutual Plan for
which any Liberty Mutual Asset Manager thereafter becomes an investment
manager, within ten (10) business days of the date that the applicable
Investment Management Agreement or Sub-Adviser Agreement with a Liberty
Mutual Plan becomes effective;
(3) Liberty Mutual annually updates such brochure (the Updated
Brochure), containing or accompanied by a
[[Page 36222]]
summary of material changes. Each Updated Brochure that is made
available following the completion of the first audit required with
respect to any Liberty Mutual Asset Manager in accordance with this
exemption must include a prominently displayed statement indicating
that the Liberty Mutual Asset Manager has completed the required audit,
and must also provide clear instructions for obtaining a copy of the
audit;
(4) The Liberty Mutual Asset Manager will be deemed to have met the
requirements pertaining to the provision of the Brochure and the
Updated Brochure if it makes such documents available to the Eligible
Recipients through a prominently displayed link on a Web site (the Plan
Benefits Web site) where it makes available information to the Eligible
Recipients about their benefits and rights under the applicable Liberty
Mutual Plan (Plan Information), and contact information for an
appropriate representative of Liberty Mutual to direct inquiries from
the Eligible Recipients, which is readily available to such Eligible
Recipients. Notwithstanding the above, the Liberty Mutual Asset Manager
will not be deemed to have met the requirements of this subparagraph
unless it provides notice of the Plan Benefits Web site, and the link
to the Brochure and Updated Brochure at least once annually, to all
Eligible Recipients;
(5) For any such Eligible Recipient to whom Liberty Mutual makes
Plan Information available by hard copy or other means (Supplemental
Delivery), the Brochure and the Updated Brochure must be provided to
such Eligible Recipient at the same time and by the same means that
Plan Information is provided;
(6) The Liberty Mutual Asset Manager will also provide supplements
to the Brochure (each, a Brochure Supplement) that contain information
about any LM Advisory Employee, including the LM Advisory Employee's
educational background, business experience, other business activities,
and disciplinary history;
(7) Each Brochure Supplement must be made available in the same
manner as the Brochure, and must be posted to the Plan Benefits Web
site, not later than 90 days following the date that any such LM
Advisory Employee begins to provide advisory services to that Liberty
Mutual Plan. Such Brochure Supplement must be included with the next
Updated Brochure included in the material provided to any Eligible
Recipient receiving such Updated Brochure by Supplemental Delivery;
(8) With respect to any individuals who become Eligible Recipients
with respect to any Liberty Mutual Plan for which Liberty Mutual or its
affiliate is then acting as an investment manager (the New Eligible
Recipients) after the delivery of the Brochure to the Eligible
Recipients with respect to the Liberty Mutual Plan, the Liberty Mutual
Asset Manager will provide a copy of the Brochure as well as the most
recent Updated Brochure, if applicable, and any Brochure Supplements
related to LM Advisory Employees employed by the Liberty Mutual Asset
Manager at the time the New Eligible Recipients became Eligible
Recipients, within 90 days of the New Eligible Recipients becoming
Eligible Recipients with respect to the Liberty Mutual Plan. The
Liberty Mutual Asset Manager will be deemed to have met the disclosure
requirements pertaining to the New Eligible Recipients if it makes the
applicable documents available to the New Eligible Recipients through a
prominently displayed link on the Plan Benefits Web site described in
section I(i)(4) of this exemption. Notwithstanding the above, the
Liberty Mutual Asset Manager will not be deemed to have met the
requirements of this subparagraph unless it provides notice of the Plan
Benefits Web site, and the link to the Brochure, Updated Brochure, and
Brochure Supplements to all New Eligible Recipients. For any such New
Eligible Recipient to whom Liberty Mutual makes Plan Information
available by Supplemental Delivery, the Brochure and the Updated
Brochure must be provided to such New Eligible Recipient at the same
time and by the same means that Plan Information is provided;
(j) Each Liberty Mutual Asset Manager must establish an internal
compliance program that addresses the Liberty Mutual Asset Manager's
performance of its fiduciary and substantive obligations under ERISA
(the Compliance Program);
(1) Each Liberty Mutual Asset Manager must designate a Chief
Compliance Officer (the CCO), who must be knowledgeable about ERISA and
have the authority to develop and enforce appropriate compliance
policies and procedures for the Liberty Mutual Asset Manager;
(2) As part of the Compliance Program, each Liberty Mutual Asset
Manager must adopt and enforce a written code of ethics that, among
other things, will reflect the Liberty Mutual Asset Manager's fiduciary
duties to the Liberty Mutual Plans. At a minimum, the Liberty Mutual
Asset Manager's code of ethics must:
(A) Set forth a minimum standard of conduct for all LM Advisory
Employees and any other employees of the Liberty Mutual Asset Manager
whose responsibilities include assisting the LM Advisory Employees in
managing the investments of any Liberty Mutual Plan (the LM
Facilitating Employees);
(B) Require LM Advisory Employees and LM Facilitating Employees to
comply with Applicable Law in fulfilling their investment management
duties to the Liberty Mutual Plans;
(C) Require each LM Advisory Employee to report his or her
securities holdings at the later of the time that the person becomes an
LM Advisory Employee or within 90 days after this exemption becomes
effective and at least once annually thereafter and to make a report at
least once quarterly of all personal securities transactions in
reportable securities to the Liberty Mutual Asset Manager's CCO or
other designated person;
(D) Require the CCO or other designated persons to pre-approve
investments by any LM Advisory Employee in IPOs or limited offerings;
(E) Require each LM Advisory Employee or LM Facilitating Employees
to promptly report any violation of Applicable Law to the Liberty
Mutual Asset Manager's CCO or other designated person;
(F) Require the Liberty Mutual Asset Manager to provide training on
applicable law and to obtain a written acknowledgment from each LM
Advisory Employee documenting his/her agreement to abide by the code of
ethics, the Policies, and applicable law; and
(G) Require the Liberty Mutual Asset Manager to keep records of any
violations of applicable law and of any actions taken against the
violators;
(k) The Liberty Mutual Asset Manager must act in the Best Interest
of the Liberty Mutual Plan at the time of the transaction. For purposes
of this paragraph, a Liberty Mutual Asset Manager acts in the ``Best
Interest'' of the Liberty Mutual Plan when the Liberty Mutual Asset
Manager acts with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, based on the
investment objectives, risk tolerance, financial circumstances, and
needs of the Liberty Mutual Plan, without regard to the financial or
other interests of the Liberty Mutual Asset Manager, any affiliate or
other party;
[[Page 36223]]
(l) The Liberty Mutual Asset Manager's statements about material
conflicts of interest and any other matters relevant to the Liberty
Mutual Asset Manager's relationship with the Liberty Mutual Plan, are
not materially misleading at the time they are made. For purposes of
this paragraph, a ``material conflict of interest'' exists when a
Liberty Mutual Asset Manager has a financial interest that a reasonable
person would conclude could affect the exercise of its best judgment as
a Liberty Mutual Asset Manager; and
(m) The Liberty Mutual Asset Manager will not charge any asset
management fees or receive any fee in connection with transactions
covered by this exemption.
Section II. Definitions
(a) The term ``Liberty Mutual Asset Manager'' means Liberty Mutual
or any organization that is either a direct or indirect 80 percent or
more owned subsidiary of Liberty Mutual, or a direct or indirect 80
percent more owned subsidiary of a parent organization of Liberty
Mutual, provided that such Liberty Mutual Asset Manager:
(1) Is an insurance company which is qualified under the laws of
more than one State to manage, acquire, or dispose of any assets of a
plan, which company has, as of the last day of its most recent fiscal
year, net worth (capital, paid-in and contributed surplus, unassigned
surplus, contingency reserves, group contingency reserves, and special
reserves) in excess of $1,000,000;
(2) Is subject to supervision and examination by a State authority
having supervision over insurance companies and is subject to periodic
audits by applicable State insurance regulators in accordance with the
requirements of applicable state law, which, under current law, would
be no less than once every five years;
(3) Has any arrangements between it and any Liberty Mutual Plan
reviewed by the applicable State insurance regulators, including any
investment management agreements (or revisions thereto) with the
Liberty Mutual Plan and sub-advisor agreements with any other Liberty
Mutual Asset Managers, the results of which will be made available
without limitation to the independent auditor conducting the audit
required under Section I(i);
(4) As of the last day of its most recent fiscal year, has under
its management and control total assets in excess of $1 billion; and
(5) Together with its affiliates, maintains Liberty Mutual Plans
holding aggregate assets of at least $500 million as of the last day of
each Liberty Mutual Plan's reporting year;
(b) For purposes of Sections II(a) and II(h), an ``affiliate'' of a
Liberty Mutual Asset Manager means a member of either (1) a controlled
group of corporations (as defined in section 414(b) of the Code) of
which the Liberty Mutual Asset Manager is a member, or (2) a group of
trades or businesses under common control (as defined in section 414(c)
of the Code) of which the Liberty Mutual Asset Manager is a member;
provided that ``50 percent'' shall be substituted for ``80 percent''
wherever ``80 percent'' appears in section 414(b) or 414(c) of the Code
or the rules thereunder;
(c) The term ``party in interest'' means a person described in
section 3(14) of ERISA and includes a ``disqualified person'' as
defined in section 4975(e)(2) of the Code;
(d) A Liberty Mutual Asset Manager is ``related'' to a party in
interest for purposes of Section I(f) of this exemption, if, as of the
last day of its most recent calendar quarter: (i) The Liberty Mutual
Asset Manager (or a person controlling, or controlled by, the Liberty
Mutual Asset Manager) owns a ten percent or more interest in the party
in interest; or (ii) the party in interest (or a person controlling, or
controlled by, the party in interest) owns a 10 percent or more
interest in the Liberty Mutual Asset Manager.
For purposes of this definition:
(1) The term ``interest'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership, or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest if, other than in a
fiduciary capacity, the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest; and
(3) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(e) For purposes of this exemption, the time as of which any
transaction occurs is the date upon which the transaction is entered
into. In addition, in the case of a transaction that is continuing, the
transaction shall be deemed to occur until it is terminated. Nothing in
this paragraph shall be construed as exempting a transaction entered
into by a plan which becomes a transaction described in section 406 of
ERISA or section 4975 of the Code while the transaction is continuing,
unless the conditions of the exemption were met either at the time the
transaction was entered into or at the time the transaction would have
become prohibited but for this exemption. In determining compliance
with the conditions of the exemption at the time that the transaction
was entered into for purposes of the preceding sentence, Section I(e)
will be deemed satisfied if the transaction was entered into between a
Liberty Mutual Plan and a person who was not then a party in interest;
(f) The term ``LMGAMI'' means Liberty Mutual Group Asset Management
Inc., a separate investment management subsidiary of Liberty Mutual;
(g) The term ``Liberty Mutual'' means Liberty Mutual Insurance
Company; and
(h) The term ``Liberty Mutual Plan'' means the Liberty Mutual
Retirement Benefit Plan and any other employee benefit plan subject to
the fiduciary responsibility provisions of Part IV of Title I of ERISA
maintained by Liberty Mutual or an affiliate of Liberty Mutual, and
covering the employees of such entities.
Effective Date: The proposed exemption, if granted, will be
effective as of the date that a final notice of granted exemption is
published in the Federal Register.
Notice to Interested Persons
Notice of the proposed exemption will be given to all Interested
Persons within 15 days of the publication of the notice of proposed
exemption in the Federal Register, by first class U.S. mail to the last
known address of all such individuals. Such 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(a)(2). The supplemental statement will inform interested
persons of their right to comment on the pending exemption. Written
comments are due within 45 days of the publication of the notice of
proposed exemption in the Federal Register.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact
[[Page 36224]]
information in the body of your comment, but DO NOT submit information
that you consider to be confidential, or otherwise protected (such as
Social Security number or an unlisted phone number) or confidential
business information that you do not want publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Scott Ness of the Department,
telephone (202) 693-8561. (This is not a toll-free number.)
Russell Investment Management, LLC (RIM), Russell Investments Capital,
LLC (RICap), and Their Affiliates (Collectively, Russell Investments or
the Applicants) Located in Seattle, WA
[Application No. D-11916]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 29 U.S.C. 1108 (section 408(a) of the Act) and 26 U.S.C.
(section 4975(c)(2) of the Code), in accordance with the procedures set
forth in 29 CFR part 2570, subpart B (76 FR 46637, 66644, October 27,
2011). 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 requested to
the Secretary of Labor. Therefore, this notice of proposed exemption is
issued solely by the Department. If the exemption is granted, the
restrictions of sections 406(a)(1)(D) and 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of sections 4975(c)(1)(D) through (F) of the Code,\13\ shall
not apply, effective June 1, 2016, to:
---------------------------------------------------------------------------
\13\ For purposes of this proposed exemption reference to
specific provisions of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of the Code.
---------------------------------------------------------------------------
(a) The receipt of a fee by Russell Investments, from an open-end
investment company or open-end investment companies (Affiliated
Fund(s)), in connection with the direct investment in shares of any
such Affiliated Fund, by an employee benefit plan or by employee
benefit plans (Client Plan(s)), where Russell Investments serves as a
fiduciary with respect to such Client Plan, and where Russell
Investments: (1) Provides investment advisory services, or similar
services to any such Affiliated Fund; and (2) provides to any such
Affiliated Fund other services (Secondary Service(s)); and
(b) In connection with the indirect investment by a Client Plan in
shares of an Affiliated Fund through investment in a pooled investment
vehicle or pooled investment vehicles (Collective Fund(s)), where
Russell Investments serves as a fiduciary with respect to such Client
Plan, the receipt of fees by Russell Investments from: (1) An
Affiliated Fund for the provision of investment advisory services, or
similar services by Russell Investments to any such Affiliated Fund;
and (2) an Affiliated Fund for the provision of Secondary Services by
Russell Investments to any such Affiliated Fund.
Summary of Facts and Representations \14\
---------------------------------------------------------------------------
\14\ The Summary of Facts and Representations is based on the
Applicants' representations, unless indicated otherwise.
---------------------------------------------------------------------------
Background
1. On October 6, 2015, the Department granted Prohibited
Transaction Exemption 2015-17 (PTE 2015-17) to Frank Russell Company
and Affiliates (collectively, FRC). PTE 2015-17 provides conditional
relief to FRC for the receipt of a fee from an Affiliated Fund, in
connection with a Client Plan's direct investment in shares of an
Affiliated Fund, or a Client Plan's indirect investment in shares of an
Affiliated Fund, through investment in a pooled investment vehicle (the
Collective Fund), where FRC: (a) Serves as a fiduciary with respect to
such Client Plan, and (b) provides to such Affiliated Fund, investment
advisory services or similar services, and Secondary Services, if
certain conditions are met.
PTE 2015-17 defines FRC as ``Frank Russell Company and any
affiliate thereof,'' and ``affiliate'' as ``[a]ny person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with the person.'' While PTE 2015-17 was
nominally granted to ``Frank Russell Company and Affiliates,'' the
primary intended beneficiaries of the relief provided were two entities
operating as ``Russell Investments''--Russell Investment Management,
LLC (RIM) and Russell Investments Capital, LLC (RICap), each of which
qualified as an ``affiliate'' of FRC within the meaning of PTE 2015-17.
However, as of June 1, 2016, RIM and RICap no longer were under the
control of, or common control with, FRC and, thus, no longer are
``affiliates'' of FRC within the meaning of PTE 2015-17.
On June 1, 2016, London Stock Exchange Group PLC (LSEG), FRC's
ultimate parent company, sold Russell Investments for $1.15 billion to
certain holding companies ultimately owned by certain private equity
funds sponsored by TA Associates Management, LP and Reverence Capital
Partners LP (the Sale). Following the Sale, FRC continues to operate as
a wholly-owned subsidiary of LSEG, whereas RIM and RICap continue to
operate as ``Russell Investments.'' Because FRC is no longer affiliated
with Russell Investments by reason of the Sale, the Applicants have
requested a new exemption that would apply the relief provided under
PTE 2015-17 to the recently sold entities comprising Russell
Investments.
Russell Investments
2. Russell Investments is a global asset management firm providing
investment management products and services to individuals and
institutions in 47 different countries. As of June 30, 2016, Russell
Investments had approximately $244 billion in assets under management.
Among the companies currently comprising Russell Investments are RIM
and RICap.
RIM is an investment adviser registered with the U.S. Securities
and Exchange Commission. RIM provides investment advisers and broker/
dealers with model strategies designed to optimize asset allocation
strategies based on various investment principles, and may also provide
marketing assistance and subject matter expertise to these investment
advisers. RIM may also provide objective setting, asset allocation,
fund and manager selection services directly to pension plans or other
institutional clients. As of December 31, 2016, RIM had total assets
under management of over $40.4 billion, all of which was discretionary.
RICap is also an investment adviser registered with the U.S.
Securities and Exchange Commission. RICap provides general investment
advisory services and acts as an adviser to separate account clients as
well as several private, private equity and hedge funds offered to
select institutional investors. RICap advises private investment funds
which involve privately negotiated equity and equity-related
investments. As of December 31, 2016, RICap had approximately $8.3
billion in assets under management, all of which was discretionary.
Investment Products and Services
3. The Applicants represent that, in the United States, certain
affiliates of Russell Investments make investments in mutual funds and
collective
[[Page 36225]]
investment funds available to Client Plans, and develop investment
products and services for such Client Plans. The investment products
include open-end investment companies registered under the Investment
Company Act of 1940, as amended, for which RIM serves as an investment
adviser or sub-adviser (i.e., the Affiliated Funds). Russell
Investments may also serve as dividend disbursing agent, shareholder
servicing agent, transfer agent, fund accountant, or provider of some
other Secondary Services, including brokerage services, to an
Affiliated Fund.
The Applicants state that other investment products provided by
Russell Investments include bank-maintained common or collective trust
funds and other similar pooled funds including, potentially, insurance
company pooled separate accounts (Collective Funds) managed by Russell
Investments Trust Company, a RIM affiliate.
4. The Applicants represent that the services provided by Russell
Investments may include various types of investment advisory and/or
investment management services which may be rendered at the individual
Plan level, the Collective Fund level, or the Affiliated Fund level.
According to the Applicants, Plan investment advisory, investment
management and similar services include money manager selection, cash
management, individual security selection and trading strategies, as
well as various asset allocation strategies involving asset class
selection and rebalancing, including target date fund ``glidepath''
strategies. Such services include Russell Investments' Adaptive
Retirement Accounts asset allocation service, under which RIM provides
individualized asset allocation advice to defined contribution plan
participants.
5. The Applicants also represent that a Russell Investments entity
acting as a fiduciary may cause a Client Plan to invest directly in one
or more Affiliated Funds. It is also possible, the Applicants state,
that a Russell Investments entity acting as a fiduciary to plans
participating in a Collective Fund may cause a Client Plan to invest
indirectly in Affiliated Funds by directing the investment of a
Collective Fund in which a Client Plan participates into one or more
Affiliated Funds.
Prohibited Transactions
6. Section 3(14)(A) and (B) of the Act defines the term ``party in
interest'' to include, respectively, any fiduciary of a plan and any
person providing services to a plan. Section 3(21)(A) of the Act
provides, in relevant part, that a person is a fiduciary with respect
to a plan to the extent that the person: (i) Exercises any
discretionary authority or control respecting management of the Plan or
any authority or control respecting management or disposition of its
assets, or (ii) renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of a plan or has any authority or responsibility to do so.
Russell Investments may currently serve, and may in the future
serve, as investment adviser, investment manager, trustee, or other
fiduciary with respect to Client Plans. Accordingly, pursuant to
section 3(21)(A)(i) and (ii) of the Act, Russell Investments may
currently be, or may in the future be, a fiduciary with respect to
Client Plans which engage in the proposed transactions. As a fiduciary,
Russell Investments may currently be, or may in the future be a party
in interest with respect to Client Plans which engage in the
transactions described in Section I of this proposed exemption.
Section 406(a)(l)(D) of the Act prohibits a fiduciary with respect
to a plan from causing such plan to engage in a transaction, if such
fiduciary knows or should know, that such transaction constitutes a
transfer to, or use by or for the benefit of, a party in interest, of
any assets of such plan. Where Russell Investments, as investment
adviser or manager to a Client Plan, invests plan assets, directly or
indirectly, in shares of a collective fund or a mutual fund that is
managed or advised by Russell Investments, the investment purchase
transaction violates section 406(a)(1)(D) of the Act.
Under section 406(b) of the Act, a fiduciary with respect to a plan
may not: (a) Deal with the assets of a plan in his own interest or for
his own account, (b) act, in his individual or in any other capacity in
any transaction involving a plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of such plan or the
interests of its participants or beneficiaries, or (c) receive any
consideration for his own personal account from any party dealing with
a plan in connection with a transaction involving the assets of such
plan.
Russell Investments, as investment manager or investment adviser to
a Client Plan, may invest plan assets, or cause the investment of plan
assets, directly or indirectly, in shares of a collective fund or
mutual fund, from which Russell Investments receives compensation. Such
added compensation would violate section 406(b)(1) and (b)(2) of the
Act.
With respect to section 406(b)(3) of the Act, Russell Investments,
as investment manager or investment adviser to a Client Plan, may
receive investment advisory fees and ``secondary services'' fees from
one or more collective funds or mutual funds in connection with a
Client Plan's investment in such funds, subject to the terms and
conditions of this proposed exemption, if granted. Such payments would
implicate section 406(b)(3) of ERISA.
Prohibited Transaction Exemption 77-4 (PTE 77-4)
7. The Applicants represent that all of the Russell Investments
entities to which the exemption would apply are currently part of the
same controlled group. In this regard, Russell Investments maintains
that--if and to the extent that Russell Investments invests Client Plan
assets (directly or indirectly via Collective Funds) in Affiliated
Funds, such Russell Investments entities can rely on the relief
provided pursuant to PTE 77-4 (42 FR 18732 (April 8, 1977)), except as
described below. PTE 77-4 exempts certain purchases and sales by a plan
of shares of a registered, open-ended investment company, where the
investment adviser of such fund: (a) Is a plan fiduciary or affiliated
with a plan fiduciary; and (b) is not an employer of employees covered
by the plan.
8. Russell Investments represents that the requested relief is
essentially the same as that afforded by PTE 77-4, with the exception
of the use of a ``negative consent'' procedure, as discussed below for:
(a) Approving Fee Increases with respect to Affiliated Funds, and (b)
approving in advance the addition of Affiliated Funds (not previously
authorized) as investments ``inside'' a Russell Investments Collective
Fund, subject to notice and a right to terminate the original approval
at the time a new Affiliated Fund is proposed to be added.
Russell Investments maintains that obtaining advance written
approval from a Second Fiduciary can be difficult, particularly in the
case of a Collective Fund, where a Second Fiduciary from every
investing Client Plan must provide written approval before fees payable
to Russell Investments by an Affiliated Fund in which such Client Plans
invest indirectly via a Collective Fund can be increased, or before a
new investment in an Affiliated Fund that was not previously authorized
can be made. Affirmative consent may also be difficult to obtain in a
timely fashion in the context of smaller Client Plans.
[[Page 36226]]
Negative Consent for Fee Increases
9. Russell Investments requests a negative consent procedure for:
(a) Any increase in the rate of a fee previously authorized in writing
by the Second Fiduciary of an affected Client Plan; (b) any increase in
any fee that results from an addition of services for which a fee is
charged; (c) any increase in any fee that results from a decrease in
the number or kind of services performed for such fee over an existing
rate for such service previously authorized by the Second Fiduciary;
and (d) any increase in a fee that results from Russell Investments
changing from one of the fee methods to another of the fee methods.
To obtain negative consent authorization with regard to a Fee
Increase, Russell Investments must provide certain disclosures, in
writing, thirty (30) days in advance of any proposed Fee Increase,
including but not limited to any Fee Increase for Secondary Services,
as such services are described below. Such disclosures would be
delivered by regular mail or personal delivery (or if the Second
Fiduciary consents by electronic means), and are to be accompanied by a
Termination Form and instructions on the use of such form.
The exemption would permit Russell Investments to implement a Fee
Increase, without waiting until the expiration of the thirty (30) day
period, provided that implementation of such Fee Increase does not
start before Russell Investments delivers to each affected Client Plan
the Notice of Intent of Change of Fees, as described in Section II(k),
and provided further that any affected Client Plan receives a cash
credit equal to its pro rata share of such Fee Increase, for the period
from the date of the implementation of such Fee Increase to the earlier
of the date of the termination of the investment or the thirtieth
(30th) day after the date Russell Investments delivers the Notice of
Change of Fee to the Second Fiduciary of each affected Client Plan. In
addition, Russell Investments must pay to each affected Client Plan
interest on such cash credit. An independent auditor, on at least an
annual basis, will verify the proper crediting of the pro rata share of
each such Fee Increase and interest. An audit report shall be completed
by such auditor no later than six (6) months after the period to which
it relates.
Failure of the Second Fiduciary to return the Termination Form or
to provide some other written notification of the intent to terminate
within a certain period of time will be deemed to be approval of the
proposed Fee Increase, including but not limited to an increase in the
fee for Secondary Services.
Negative Consent for New Affiliated Funds
10. The exemption would further permit a Russell Investments
Collective Fund holding the assets of a Client Plan, such as a Target
Date Fund, to purchase shares of an Affiliated Fund not previously
affirmatively authorized by the Second Fiduciary of such Client Plan,
provided: (a) The organizational document of such Collective Fund
expressly provides for the addition of one or more Affiliated Funds to
the portfolio of such Collective Fund and such organizational document
is disclosed initially to such Client Plan; and (b) Russell Investments
satisfies the requirements of the negative consent procedure for
obtaining the approval of the Second Fiduciary for each Client Plan
invested in such Collective Fund at the time Russell Investments
proposes to add an Affiliated Fund to such Collective Fund's portfolio.
Specifically, the Second Fiduciary of each Client Plan invested in
such Collective Fund would receive in advance: (a) A notice of Russell
Investments' intent to add an Affiliated Fund to the portfolio of such
Collective Fund; and (b) certain disclosures in writing, including a
summary prospectus of such Affiliated Fund.
The disclosures are delivered by regular mail or personal delivery
(or if the Second Fiduciary consents, by electronic means), and are
accompanied by a Termination Form and instructions on the use of such
form.
Failure of the Second Fiduciary to return the Termination Form or
to provide some other written notification of the intent to terminate
within a certain period of time will be deemed to be approval of the
investment by such Collective Fund in such Affiliated Fund.
Authorizations for fee increases and new affiliated funds may also
be made affirmatively, in writing, by a Second Fiduciary, in a manner
that is otherwise consistent with the requirements of the exemption.
11. Russell Investments represents that because the Second
Fiduciary of each Client Plan will receive all of the necessary
disclosures and will have an opportunity to terminate the investment in
any Affiliated Fund without penalty, such Client Plan and its
participants and beneficiaries are adequately protected. Further,
Russell Investments states that to the extent it finds it desirable to
create an Affiliated Fund with new investment goals, the negative
consent procedure will facilitate the addition of an Affiliated Fund
into the portfolios of Russell Investments' Collective Funds.
Electronic Disclosures
12. Russell Investments may utilize electronic mail with hyperlinks
to documents required to be disclosed by this proposed exemption.
Russell Investments will ``actively'' satisfy the various disclosure
requirements of this proposed exemption by transmitting emails, rather
than relying on ``passive'' postings on a Web site. Russell Investments
represents that this method of disclosure will be consistent with the
Department's regulations at 29 CFR 2520.104b-l. Russell Investments
represents that Client Plans which do not authorize electronic delivery
will receive in advance hard copies of the documents required to be
disclosed, and hard copies of documents will also be available on
request.
Termination
13. A Client Plan invested directly in shares of an Affiliated Fund
or invested indirectly through a Collective Fund will have an
opportunity to terminate and withdraw from investment in such
Affiliated Fund, and, as applicable, to terminate and withdraw from
investment in such Collective Fund in the event of a Fee Increase and
in the event of the addition of an Affiliated Fund to the portfolio of
a Collective Fund. In this regard, a Second Fiduciary will be provided
with a Termination Form at least annually and may terminate the
authorization to invest directly in shares of an Affiliated Fund or
indirectly through a Collective Fund, at will, without penalty to a
Client Plan. Termination of the authorization by the Second Fiduciary
of a Client Plan investing directly in shares of an Affiliated Fund
will result in such Client Plan withdrawing from such Affiliated Fund.
Termination of the authorization by the Second Fiduciary of a Client
Plan investing indirectly in shares of an Affiliated Fund through a
Collective Fund will result in such Client Plan withdrawing from such
Collective Fund.
Generally, Russell Investments will process timely requests for
withdrawal from an Affiliated Fund within one (1) business day.
Withdrawal from a Collective Fund will generally be processed within
the same time frame, subject to rules designed to ensure orderly
withdrawals and fairness for the withdrawing Client Plans and non-
withdrawing Client Plans, but in no event shall such withdrawal be
implemented by Russell Investments more than five (5) business days
after
[[Page 36227]]
receipt by Russell Investments of a Termination Form or other written
notification of intent to terminate investment in such Collective Fund
from the Second Fiduciary acting on behalf of the withdrawing Client
Plan. Russell Investments will pay interest on the settlement amount
for the period from receipt by Russell Investments of a Termination
Form or other written notification of intent to terminate from the
Second Fiduciary, acting on behalf of the withdrawing Client Plan, to
the date Russell Investments pays the settlement amount, plus interest
thereon.
From the date a Client Plan terminates its investment in an
Affiliated Fund, such Client Plan will not be subject to pay a pro rata
share of the fees received by Russell Investments from such Affiliated
Fund. Likewise, from the date a Client Plan terminates its investment
in a Collective Fund, such Client Plan will not be subject to pay a pro
rata share of the fees received by Russell Investments from such
Collective Fund, nor will such Client Plan be subject to changes in the
portfolio of such Collective Fund, including a pro rata share of any
Affiliated Fund-Level Advisory Fee arising from the investment by such
Collective Fund in an Affiliated Fund.
Receipt of Fees Pursuant to the Fee Methods
14. The exemption, if granted, includes conditions which detail
various methods which ensure that Russell Investments complies with the
prohibition against a Client Plan paying double investment management
fees, investment advisory, and similar fees for the assets of Client
Plans invested directly in shares of an Affiliated Fund or invested
indirectly in shares of an Affiliated Fund though a Collective Fund.
These methods are described below in Section II(a)(l)-(3).
Receipt of Fees for Secondary Services
15. Russell Investments may also receive various fees and expenses
for ``Secondary Services,'' which are services other than investment
management services, investment advisory services, and any similar
service, which are provided by Russell Investments to an Affiliated
Fund. These services include accounting, administrative and brokerage
services. It is represented that all fees for Secondary Services
received by Russell Investments at this time are paid to Russell
Investments directly by the Affiliated Funds. The negative consent
procedure applicable for a Fee Increase for Secondary Services is
discussed above.
Russell Investments affiliates may receive commissions for the
performance of brokerage services for the mutual funds. Under the
conditions of this proposed exemption, if an Affiliated Fund places
brokerage transactions with Russell Investments, Russell Investments
will provide the Second Fiduciary of each such Client Plan, at least
annually, the disclosure described in Section II(o) of this proposed
exemption.
Statutory Findings
16. According to the Applicants, the use of a Termination Form will
provide both a record and a regular reminder to the Second Fiduciary of
a Client Plan of such plan's rights vis-[agrave]-vis investing in
Affiliated Funds, either directly or indirectly through a Collective
Fund. Further the Applicants state that with very narrow exceptions
relating to the negative consent authorizations described above, all of
the conditions of PTE 77-4, as amended and/or restated, must be met.
17. The Applicants represent that the proposed exemption is in the
interest of Client Plans, because it will allow Russell Investments to
manage or advise with respect to the assets of such Client Plans
invested in shares of an Affiliated Fund, either directly or indirectly
through a Collective Fund, in an efficient or timely manner and on
terms that might not otherwise be available without exemptive relief.
18. The Applicants represent that the proposed exemption is
protective of Client Plans because: (a) Prior to any investment by a
Client Plan directly or indirectly in shares of an Affiliated Fund,
such investment must be authorized by the Second Fiduciary of such
Client Plan, based on full and detailed written disclosure concerning
such Affiliated Fund; (b) Fee Increases and Affiliated Fund additions
to the portfolios of Collective Funds will be monitored and approved by
the Second Fiduciary, who will have the ability to avoid the effect of
such Fee Increases of Affiliated Fund additions; (c) Client Plan
investments in shares of an Affiliated Fund, either directly or
indirectly, will be subject to the ongoing ability of the Second
Fiduciary of such Client Plan to terminate such investment, without
penalty to such Client Plan; (d) Russell Investments will provide to
such Second Fiduciary, in addition to certain initial disclosures,
ongoing disclosures regarding such Affiliated Funds; and (e) Russell
Investments, in its fiduciary capacity, will: (i) Act in the Best
Interest of the Client Plans; (ii) charge fees which are reasonable in
relation to the total services it provides to Client Plans; and (iii)
not make misleading statements to Client Plans regarding recommended
investments, fees, material conflicts of interest, and any other
matters relevant to a Client Plan's investment decisions.
Summary
19. Given the conditions described below, the Department has
tentatively determined that the relief sought by the Applicants
satisfies the statutory requirements for an exemption under section
408(a) of the Act.
Proposed Exemption Operative Language
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (76 FR
46637, 66644, October 27, 2011).
Section I. Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D) and 406(b) of the Act, and the sanctions resulting from
the application of section 4975 of the Code, by reason of sections
4975(c)(1)(D) through (F) of the Code, shall not apply, effective June
1, 2016, to:
(a) The receipt of a fee by Russell Investments, from an Affiliated
Fund, in connection with the direct investment in shares of any such
Affiliated Fund, by a Client Plan, where Russell Investments serves as
a fiduciary with respect to such Client Plan, and where Russell
Investments:
(1) Provides investment advisory services, or similar services to
any such Affiliated Fund; and
(2) Provides to any such Affiliated Fund other services (Secondary
Service(s)), as defined below in Section IV(i); and
(b) In connection with the indirect investment by a Client Plan in
shares of an Affiliated Fund through investment in a pooled investment
vehicle or pooled investment vehicles (Collective Fund(s)), where
Russell Investments serves as a fiduciary with respect to such Client
Plan, the receipt of fees by Russell Investments from:
(1) An Affiliated Fund for the provision of investment advisory
services, or similar services by Russell Investments to any such
Affiliated Fund; and
(2) An Affiliated Fund for the provision of Secondary Services by
Russell Investments to any such Affiliated Fund; provided that the
[[Page 36228]]
conditions, as set forth below, were satisfied, as of June 1, 2016, the
effective date of this exemption, and continue to be satisfied
thereafter.
Section II. Specific Conditions
(a)(1) Each Client Plan which is invested directly in shares of an
Affiliated Fund either:
(i) Does not pay to Russell Investments, for the entire period of
such investment, any investment management fee, any investment advisory
fee, or any similar fee at the plan-level (the Plan-Level Management
Fee), as defined below in Section IV(m), with respect to any of the
assets of such Client Plan which are invested directly in shares of
such Affiliated Fund; or
(ii) Pays to Russell Investments a Plan-Level Management Fee, based
on total assets of such Client Plan under management by Russell
Investments at the plan-level, from which a credit has been subtracted
from such Plan-Level Management Fee, where the amount subtracted
represents such Client Plan's pro rata share of any investment advisory
fee and any similar fee (the Affiliated Fund Level Advisory Fee), as
defined below in Section IV(o), paid by such Affiliated Fund to Russell
Investments.
If, during any fee period, in the case of a Client Plan invested
directly in shares of an Affiliated Fund, such Client Plan has prepaid
its Plan Level Management Fee, and such Client Plan purchases shares of
an Affiliated Fund directly, the requirement of this Section
II(a)(1)(ii) shall be deemed met with respect to such prepaid Plan-
Level Management Fee, if, by a method reasonably designed to accomplish
the same, the amount of the prepaid Plan-Level Management Fee that
constitutes the fee with respect to the assets of such Client Plan
invested directly in shares of an Affiliated Fund:
(A) Is anticipated and subtracted from the prepaid Plan-Level
Management Fee at the time of the payment of such fee; or
(B) Is returned to such Client Plan, no later than during the
immediately following fee period; or
(C) Is offset against the Plan-Level Management Fee for the
immediately following fee period or for the fee period immediately
following thereafter.
For purposes of Section II(a)(1)(ii), a Plan-Level Management Fee
shall be deemed to be prepaid for any fee period, if the amount of such
Plan-Level Management Fee is calculated as of a date not later than the
first day of such period.
(2) Each Client Plan invested in a Collective Fund the assets of
which are not invested in shares of an Affiliated Fund:
(i) Does not pay to Russell Investments for the entire period of
such investment any Plan-Level Management Fee with respect to any
assets of such Client Plan invested in such Collective Fund.
The requirements of this Section II(a)(2)(i) do not preclude the
payment of a Collective Fund-Level Management Fee by such Collective
Fund to Russell Investments, based on the assets of such Client Plan
invested in such Collective Fund; or
(ii) Does not pay to Russell Investments for the entire period of
such investment any Collective Fund-Level Management Fee with respect
to any assets of such Client Plan invested in such Collective Fund.
The requirements of this Section II(a)(2)(ii) do not preclude the
payment of a Plan-Level Management Fee by such Client Plan to Russell
Investments, based on total assets of such Client Plan under management
by Russell Investments at the plan-level; or
(iii) Such Client Plan pays to Russell Investments a Plan-Level
Management Fee, based on total assets of such Client Plan under
management by Russell Investments at the plan-level, from which a
credit has been subtracted from such Plan-Level Management Fee (the
``Net'' Plan-Level Management Fee), where the amount subtracted
represents such Client Plan's pro rata share of any Collective Fund-
Level Management Fee paid by such Collective Fund to Russell
Investments.
The requirements of this Section II(a)(2)(iii) do not preclude the
payment of a Collective Fund-Level Management Fee by such Collective
Fund to Russell Investments, based on the assets of such Client Plan
invested in such Collective Fund.
(3) Each Client Plan invested in a Collective Fund, the assets of
which are invested in shares of an Affiliated Fund:
(i) Does not pay to Russell Investments for the entire period of
such investment any Plan-Level Management Fee (including any ``Net''
Plan-Level Management Fee, as described, above, in Section
II(a)(2)(ii)), and does not pay directly to Russell Investments or
indirectly to Russell Investments through the Collective Fund for the
entire period of such investment any Collective Fund-Level Management
Fee with respect to the assets of such Client Plan which are invested
in such Affiliated Fund; or
(ii) Pays indirectly to Russell Investments a Collective Fund-Level
Management Fee, in accordance with Section II(a)(2)(i) above, based on
the total assets of such Client Plan invested in such Collective Fund,
from which a credit has been subtracted from such Collective Fund-Level
Management Fee, where the amount subtracted represents such Client
Plan's pro rata share of any Affiliated Fund-Level Advisory Fee paid to
Russell Investments by such Affiliated Fund; and does not pay to
Russell Investments for the entire period of such investment any Plan-
Level Management Fee with respect to any assets of such Client Plan
invested in such Collective Fund; or
(iii) Pays to Russell Investments a Plan-Level Management Fee, in
accordance with Section II(a)(2)(ii) above, based on the total assets
of such Client Plan under management by Russell Investments at the
plan-level, from which a credit has been subtracted from such Plan-
Level Management Fee, where the amount subtracted represents such
Client Plan's pro rata share of any Affiliated Fund-Level Advisory Fee
paid to Russell Investments by such Affiliated Fund; and does not pay
directly to Russell Investments or indirectly to Russell Investments
through the Collective Fund for the entire period of such investment
any Collective Fund-Level Management Fee with respect to any assets of
such Client Plan invested in such Collective Fund; or
(iv) Pays to Russell Investments a ``Net'' Plan-Level Management
Fee, in accordance with Section II(a)(2)(iii) above, from which a
further credit has been subtracted from such ``Net'' Plan-Level
Management Fee, where the amount of such further credit which is
subtracted represents such Client Plan's pro rata share of any
Affiliated Fund-Level Advisory Fee paid to Russell Investments by such
Affiliated Fund.
Provided that the conditions of this proposed exemption are
satisfied, the requirements of Section II(a)(1)(i)-(ii) and Section
II(a)(3)(i)-(iv) do not preclude the payment of an Affiliated Fund-
Level Advisory Fee by an Affiliated Fund to Russell Investments under
the terms of an investment advisory agreement adopted in accordance
with section 15 of the Investment Company Act of 1940 (the Investment
Company Act). Further, the requirements of Section II(a)(1)(i)-(ii) and
Section II(a)(3)(i)-(iv) do not preclude the payment of a fee by an
Affiliated Fund to Russell Investments for the provision by Russell
Investments of Secondary Services to such Affiliated Fund under the
terms of a duly adopted agreement between Russell Investments and such
Affiliated Fund.
For the purpose of Section II(a)(1)(ii) and Section II(a)(3)(ii)-
(iv), in
[[Page 36229]]
calculating a Client Plan's pro rata share of an Affiliated Fund-Level
Advisory Fee, Russell Investments must use an amount representing the
``gross'' advisory fee paid to Russell Investments by such Affiliated
Fund. For purposes of this paragraph, the ``gross'' advisory fee is the
amount paid to Russell Investments by such Affiliated Fund, including
the amount paid by such Affiliated Fund to sub-advisers.
(b) The purchase price paid and the sales price received by a
Client Plan for shares in an Affiliated Fund purchased or sold
directly, and the purchase price paid and the sales price received by a
Client Plan for shares in an Affiliated Fund purchased or sold
indirectly through a Collective Fund, is the net asset value per share
(NAV), as defined below in Section IV(f), at the time of the
transaction, and is the same purchase price that would have been paid
and the same sales price that would have been received for such shares
by any other shareholder of the same class of shares in such Affiliated
Fund at that time.\15\
---------------------------------------------------------------------------
\15\ The selection of a particular class of shares of an
Affiliated Fund as an investment for a Client Plan indirectly
through a Collective Fund is a fiduciary decision that must be made
in accordance with the provisions of section 404(a) of the Act.
---------------------------------------------------------------------------
(c) Russell Investments, including any officer and any director of
Russell Investments, does not purchase any shares of an Affiliated Fund
from, and does not sell any shares of an Affiliated Fund to, any Client
Plan which invests directly in such Affiliated Fund, and Russell
Investments, including any officer and director of Russell Investments,
does not purchase any shares of any Affiliated Fund from, and does not
sell any shares of an Affiliated Fund to, any Collective Fund in which
a Client Plan invests indirectly in shares of such Affiliated Fund.
(d) No sales commissions, no redemption fees, and no other similar
fees are paid in connection with any purchase and in connection with
any sale by a Client Plan directly in shares of an Affiliated Fund, and
no sales commissions, no redemption fees, and no other similar fees are
paid by a Collective Fund in connection with any purchase, and in
connection with any sale, of shares in an Affiliated Fund by a Client
Plan indirectly through such Collective Fund. However, this Section
II(d) does not prohibit the payment of a redemption fee, if:
(1) Such redemption fee is paid only to an Affiliated Fund; and
(2) The existence of such redemption fee is disclosed in the
summary prospectus for such Affiliated Fund in effect both at the time
of any purchase of shares in such Affiliated Fund and at the time of
any sale of such shares.
(e) The combined total of all fees received by Russell Investments
is not in excess of reasonable compensation within the meaning of
section 408(b)(2) of the Act, for services provided:
(1) By Russell Investments to each Client Plan;
(2) By Russell Investments to each Collective Fund in which a
Client Plan invests;
(3) By Russell Investments to each Affiliated Fund in which a
Client Plan invests directly in shares of such Affiliated Fund; and
(4) By Russell Investments to each Affiliated Fund in which a
Client Plan invests indirectly in shares of such Affiliated Fund
through a Collective Fund.
(f) Russell Investments does not receive any fees payable pursuant
to Rule 12b-1 under the Investment Company Act in connection with the
transactions covered by this proposed exemption;
(g) No Client Plan is an employee benefit plan sponsored or
maintained by Russell Investments.
(h)(1) In the case of a Client Plan investing directly in shares of
an Affiliated Fund, a second fiduciary (the Second Fiduciary), as
defined below in Section IV(h), acting on behalf of such Client Plan,
receives, in writing, in advance of any investment by such Client Plan
directly in shares of such Affiliated Fund, a full and detailed
disclosure via first class mail or via personal delivery of (or, if the
Second Fiduciary consents to such means of delivery, through electronic
email, in accordance with Section II(q), as set forth below)
information concerning such Affiliated Fund, including but not limited
to the items listed below:
(i) A current summary prospectus issued by each such Affiliated
Fund;
(ii) A statement describing the fees, including the nature and
extent of any differential between the rates of such fees for:
(A) Investment advisory and similar services to be paid to Russell
Investments by each Affiliated Fund;
(B) Secondary Services to be paid to Russell Investments by each
such Affiliated Fund; and
(C) All other fees to be charged by Russell Investments to such
Client Plan and to each such Affiliated Fund and all other fees to be
paid to Russell Investments by each such Client Plan and by each such
Affiliated Fund;
(iii) The reasons why Russell Investments may consider investment
directly in shares of such Affiliated Fund by such Client Plan to be
appropriate for such Client Plan;
(iv) A statement describing whether there are any limitations
applicable to Russell Investments with respect to which assets of such
Client Plan may be invested directly in shares of such Affiliated Fund,
and if so, the nature of such limitations; and
(v) Upon the request of the Second Fiduciary acting on behalf of
such Client Plan, a copy of the Notice of Proposed Exemption (the
Notice), a copy of the final exemption, if granted, and any other
reasonably available information regarding the transactions which are
the subject of this proposed exemption.
(2) In the case of a Client Plan whose assets are proposed to be
invested in a Collective Fund after such Collective Fund has begun
investing in shares of an Affiliated Fund, a Second Fiduciary, acting
on behalf of such Client Plan, receives, in writing, in advance of any
investment by such Client Plan in such Collective Fund, a full and
detailed disclosure via first class mail or via personal delivery (or,
if the Second Fiduciary consents to such means of delivery, through
electronic email, in accordance with Section II(q), as set forth below)
of information concerning such Collective Fund and information
concerning each such Affiliated Fund in which such Collective Fund is
invested, including but not limited to the items listed, below:
(i) A current summary prospectus issued by each such Affiliated
Fund;
(ii) A statement describing the fees, including the nature and
extent of any differential between the rates of such fees for:
(A) Investment advisory and similar services to be paid to Russell
Investments by each Affiliated Fund;
(B) Secondary Services to be paid to Russell Investments by each
such Affiliated Fund; and
(C) All other fees to be charged by Russell Investments to such
Client Plan, to such Collective Fund, and to each such Affiliated Fund
and all other fees to be paid to Russell Investments by such Client
Plan, by such Collective Fund, and by each such Affiliated Fund;
(iii) The reasons why Russell Investments may consider investment
by such Client Plan in shares of each such Affiliated Fund indirectly
through such Collective Fund to be appropriate for such Client Plan;
(iv) A statement describing whether there are any limitations
applicable to Russell Investments with respect to which assets of such
Client Plan may be invested indirectly in shares of each such
Affiliated Fund through such
[[Page 36230]]
Collective Fund, and if so, the nature of such limitations;
(v) Upon the request of the Second Fiduciary, acting on behalf of
such Client Plan, a copy of the Notice, a copy of the final exemption,
if granted, and any other reasonably available information regarding
the transactions which are the subject of this proposed exemption; and
(vi) A copy of the organizational documents of such Collective Fund
which expressly provide for the addition of one or more Affiliated
Funds to the portfolio of such Collective Fund.
(3) In the case of a Client Plan whose assets are proposed to be
invested in a Collective Fund before such Collective Fund has begun
investing in shares of any Affiliated Fund, a Second Fiduciary, acting
on behalf of such Client Plan, receives, in writing, in advance of any
investment by such Client Plan in such Collective Fund, a full and
detailed disclosure via first class mail or via personal delivery (or,
if the Second Fiduciary consents to such means of delivery through
electronic email, in accordance with Section II(q), as set forth below)
of information, concerning such Collective Fund, including but not
limited to, the items listed below:
(i) A statement describing the fees, including the nature and
extent of any differential between the rates of such fees for all fees
to be charged by Russell Investments to such Client Plan and to such
Collective Fund and all other fees to be paid to Russell Investments by
such Client Plan, and by such Collective Fund;
(ii) Upon the request of the Second Fiduciary, acting on behalf of
such Client Plan, a copy of the Notice, a copy of the final exemption,
if granted, and any other reasonably available information regarding
the transactions which are the subject of this proposed exemption; and
(iii) A copy of the organizational documents of such Collective
Fund which expressly provide for the addition of one or more Affiliated
Funds to the portfolio of such Collective Fund.
(i) On the basis of the information, described above in Section
II(h), a Second Fiduciary, acting on behalf of a Client Plan:
(1) Authorizes in writing the investment of the assets of such
Client Plan, as applicable:
(i) Directly in shares of an Affiliated Fund;
(ii) Indirectly in shares of an Affiliated Fund through a
Collective Fund where such Collective Fund has already invested in
shares of an Affiliated Fund; and
(iii) In a Collective Fund which is not yet invested in shares of
an Affiliated Fund but whose organizational document expressly provides
for the addition of one or more Affiliated Funds to the portfolio of
such Collective Fund; and
(2) Authorizes in writing, as applicable:
(i) The Affiliated Fund-Level Advisory Fee received by Russell
Investments for investment advisory services and similar services
provided by Russell Investments to such Affiliated Fund;
(ii) The fee received by Russell Investments for Secondary Services
provided by Russell Investments to such Affiliated Fund;
(iii) The Collective Fund-Level Management Fee received by Russell
Investments for investment management, investment advisory, and similar
services provided by Russell Investments to such Collective Fund in
which such Client Plan invests;
(iv) The Plan-Level Management Fee received by Russell Investments
for investment management and similar services provided by Russell
Investments to such Client Plan at the plan-level; and
(v) The selection by Russell Investments of the applicable fee
method, as described above in Section II(a)(1)-(3).
All authorizations made by a Second Fiduciary pursuant to this
Section II(i) must be consistent with the responsibilities,
obligations, and duties imposed on fiduciaries by Part 4 of Title I of
the Act;
(j)(1) Any authorization, described above in Section II(i), and any
authorization made pursuant to negative consent, as described below in
Section II(k) and in Section II(l), made by a Second Fiduciary, acting
on behalf of a Client Plan, shall be terminable at will by such Second
Fiduciary, without penalty to such Client Plan (including any fee or
charge related to such penalty), upon receipt by Russell Investments
via first class mail, via personal delivery, or via electronic email of
a written notification of the intent of such Second Fiduciary to
terminate any such authorization;
(2) A form (the Termination Form), expressly providing an election
to terminate any authorization, described above in Section II(i), or to
terminate any authorization made pursuant to negative consent, as
described below in Section II(k) and in Section II(l), with
instructions on the use of such Termination Form, must be provided to
such Second Fiduciary at least annually, either in writing via first
class mail or via personal delivery (or if such Second Fiduciary
consents to such means of delivery through electronic email, in
accordance with Section II(q), as set forth below). However, if a
Termination Form has been provided to such Second Fiduciary pursuant to
Section II(k) or pursuant to Section II(l) below, then a Termination
Form need not be provided pursuant to this Section II(j), until at
least six (6) months, but no more than twelve (12) months, have
elapsed, since the prior Termination Form was provided;
(3) The instructions for the Termination Form must include the
following statements:
(i) Any authorization, described above in Section II(i), and any
authorization made pursuant to negative consent, as described below in
Section II(k) or in Section II(l), is terminable at will by a Second
Fiduciary, acting on behalf of a Client Plan, without penalty to such
Client Plan, upon receipt by Russell Investments via first class mail
or via personal delivery or via electronic email of the Termination
Form, or some other written notification of the intent of such Second
Fiduciary to terminate such authorization;
(ii) Within thirty (30) days from the date the Termination Form is
sent to such Second Fiduciary by Russell Investments, the failure by
such Second Fiduciary to return such Termination Form or the failure by
such Second Fiduciary to provide some other written notification of the
Client Plan's intent to terminate any authorization, described in
Section II(i), or intent to terminate any authorization made pursuant
to negative consent, as described below in Section II(k) or in Section
II(l), will be deemed to be an approval by such Second Fiduciary;
(4) In the event that a Second Fiduciary, acting on behalf of a
Client Plan, at any time returns a Termination Form or returns some
other written notification of intent to terminate any authorization, as
described above in Section II(i), or intent to terminate any
authorization made pursuant to negative consent, as described below in
Section II(k) or in Section II(l);
(i)(A) In the case of a Client Plan which invests directly in
shares of an Affiliated Fund, the termination will be implemented by
the withdrawal of all investments made by such Client Plan in the
affected Affiliated Fund, and such withdrawal will be effected by
Russell Investments within one (1) business day of the date that
Russell Investments receives such Termination Form or receives from the
Second Fiduciary, acting on behalf of such Client Plan,
[[Page 36231]]
some other written notification of intent to terminate any such
authorization;
(B) From the date a Second Fiduciary, acting on behalf of a Client
Plan that invests directly in shares of an Affiliated Fund, returns a
Termination Form or returns some other written notification of intent
to terminate such Client Plan's investment in such Affiliated Fund,
such Client Plan will not be subject to pay a pro rata share of any
Affiliated Fund-Level Advisory Fee and will not be subject to pay any
fees for Secondary Services paid to Russell Investments by such
Affiliated Fund, or any other fees or charges;
(ii)(A) In the case of a Client Plan which invests in a Collective
Fund, the termination will be implemented by the withdrawal of such
Client Plan from all investments in such affected Collective, and such
withdrawal will be implemented by Russell Investments within such time
as may be necessary for withdrawal in an orderly manner that is
equitable to the affected withdrawing Client Plan and to all non-
withdrawing Client Plans, but in no event shall such withdrawal be
implemented by Russell Investments more than five business (5) days
after the day Russell Investments receives from the Second Fiduciary,
acting on behalf of such withdrawing Client Plan, a Termination Form or
receives some other written notification of intent to terminate the
investment of such Client Plan in such Collective Fund, unless such
withdrawal is otherwise prohibited by a governmental entity with
jurisdiction over the Collective Fund, or the Second Fiduciary fails to
instruct Russell Investments as to where to reinvest or send the
withdrawal proceeds; and
(B) From the date Russell Investments receives from a Second
Fiduciary, acting on behalf of a Client Plan, that invests in a
Collective Fund, a Termination Form or receives some other written
notification of intent to terminate such Client Plan's investment in
such Collective Fund, such Client Plan will not be subject to pay a pro
rata share of any fees arising from the investment by such Client Plan
in such Collective Fund, including any Collective Fund-Level Management
Fee, nor will such Client Plan be subject to any other charges to the
portfolio of such Collective Fund, including a pro rata share of any
Affiliated Fund-Level Advisory Fee and any fee for Secondary Services
arising from the investment by such Collective Fund in an Affiliated
Fund.
(k)(1) Russell Investments, at least thirty (30) days in advance of
the implementation of each fee increase (Fee Increase(s)), as defined
below in Section IV(l), must provide in writing via first class mail or
via personal delivery (or if the Second Fiduciary consents to such
means of delivery through electronic email, in accordance with Section
II(q), as set forth below), a notice of change in fees (the Notice of
Change in Fees) (which may take the form of a proxy statement, letter,
or similar communication which is separate from the summary prospectus
of such Affiliated Fund) and which explains the nature and the amount
of such Fee Increase to the Second Fiduciary of each affected Client
Plan. Such Notice of Change in Fees shall be accompanied by a
Termination Form and by instructions on the use of such Termination
Form, as described above in Section II(j)(3);
(2) Subject to the crediting, interest-payback, and other
requirements below, for each Client Plan affected by a Fee Increase,
Russell Investments may implement such Fee Increase without waiting for
the expiration of the 30-day period, described above in Section
II(k)(1), provided Russell Investments does not begin implementation of
such Fee Increase before the first day of the 30-day period, described
above in Section II(k)(1), and provided further that the following
conditions are satisfied:
(i) Russell Investments delivers, in the manner described in
Section II(k)(1), to the Second Fiduciary for each affected Client
Plan, the Notice of Change of Fees, as described in Section II(k)(1),
accompanied by the Termination Form and by instructions on the use of
such Termination Form, as described above in Section II(j)(3);
(ii) Each affected Client Plan receives from Russell Investments a
credit in cash equal to each such Client Plan's pro rata share of such
Fee Increase to be received by Russell Investments for the period from
the date of the implementation of such Fee Increase to the earlier of:
(A) The date when an affected Client Plan, pursuant to Section
II(j), terminates any authorization, as described above in Section
II(i), or terminates any negative consent authorization, as described
in Section II(k) or in Section II(l); or
(B) The 30th day after the day that Russell Investments delivers to
the Second Fiduciary of each affected Client Plan the Notice of Change
of Fees, described in Section II(k)(1), accompanied by the Termination
Form and by the instructions on the use of such Termination Form, as
described above in Section II(j)(3).
(iii) Russell Investments pays to each affected Client Plan the
cash credit, as described above in Section II(k)(2)(ii), with interest
thereon, no later than five (5) business days following the earlier of:
(A) The date such affected Client Plan, pursuant to Section II(j),
terminates any authorization, as described above in Section II(i), or
terminates, any negative consent authorization, as described in Section
II(k) or in Section II(l); or
(B) The 30th day after the day that Russell Investments delivers to
the Second Fiduciary of each affected Client Plan, the Notice of Change
of Fees, described in Section II(k)(1), accompanied by the Termination
Form and instructions on the use of such Termination Form, as described
above in Section II(j)(3);
(iv) Interest on the credit in cash is calculated at the prevailing
Federal funds rate plus two percent (2%) for the period from the day
Russell Investments first implements the Fee Increase to the date
Russell Investments pays such credit in cash, with interest thereon, to
each affected Client Plan;
(v) An independent accounting firm (the Auditor) at least annually
audits the payments made by Russell Investments to each affected Client
Plan, audits the amount of each cash credit, plus the interest thereon,
paid to each affected Client Plan, and verifies that each affected
Client Plan received the correct amount of cash credit and the correct
amount of interest thereon;
(vi) Such Auditor issues an audit report of its findings no later
than six (6) months after the period to which such audit report
relates, and provides a copy of such audit report to the Second
Fiduciary of each affected Client Plan; and
(3) Within thirty (30) days from the date Russell Investments sends
to the Second Fiduciary of each affected Client Plan, the Notice of
Change of Fees and the Termination Form, the failure by such Second
Fiduciary to return such Termination Form and the failure by such
Second Fiduciary to provide some other written notification of the
Client Plan's intent to terminate the authorization, described in
Section II(i), or to terminate the negative consent authorization, as
described in Section II(k) or in Section II(l), will be deemed to be an
approval by such Second Fiduciary of such Fee Increase.
(l) Effective upon the date that the final exemption is granted, in
the case of (a) a Client Plan which has received the disclosures
detailed in Section II(h)(2)(i), II(h)(2)(ii)(A), II(h)(2)(ii)(B),
II(h)(2)(ii)(C), II(h)(2)(iii), II(h)(2)(iv),
[[Page 36232]]
II(h)(2)(v), and II(h)(2)(vi), and which has authorized the investment
by such Client Plan in a Collective Fund in accordance with Section
II(i)(1)(ii) above, and (b) a Client Plan which has received the
disclosures detailed in Section II(h)(3)(i), II(h)(3)(ii), and
II(h)(3)(iii), and which has authorized investment by such Client Plan
in a Collective Fund, in accordance with Section II(i)(1)(iii) above,
the authorization pursuant to negative consent in accordance with this
Section II(l), applies to:
(1) The purchase, as an addition to the portfolio of such
Collective Fund, of shares of an Affiliated Fund (a New Affiliated
Fund) where such New Affiliated Fund has not been previously authorized
pursuant to Section II(i)(1)(ii), or, as applicable, Section
II(i)(1)(iii), and such Collective Fund may commence investing in such
New Affiliated Fund without further written authorization from the
Second Fiduciary of each Client Plan invested in such Collective Fund,
provided that:
(i) The organizational documents of such Collective Fund expressly
provide for the addition of one or more Affiliated Funds to the
portfolio of such Collective Fund, and such documents were disclosed in
writing via first class mail or via personal delivery (or, if the
Second Fiduciary consents to such means of delivery, through electronic
email, in accordance with Section II(q)) to the Second Fiduciary of
each such Client Plan invested in such Collective Fund, in advance of
any investment by such Client Plan in such Collective Fund;
(ii) At least thirty (30) days in advance of the purchase by a
Client Plan of shares of such New Affiliated Fund indirectly through a
Collective Fund, Russell Investments provides, either in writing via
first class or via personal delivery (or if the Second Fiduciary
consents to such means of delivery through electronic email, in
accordance with Section II(q)) to the Second Fiduciary of each Client
Plan having an interest in such Collective Fund, full and detailed
disclosures about such New Affiliated Fund, including but not limited
to:
(A) A notice of Russell Investments' intent to add a New Affiliated
Fund to the portfolio of such Collective Fund, where such notice may
take the form of a proxy statement, letter, or similar communication
that is separate from the summary prospectus of such New Affiliated
Fund to the Second Fiduciary of each affected Client Plan;
(B) Such notice of Russell Investments' intent to add a New
Affiliated Fund to the portfolio of such Collective Fund shall be
accompanied by the information described in Section II(h)(2)(i),
II(h)(2)(ii)(A), II(h)(2)(ii)(B), II(h)(2)(ii)(C), II(h)(2)(iii),
II(h)(2)(iv), and II(2)(v) with respect to each such New Affiliated
Fund proposed to be added to the portfolio of such Collective Fund; and
(C) A Termination Form and instructions on the use of such
Termination Form, as described in Section II(j)(3); and
(2) Within thirty (30) days from the date Russell Investments sends
to the Second Fiduciary of each affected Client Plan, the information
described above in Section II(l)(1)(ii), the failure by such Second
Fiduciary to return the Termination Form or to provide some other
written notification of the Client Plan's intent to terminate the
authorization described in Section II(i)(1)(ii), or, as appropriate, to
terminate the authorization, described in Section II(i)(1)(iii), or to
terminate any authorization, pursuant to negative consent, as described
in this Section II(l), will be deemed to be an approval by such Second
Fiduciary of the addition of a New Affiliated Fund to the portfolio of
such Collective Fund in which such Client Plan invests, and will result
in the continuation of the authorization of Russell Investments to
engage in the transactions which are the subject of this proposed
exemption with respect to such New Affiliated Fund.
(m) Russell Investments is subject to the requirement to provide
within a reasonable period of time any reasonably available information
regarding the covered transactions that the Second Fiduciary of such
Client Plan requests Russell Investments to provide.
(n) All dealings between a Client Plan and an Affiliated Fund,
including all such dealings when such Client Plan is invested directly
in shares of such Affiliated Fund and when such Client Plan is invested
indirectly in such shares of such Affiliated Fund through a Collective
Fund, are on a basis no less favorable to such Client Plan, than
dealings between such Affiliated Fund and other shareholders of the
same class of shares in such Affiliated Fund.
(o) In the event a Client Plan invests directly in shares of an
Affiliated Fund, and, as applicable, in the event a Client Plan invests
indirectly in shares of an Affiliated Fund through a Collective Fund,
if such Affiliated Fund places brokerage transactions with Russell
Investments, Russell Investments will provide to the Second Fiduciary
of each such Client Plan, so invested, at least annually a statement
specifying:
(1) The total, expressed in dollars, of brokerage commissions that
are paid to Russell Investments by each such Affiliated Fund;
(2) The total, expressed in dollars, of brokerage commissions that
are paid by each such Affiliated Fund to brokerage firms unrelated to
Russell Investments;
(3) The average brokerage commissions per share, expressed as cents
per share, paid to Russell Investments I by each such Affiliated Fund;
and
(4) The average brokerage commissions per share, expressed as cents
per share, paid by each such Affiliated Fund to brokerage firms
unrelated to Russell Investments;
(p)(1) Russell Investments provides to the Second Fiduciary of each
Client Plan invested directly in shares of an Affiliated Fund with the
disclosures, as set forth below, and at the times set forth below in
Section II(p)(1)(i), II(p)(1)(ii), II(p)(1)(iii), II(p)(1)(iv), and
II(p)(1)(v), either in writing via first class mail or via personal
delivery (or if the Second Fiduciary consents to such means of
delivery, through electronic email, in accordance with Section II(q) as
set forth below):
(i) Annually, with a copy of the current summary prospectus for
each Affiliated Fund in which such Client Plan invests directly in
shares of such Affiliated Fund;
(ii) Upon the request of such Second Fiduciary, a copy of the
statement of additional information for each Affiliated Fund in which
such Client Plan invests directly in shares of such Affiliated Fund
which contains a description of all fees paid by such Affiliated Fund
to Russell Investments;
(iii) With regard to any Fee Increase received by Russell
Investments pursuant to Section II(k)(2), a copy of the audit report
referred to in Section II(k)(2)(v) within sixty (60) days of the
completion of such audit report;
(iv) Oral or written responses to the inquiries posed by the Second
Fiduciary of such Client Plan, as such inquiries arise; and
(v) Annually, with a Termination form, as described in Section
II(j)(1), and instructions on the use of such form, as described in
Section II(j)(3), except that if a Termination Form has been provided
to such Second Fiduciary, pursuant to Section II(k) or pursuant to
Section II(l), then a Termination Form need not be provided again
pursuant to this Section II(p)(1)(v) until at least six (6) months but
no more than twelve (12) months have elapsed since a Termination Form
was provided.
(2) Russell Investments provides to the Second Fiduciary of each
Client
[[Page 36233]]
Plan invested in a Collective Fund, with the disclosures, as set forth
below, and at the times set forth below in Section II(p)(2)(i),
II(p)(2)(ii), II(p)(2)(iii), II(p)(2)(iv), II(p)(2)(v), II(p)(2)(vi),
II(p)(2)(vii), and II(p)(2)(viii), either in writing via first class
mail or via personal delivery (or if the Second Fiduciary consents to
such means of delivery, through electronic email, in accordance with
Section II(q), as set forth below:
(i) Annually, with a copy of the current summary prospectus for
each Affiliated Fund in which such Client Plan invests indirectly in
shares of such Affiliated Fund through each such Collective Fund;
(ii) Upon the request of such Second Fiduciary, a copy of the
statement of additional information for each Affiliated Fund in which
such Client Plan invests indirectly in shares of such Affiliated Fund
through each such Collective Fund which contains a description of all
fees paid by such Affiliated Fund to Russell Investments;
(iii) Annually, with a statement of the Collective Fund-Level
Management Fee for investment management, investment advisory or
similar services paid to Russell Investments by each such Collective
Fund, regardless of whether such Client Plan invests in shares of an
Affiliated Fund through such Collective Fund;
(iv) A copy of the annual financial statement of each such
Collective Fund in which such Client Plan invests, regardless of
whether such Client Plan invests in shares of an Affiliated Fund
through such Collective Fund, within sixty (60) days of the completion
of such financial statement;
(v) With regard to any Fee Increase received by Russell Investments
pursuant to Section II(k)(2), a copy of the audit report referred to in
Section II(k)(2)(v) within sixty (60) days of the completion of such
audit report;
(vi) Oral or written responses to the inquiries posed by the Second
Fiduciary of such Client Plan as such inquiries arise;
(vii) For each Client Plan invested indirectly in shares of an
Affiliated Fund through a Collective Fund, a statement of the
approximate percentage (which may be in the form of a range) on an
annual basis of the assets of such Collective Fund that was invested in
Affiliated Funds during the applicable year; and
(viii) Annually, with a Termination Form, as described in Section
II(j)(1), and instructions on the use of such form, as described in
Section II(j)(3), except that if a Termination Form has been provided
to such Second Fiduciary, pursuant to Section II(k) or pursuant to
Section II(l), then a Termination Form need not be provided again
pursuant to this Section II(p)(2)(viii) until at least six (6) months
but no more than twelve (12) months have elapsed since a Termination
Form was provided.
(q) Any disclosure required herein to be made by Russell
Investments to a Second Fiduciary may be delivered by electronic email
containing direct hyperlinks to the location of each such document
required to be disclosed, which are maintained on a Web site by Russell
Investments, provided:
(1) Russell Investments obtains from such Second Fiduciary prior
consent in writing to the receipt by such Second Fiduciary of such
disclosure via electronic email;
(2) Such Second Fiduciary has provided to Russell Investments a
valid email address; and
(3) The delivery of such electronic email to such Second Fiduciary
is provided by Russell Investments in a manner consistent with the
relevant provisions of the Department's regulations at 29 CFR
2520.104b-1(c) (substituting the word ``Russell Investments'' for the
word ``administrator'' as set forth therein, and substituting the
phrase ``Second Fiduciary'' for the phrase ``the participant,
beneficiary or other individual'' as set forth therein).
(r) The authorizations described in Sections II(k) or II(l) may be
made affirmatively, in writing, by a Second Fiduciary, in a manner that
is otherwise consistent with the requirements of those sections.
(s) All of the conditions of PTE 77-4, as amended and/or restated,
are met. Notwithstanding this, if PTE 77-4 is amended and/or restated,
the requirements of paragraph (e) therein will be deemed to be met with
respect to authorizations described in Section II(l) above, but only to
the extent the requirements of Section II(l) are met. Similarly, if PTE
77-4 is amended and/or restated, the requirements of paragraph (f)
therein will be deemed to be met with respect to authorizations
described in Section II(k) above, if the requirements of Section II(k)
are met.
(t) Standards of Impartial Conduct. If Russell Investments is a
fiduciary within the meaning of section 3(21)(A)(i) or (ii) of the Act,
or section 4975(e)(3)(A) or (B) of the Code, with respect to the assets
of a Client Plan involved in the transaction, Russell Investments must
comply with the following conditions with respect to the transaction:
(1) Russell Investments acts in the Best Interest (as defined below, in
Section IV(q)) of the Client Plan, at the time of the Transaction; (2)
all compensation received by Russell Investments in connection with the
transaction in relation to the total services the fiduciary provides to
the Client Plan does not exceed reasonable compensation within the
meaning of section 408(b)(2) of the Act; and (3) Russell Investments'
statements about recommended investments, fees, material conflicts of
interest,\16\ and any other matters relevant to a Client Plan's
investment decisions are not materially misleading at the time they are
made.
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\16\ A ``material conflict of interest'' exists when a fiduciary
has a financial interest that could affect the exercise of its best
judgment as a fiduciary in rendering advice to a Client Plan. For
this purpose, the failure of Russell Investments to disclose a
material conflict of interest relevant to the services it is
providing to a Client Plan, or other actions it is taking in
relation to a Client Plan's investment decisions, is deemed to be a
misleading statement.
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For purposes of this section, Russell Investments acts in the
``Best Interest'' of the Client Plan when Russell Investments acts with
the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent person would exercise based on the investment
objectives, risk tolerance, financial circumstances, and needs of the
plan or IRA, without regard to the financial or other interests of the
fiduciary, any affiliate or other party.
Section III. General Conditions
(a) Russell Investments maintains for a period of six (6) years the
records necessary to enable the persons, described below in Section
III(b), to determine whether the conditions of this proposed exemption
have been met, except that:
(1) A prohibited transaction will not be considered to have
occurred, if solely because of circumstances beyond the control of
Russell Investments, the records are lost or destroyed prior to the end
of the six-year period; and
(2) No party in interest other than Russell Investments 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 below by Section III(b).
(b)(1) Except as provided in Section III(b)(2) and notwithstanding
any provisions of section 504(a)(2) of the Act, the records referred to
in Section III(a) are unconditionally available at their customary
location for examination during normal business hours by:
(i) Any duly authorized employee or representative of the
Department or the
[[Page 36234]]
Internal Revenue Service, or the Securities & Exchange Commission;
(ii) Any fiduciary of a Client Plan invested directly in shares of
an Affiliated Fund, any fiduciary of a Client Plan who has the
authority to acquire or to dispose of the interest in a Collective Fund
in which a Client Plan invests, any fiduciary of a Client Plan invested
indirectly in an Affiliated Fund through a Collective Fund where such
fiduciary has the authority to acquire or to dispose of the interest in
such Collective Fund, and any duly authorized employee or
representative of such fiduciary; and
(iii) Any participant or beneficiary of a Client Plan invested
directly in shares of an Affiliated Fund or invested in a Collective
Fund, and any participant or beneficiary of a Client Plan invested
indirectly in shares of an Affiliated Fund through a Collective Fund,
and any representative of such participant or beneficiary; and
(2) None of the persons described in Section III(b)(1)(ii) and
(iii) shall be authorized to examine trade secrets of Russell
Investments, or commercial or financial information which is privileged
or confidential.
Section IV. Definitions
For purposes of this proposed exemption:
(a) The term ``Russell Investments'' means RIM (f/k/a Russell
Investment Management Company), RICap, and any affiliate thereof, as
defined below, in Section IV(c).
(b) The term ``Client Plan(s)'' means a 401(k) plan(s), an
individual retirement account(s), other tax-qualified plan(s), and
other plan(s) as defined in the Act and Code, but does not include any
employee benefit plan sponsored or maintained by Russell Investments,
as defined above in Section IV(a).
(c) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Affiliated Fund(s)'' means Russell Investment
Company, a series of mutual funds managed by RIM, and any other
diversified open-end investment company or companies registered with
the Securities and Exchange Commission under the Investment Company
Act, as amended, established and maintained by Russell Investments now
or in the future for which Russell Investments serves as an investment
adviser.
(f) The term ``net asset value per share'' and the term ``NAV''
mean the amount for purposes of pricing all purchases and sales of
shares of an Affiliated Fund, calculated by dividing the value of all
securities, determined by a method as set forth in the summary
prospectus for such Affiliated Fund and in the statement of additional
information, and other assets belonging to such Affiliated Fund or
portfolio of such Affiliated Fund, less the liabilities charged to each
such portfolio or each such Affiliated Fund, by the number of
outstanding shares.
(g) The term ``relative'' means a relative as that term is defined
in section 3(15) of the Act (or a member of the family as that term is
defined in section 4975(e)(6) of the Code), or a brother, a sister, or
a spouse of a brother or a sister.
(h) The term ``Second Fiduciary'' means the fiduciary of a Client
Plan who is independent of and unrelated to Russell Investments. For
purposes of this proposed exemption, the Second Fiduciary will not be
deemed to be independent of and unrelated to Russell Investments if:
(1) Such Second Fiduciary, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common
control with Russell Investments;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary, is an officer,
director, partner, or employee of Russell Investments (or is a relative
of such person); or
(3) Such Second Fiduciary, directly or indirectly, receives any
compensation or other consideration for his or her personal account in
connection with any transaction described in this proposed exemption.
If an officer, director, partner, or employee of Russell Investments
(or relative of such person) is a director of such Second Fiduciary,
and if he or she abstains from participation in:
(i) The decision of a Client Plan to invest in and to remain
invested in shares of an Affiliated Fund directly, the decision of a
Client Plan to invest in shares of an Affiliated Fund indirectly
through a Collective Fund, and the decision of a Client Plan to invest
in a Collective Fund that may in the future invest in shares of an
Affiliated Fund;
(ii) Any authorization in accordance with Section II(i), and any
authorization, pursuant to negative consent, as described in Section
II(k) or in Section II(l); and
(iii) The choice of such Client Plan's investment adviser, then
Section IV(h)(2) above shall not apply.
(i) The term ``Secondary Service(s)'' means a service or services
other than an investment management service, investment advisory
service, and any similar service which is provided by Russell
Investments to an Affiliated Fund, including, but not limited to,
custodial, accounting, administrative services, and brokerage services.
Russell Investments may also serve as a dividend disbursing agent,
shareholder servicing agent, transfer agent, fund accountant, or
provider of some other Secondary Service, as defined in this Section
IV(i).
(j) The term ``Collective Fund(s)'' means a separate account of an
insurance company, as defined in section 2510.3-101(h)(1)(iii) of the
Department's plan assets regulations,\17\ maintained by Russell
Investments, and a bank-maintained common or collective investment
trust maintained by Russell Investments.
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\17\ 51 FR 41262 (November 13, 1986).
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(k) The term ``business day'' means any day that:
(1) Russell Investments is open for conducting all or substantially
all of its business; and
(2) The New York Stock Exchange (or any successor exchange) is open
for trading.
(l) The term ``Fee Increase(s)'' includes any increase by Russell
Investments in a rate of a fee previously authorized in writing by the
Second Fiduciary of each affected Client Plan pursuant to Section
II(i)(2)(i)-(iv) above, and in addition includes, but is not limited
to:
(1) Any increase in any fee that results from the addition of a
service for which a fee is charged;
(2) Any increase in any fee that results from a decrease in the
number of services and any increase in any fee that results from a
decrease in the kind of service(s) performed by Russell Investments for
such fee over an existing rate of fee for each such service previously
authorized by the Second Fiduciary, in accordance with Section
II(i)(2)(i)-(iv) above; and
(3) Any increase in any fee that results from Russell Investments
changing from one of the fee methods, as described above in Section
II(a)(1)-(3), to using another of the fee methods, as described above
in Section II(a)(1)-(3).
[[Page 36235]]
(m) The term ``Plan-Level Management Fee'' includes any investment
management fee, investment advisory fee, and any similar fee paid by a
Client Plan to Russell Investments for any investment management
services, investment advisory services, and similar services provided
by Russell Investments to such Client Plan at the plan-level. The term
``Plan-Level Management Fee'' does not include a separate fee paid by a
Client Plan to Russell Investments for asset allocation service(s)
(Asset Allocation Service(s)), as defined below in Section IV(p),
provided by Russell Investments to such Client Plan at the plan-level.
(n) The term ``Collective Fund-Level Management Fee'' includes any
investment management fee, investment advisory fee, and any similar fee
paid by a Collective Fund to Russell Investments for any investment
management services, investment advisory services, and any similar
services provided by Russell Investments to such Collective Fund at the
collective fund level.
(o) The term ``Affiliated Fund-Level Advisory Fee'' includes any
investment advisory fee and any similar fee paid by an Affiliated Fund
to Russell Investments under the terms of an investment advisory
agreement adopted in accordance with section 15 of the Investment
Company Act.
(p) The term ``Asset Allocation Service(s)'' means a service or
services to a Client Plan relating to the selection of appropriate
asset classes or target-date ``glidepath'' and the allocation or
reallocation (including rebalancing) of the assets of a Client Plan
among the selected asset classes. Such services do not include the
management of the underlying assets of a Client Plan, the selection of
specific funds or manager, and the management of the selected
Affiliated Funds or Collective Funds.
(q) The term ``Best Interest'' means acting with the care, skill,
prudence, and diligence under the circumstances then prevailing that a
prudent person acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with
like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the plan or IRA, without regard
to the financial or other interests of Russell Investments, any
affiliate or other party.
Effective Date: If granted, this proposed exemption will be
effective as of June 1, 2016.
Notice to Interested Persons
Those persons who may be interested in the publication in the
Federal Register of the Notice include each Client Plan invested
directly in shares of an Affiliated Fund, each Client Plan invested
indirectly in shares of an Affiliated Fund through a Collective Fund,
and each plan for which Russell Investments provides discretionary
management services at the time the proposed exemption is published in
the Federal Register.
It is represented that notification will be provided to each of
these interested persons by first class mail, within fifteen (15)
calendar days of the date of the publication of the Notice in the
Federal Register. Such mailing will contain a copy of the Notice, as it
appears in the Federal Register on the date of publication, plus a copy
of the Supplemental Statement, as required, pursuant to 29 CFR
2570.43(b)(2), which will advise such interested persons of their right
to comment and to request a hearing. The Department must receive all
written comments and requests for a hearing no later than forty-five
(45) days from the date of the publication of the Notice in the Federal
Register.
All comments will be made available to the public.
Warning: Do not include any personally identifiable information
(such as name, address, or other contact information) or confidential
business information that you do not want publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department,
telephone (202) 693-8456. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or 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, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 28th day of July, 2017.
Lyssa E. Hall,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2017-16295 Filed 8-2-17; 8:45 am]
BILLING CODE 4510-29-P