SEC Division of Investment Management staff letter: State Street Bank & Trust

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Our Ref. No. 96-402-CC
State Street Bank and
REPONSE OF TIE OFFICE OF TI CIl COUNSEL
Trust Company DIVISION OF INVESTMEN MANAGEMNT File No. 132-3

By letter dated July 29, 1996, you request our assurace that we would not recommend enforcement action to the Commission if, as more fully described in your letter, various plans ("457 Plans") meeting the definition of "eligible deferred compensation plan" in Section 457 of the Internal Revenue Code of 1986, as amended (the "Code"), paricipate in cert collective trust funds ("Funds") maitaed by State Street Ban and Trust

Company (" State Street") without registration of the Funds under the Investment Company Act of 1940 ("Investment Company Act") in reliance on Section 3(c)(1l) of that Act, and without registration of the units of paricipation therein under the Securities Act of 1933 ("Securities Act") or the Securities Exchange Act of 1934 ("Exchange Act"), in reliance on

Section 3(a)(2) of the Securities Act and Section 3(a)(12) of the Exchange Act.

Facts
The State Street Ban and Trust Company Investment Funds for Tax Exempt Retirement Plans ("Trust") consists of the Funds. Units in the Funds currently are offered and sold exclusively to cert types of ta-qualed employee benefit plans, as well as to commingled investment vehicles contag assets of ta-qualed employee benefit plans. State Street proposes to offer units in the Funds to 457 Plans established by varous governenta entities described in Section 457(e)(1)(A) of the Code. You represent that the Plan documents of the 457 Plans investing in the Trust wil provide that Plan assets wil not be used for any purpose other than for the exclusive benefit of 457 Plan paricipants, except that Plan assets shal remai subject to the clais of genera creditors of the employer to the

extent necessar to comply with Section 457 of the Code. 1/ You also represent that the Investment Management Agreement ("Agreement") between State Street and the 457 Plan wil specifcaly prohibit a paricipating employer from withdrawing Plan assets from the

Trust, except for the following purposes:

(1) To trasfer Plan assets to a trustee in bankptcy in the event of the

employer's insolvency or bankptcy, or to any other agent independent of the employer authoried to act in such proceedings; 1/ If a 457 Plan's document does not conta such a provision, you represent that State

Street wil obtain a written representation to this effect from an authoried representative of the 457 Plan (the "Plan Adminstrator"). You further represent that in no event wil State Street alow a 457 Plan to participate in the Trust if, in State Street's opinon, the Plan document contains any provision that would not permit it to be interpreted to require such "exclusive benefit" treatment.

(2) To satisfy the claims of the employer's general creditors in the event of the employer's insolvency or bankptcy; (3) To pay benefits to an employee paricipating in a 457 Plan;

(4) To trasfer assets to a 457 Plan's custodian or other person designated by a

sponsorig employer in case the Agreement is terminated or a withdrawal is made for the purpose of using another investment manager or investment argement; (5) To distribute Plan assets to participating employees in the event a 457 Plan is terminated pursuant to a plan of liquidation; or (6) To reimburse an employer for any 457 Plan benefits that the employer may

have paid out of its other assets, or to correct an excess deferr or other mistaen investment in the Trust. You state that the Agreement wil define "insolvency" as a circumstace in which an employer is unable to pay its debts as they become due, or is subject to a pending proceeing under the United States Banptcy Code. Under the Agreement, a withdrawal based on a clai of insolvency must be premised on a determination made by the highest governg body of the employer, as well as its highest executive officer, afer notice of a public hearig has been given and a public heag has been held on th~. subject of the employer's insolvency. You represent that the Agreement wil require that any withdrawal request be accompaned by a written notication from the Plan Adminstrator explaig the reasons therefor. If the writing indicates that an employer wants to redeem units becuse it is insolvent, then such writing wil describe the procedures that were followed in makg the insolvency determination. If the writing indicates that an employer is redeeming units because it wants to terminate its investment management arngement with State Street, or withdraw funds for the purpose of using another investment manager or investment arangement, then such writing wil conta a representation from the terminating employer

naming the person to whom State Street would transfer such money and affiring that the Plan assets are not to be used for employer purposes. The Agreement also wil provide that, in deciding whether to honor a withdrawal request, State Street may rely on any such writing it reasonably believes was submitted in good faith by a paricipating employer. You also represent that State Street wil give directly to al 457 Plan paricipants, or provide to each sponsorig employer for distribution to all participants, brochures that prominently disclose (a) that the amounts alocated to tha Funds wil be subject to the claims of the employer's general creditors as required by the Code, and (b) the potential risks

(including access by genera creditors of the employer to Plan assets) 2/ to paricipants posed by investing in 457 Plans. Finally, you represent that employee contributions to a

particular 457 Plan wil not be invested in securities of the sponsorig employer or its controlled or commonly controlled entities. Analysis
Section 3(a)(2) of the Securities Act and Section 3(a)(12) of the Exchange Act exempt
from registration any interest or paricipation in a coiieètive trust fund maitaed by a bank, which interest or paricipation is issued in connection with a governenta plan as defined in
Section 414( d) of the Code that has been "established by an employer for the exclusive
benefit of its employees . . . if under such plan it is impossible . . . for any par of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees." 3./ Section 3(c)(1l) of the Investment Company Act excludes from the defintion of "investment company" any collective trust fund maitaed by a ban consisting solely of assets of such plans. Whie Section 3(a)(2) does not explicitly refer to 457 Plans, such plans are deferred compensation plans established and maitaed by state and local governents, and thus, you

represent, are as a techncal matter, "governenta plans" withi Section 4l4(d) of the Code.
Section 457(b)(6) of the Code, however, requires that al assets accumulated under a 457
Plan must remai solely the property of the sponsorig employer, "subject only to the clais of the employer's genera creditors." Therefore, 457 Plans techncaly may not meet the requirement that it be impossible to use plan assets for "purposes other than the exclusive benefit" of employees. You state that 457 Plan assets effectively wil be adminstered for the "exclusive benefit" of participating employees because a sponsorig employer would not be permitted to withdraw plan assets for its own use except, in the event of the employer's insolvency or banptcy, to satisfy its genera creditors. Although it is possible for the assets held in a 457 Plan to be used by the employer for its own purposes, . yo:n believe that the provisions contaed in the Agreement and the Plan documents, along with the, aupplementa written representations made upon any withdrawal of Plan assets,snould ensure that employer use remais only a remote possibilty, and that the assets wil be adminstered in a manner that substantially comports with the requirements applicable to qualed employee benefit plans. 2/ Telephone conversation on August 1, 1996 between Wendell Fara, counsel to State

Street, and Kare McMilan of the staf.
3./ Section 414(d) of the Code provides, in relevant par, that a "governenta plan

means a plan established and maitaed for its employees by the Governent of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentaity of any of the foregoing."

You further state that, at all times, the Plan Administrator wil exercise fiduciary responsibilities in seeking to ensure that the interests of 457 Plan paricipants are adequately protected. In light of the foregoing, we would not recommend enforcement action to the Commission if State Street offers and sells units in the Funds to 457 Plans without registerig the Funds as investment companes in reliance on Section 3(c)(1l) of the Investment Company Act. The Division of Corporation Finance has asked us to inorm you that it would not recommend enforcement action to the Commission if State Street, in reliance upon your opinon as counsel that the exemptions under Section 3

(a) (2) of the Securities Act and Section 3(a)(12) of the Exchange Act are avaiable, offers units in the Funds to 457 Plans without registration under these Acts. The Division of Market Regulation has asked us to inorm you that it concurs in this position with respect to the Exchange Act. The Divisions' positions are based on the facts and representations in your letter. You should note that any different facts or circumstaces might require a different conclusion. Furthermore, this response represents only the Divisions' positions on enforcement action and does not purport to express any legal conclusions as to the questions presented.

Status of Prior Letters

The staf previously has issued a number of no-action letters relating to 457 plans. M The positions taen in these letters were based largely on the genera representation that plan assets would not be used for any purpose other than the exclusive benefit of paricipants except to the extent that plan assets must remai subject to the clais of general creditors of the employer to preserve the plan.'s qualcation under Section 457 of the Code. The sta, however, now believes that this genera representation no longer provides an adequate basis for no-action relief without specifc additional restrctions on the 1/ See, e.g., The Lincoln National Life Insurance Company (pub. avai. Oct. 26, 1992);

Harford Life Insurance Company (pub. avai. June 24, 1992); Pan American Life Insurace Company (pub. avai. Nov. 19, 1991); Standard Insurance Company (pub. avail. Sept. 11, 1991); Aetna Life Insurance and Anuity Company (pub. avai. Sept. 11, 1991); Pricipal Mutual Life Insurace Company (pub. avai. June 27, 1991); Metropolitan Life Insurance Company (pub. avai. June 6, 1991); Monarch Life Insurance Company (pub. avai. Apr. 3, 1991); The Travelers Insurace Company (pub. avail. Aug. 6, 1990); Great-West Life and Anuity Insurace Co. (pub. avai. Feb. 1, 1990); Fidelity Management Trust Company (pub. avail. Nov. 2, 1989); Aetna Life Insurance Company (pub. avail. Oct. 18, 1989); Nationwide Life Insurace Company (pub. avai. May 12, 1989Y; North Shore Savings and Loan Association (pub. avail. Dec. 8, 1988); Wells Fargo Bank, N.A. (pub. avail. Sept. 7, 1988).

ability of an employer to withdraw assets similar to those described in this letter. The prior no-action letters, therefore, no longer represent the staf's position on enforcement action in this area. ~/ K.~ Me \ALLo.

Kare McMilan

Special Counsel
5.1 The staff realies that a number of bans and insurace companes may be permitting

457 Plans to invest in their collective trust funds or separte accounts in reliance on these prior letters. To faciltate an orderly trasition to its current position, the staf

wil not recommend enforcement action to the Commission for a period of twelve months from the date of this letter if these persons continue to rely on the prior letters. At the end of that period, however, banks and insurace companes wishig to continue including 457 Plans in their collective trust funds or separte accounts should, for new contracts, enter into an agreement similar to that described above with the sponsor of each such 457 Plan, and for existing contracts, use reasonable efforts to amend plan documents andlor supporting contracts to conform to the agreement (or one similar to the one) described above.

LAW OFFICES OF

COUNSEL A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS ATLANTA OFFICE LEE G. PAUL SUITE 2400 ROBERT p, HASTINGS

LEONARD S. JANOFSKY
TENTH FLOOR 600 PEACHTREE STREET, N.E.
CHARLES M. WALKER ATLANTA. GEORGIA 30308-2222 1299 PENNSYLVANIA AVENUE, N.W. TELEPHONE (404) 81S-2400 LOS ANGELES OFFICE SSS SOUTH FLOWER STREET WASHINGTON, D,C. 20004-2400 CONNECTICUT OFFICE LOS ANGELES, CALIFORNIA 90071-2371 1055 WASHINGTON BOULEVARD TELEPHONE (213. 683-6000 -Te:i.e:PHÓN-e:''- (202) 50a~"500 STAMFORD, CONNECTICUT 06901-2217 TELEPHONE (203) 961-7400 ORANGE COUNTY OFFICE FACSIMILe:: (202) 506-9700 695 TOWN CENTER DRIVE NEW YORK OFFICE COSTA MESA, CALIFORNIA 92626-1924 399 PARK AVENUE TELEPHONE (714) .668-6200 NEW YORK, NEW YORK 10022-4697 TELEPHONE (212) 318-6000 WEST LOS ANGELES OFFICE 1299 OCEAN AVENUE TOKYO OFFICE SANTA MONICA. CALIFORNIA 90401-1078 July 29, 1996 ARK MORI BUILDING, 30TH FLOOR TELEPHONE (310) 319-3300 P.O. BOX 577 12-32, AKASAKA l-CHOME MINATO-KU, TOKYO 107 WRITER'S DIRECT DIAL NUMBER TELEPHONE (03) 3S86-4711 ....,(~.Q;i~) "'.QS-Qr:74... "','/' "'.,"~hiii~~iôíl'wt'lll...",~t, 2 1'&6 fi';E77 2 5 t I i.,i~t lCA r'''- ....,~..~ Section 3 (a) (2) of the ~~Ot1on 3(c.) (I l) ! Securities Act of 1933; i ",....,...,,,iSection 3(a) (12) of the , Securities Exchange Act of h::Yl.L , .-"..~ 1934; t'ub1.Ú:
ì" ':ld laoll1ty 6/1/4Ú/ . . . lSection 3(c) (11) of the ..i........__~~, f ..~..~____,..,! Investment Company Act of 1940 VIA MESSENGER

Jack W. Murphy, Esq.

Associate Director and Chief Counsel

Division of Investment Management

Securi ties and Exchange Commission

450 Fifth street, N.W.

Washington, D. C. 20549

Martin P. Dunn, Esq.

Chief Counsel

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: State Street Bank and Trust Company:

Section 457 Plan No-Action Letter Request

Ladies and Gentlemen:

We are writing on behalf of our client, State

street Bank and Trust Company (" State Street"), to

respectfully request that the Staff (the "Staff") of the

Securities and Exchange Commission (the "Commission") agree not to recommend enforcement action to the Commission if various plans meeting the definition of "eligible deferred compensation plan" in Section 457 of the Internal Revenue Code of 1986, as amended, ("Code") were to participate in certain collective trust funds maintained by State Street without registering the funds or the offering of units of participation therein under the federal securities laws. More particularly, we respectfully request that the Staff concur in our opinion that units in the collective trust funds may be offered to Section 457 governmental plans (i. e., governmental plans established pursuant to section 457 of the Code) in reliance on the exemptions from

registration afforded under Section 3 (a) (2) of the Securities Act of 1933 ("Securities Act") and Section

3 (a) (12) of the Securities and Exchange Act of 1934 ("Exchange Act"), and the exception from regulation as an

investment company affo~ded under Section 3 (c) (11) of the Investment Company Act of 1940 (" Investment Company Act") . 1/ 1/ For convenience, we occasionally refer in this letter

to the exception from regulation as an investment company

afforded in Section 3 (c) (11) of the Investment Company Act

as an "exemption."

PAUL. HASTINGS. JANOFSKY & WALKER

I.

STATEMENT OF FACTS

A. Backqround

state street is a trust company establ ished in

1891 under the laws of The Commonwealth of Massachusetts and

is a wholly-owned subsidiary of state street Boston

Corporation, a federal bank holding company. state street

is subject to the supervision and examination of the

Massachusetts Commissioner of Banks and the Federal Deposit

Insurance Corporation, which insures state street's

deposi ts. state street is also a member of the Federal

Reserve System and subject to supervision and examination by

the Board of Governors of the Federal Reserve System. As of December 31, 1995, State Street and its affiliates world￾wide had over $2.3 trillion of assets in trust or under

custody and over $226 billion of assets under management.

State Street has established various collective

trust funds under the State Street Bank and Trust Company

Investment Funds for Tax Exempt Retirement Plans (all such

collective trust funds referred to hereafter as "Trust").

The Trust is offered and sold to employee benefit plans

qualified for favorable tax treatment under Section 401 (a)

of the Code, and to governmental plans defined in Code

Section 414 (d) which also qualify for favorable federal tax

treatment. Employee benefit plans for self-employed

individuals within the meaning of Code Section 401(c) (1)

("Keogh Plans") also may participate in the Trust, but only

to the extent the interests in such -plans, and the interests

of any such plans in pooled investment vehicles in which

they invest, are exempt from registration in reliance on

Rule 180 under the Securities Act. Commingled investment

vehicles containing only assets -of some or all of the

employee benefit plans eligible for participating directly

in the Trust, also may invest in the Trust. Individual

retirement account plans established pursuant to Code

Section 408 (a), however, and tax-she
i tered arrangements established pursuant to Code Section 403 (b), may not

participate in the Trust.

The Trust is operated in reliance on various

exemptions under the federal securities laws. Trust units

are offered and sold to qualified participants in reliance

on the exemption from registration afforded by Section

3 (a) (2) of the Securities Act and the corresponding exemption from registration afforded by Section 3 (a) (12) of the Exchange Act. In addition, the Trust operates in

reI iance on the exception from regulation as an investment company afforded under Section 3 (c) (11) of the Investment Company Act.

PAUL, HASTINGS. JANOfSKY & WAlKER
B. Proposal

state Street- proposes to offer unitg in the Trust to Section 457 plans established by various governmental

units described in Code Section 457 (e) (1) (A) ("Section 457 Plan" or "Plan,,)gf, in reliance on- the exemptions from

registration afforded under the Securities Act, the Exchange

Act, and the Investment Company Act. W As here relevant and

fully in accordance with the requirements of Section

457 (b) (6) of the Code, a Section 457 Plan participating in the Trust will provide, among other requirements, that all

assets accumulated under the Plan shall remain "solely the

property and rights of the (sponsoring) employer . . .

subject only to the claims of the employer's general

creditors. " In addition, and also fully in accordance with

the provisions of Treasury Regulations § 1.457-1(b) and §

1.457-2 (j), a participating Section 457 Plan may permit an

employee participating Ëhereunder to direct the investment

of contributions and amounts accumulated on such person's

y Section 457 (e) (1) (A) defines the term "eligible

employer", for purposes of the definition of "eligible

deferred compensation plan" in Section 457 (b), to mean any

"State, political subdivision of a State, and any agency or

instrumentality of a State or political subdivision of a

State. "
1/ State Street is requesting that the Staff grant no-

action assurance only with respect to future investment

arrangements involving Section 457 plans.

behalf, even though such amounts are considered the

"property and rights" of the sponsoring employer.

Participation in the' Trust-by a Section 457 Plan will be evidenced by an Investment Management Agreement

("Agreement") executed between State Street and an

authorized representative of such Plan (referred to herein

as the "Plan Administrator")+ .This Agreement will contain a

number of provisions intended to ensure that the assets of a

participating Plan will be administered for the exclusive

benefi t of Plan participants, subj ect to the requirements of

Section 457 (b) (6) of the Code and interpretations thereof .~I
As an initial matter, the Agreement will prohibit

a Section 457 Plan from participating in the Trust unless

the Plan document contains a provision (or is interpreted in

a manner) that requires Plan assets to be administered for

the exclusive benefit of Plan participants, except to the

extent necessary to satisfy the provisions of Section

457(b) (6) of the Code. .In the event the Plan document, in

State Street's opinion, does not provide for administering

AI The Internal Revenue Service has issued Revenue

Procedure 92-64, 26 CFR 601.201, 1992 IRB LEXIS 380, 1992-33 LR.B. 11 (Aug. 17, 1992), which affords a "safe harbor" for unfunded deferred compensation plans that use a "Rabbi Trust" in the manner described in that ruling. Although State Street's proposed investment arrangement does not involve use of a Rabbi Trust, State street believes that the terms of its proposed arrangement generally are consistent

with the terms and conditions of Revenue Procedure 92-64.

PAUL, HASTINGS. JANOfSKY & WALKER
Plan assets for the exclusive benefit of participants

(consistent with federal tax law), the Agreement will

authorize state street to obtain from a Plan Administrator a

wri ting explaining that the Plan document is to be interpreted in this manner. state street represents that in no event will it allow a Section 457 Plan to participate in

the Trust if, in state street's opinion, the Plan document

contains any provision that would not permit it to be

interpreted to require such "exclusive benefit" treatment.

Consistent with this "exclusive benefit" condition

and the requirements of federal tax law, the Agreement will

contain provisions that prohibit an employer from

wi thdrawing Plan assets from the Trust except for one or

more of the following reasons:

( i) to transfer Plan assets to a trustee in bankruptcy

in the event of the employer's insolvency or

bankruptcy, or to any other agent independent of

the employer authorized to act in such

proceedings;
(2) to satisfy the claims of general creditors of the

employer in the event of the employer's insolvency

or bankruptcy;

(3) to pay benefits to an employee participating under

a Plan;

(4) to transfer assets to a Plan custodian or other

person designated by a sponsoring employer in case

the Agreement is terminated or a ,withdrawal is

made for the purpose of using another investment

manager or investment arrangement;

(5) to distribute Plan assets to participating

employees in the event a Plan is terminated

pursuant to a plan of liquidation; or

(6) - to meet the following miscellaneous expenses related to Plan administration: (a) to reimburse

an employer for any Plan benefits that may have

been paid by the employer out of its other assets,

or (b) to correct an excess deferral or other

mistaken investment in the Trust.

The Agreement will define "insolvency", for

purposes of clauses (1) and (2) above, as a circumstance in

which an employer is unable to pay its debts as they become

due or is subj ect to a pending proceeding as a debtor under

the United states Bankruptcy Code.~ In this regard, the

Agreement will require a Plan Administrator to represent

that a withdrawal based on a claim of insolvency will be

premised on a determination made by the highest governing

body of the employer, as well as its highest executive

officer, after notice of public hearing has been given and a

public hearing has been held.

wi th respect to the conditions conta ",ned in

clauses (4) and (5) above, the Agreement will contain a

representation from the Plan Administrator that in no event

will an employer be permitted to use Plan assets for its

purposes when assets are withdrawn for the reasons stated in

those clauses.
2J This definition is consistent with the definition of " insol veney" contained in Revenue Procedure 92 -64. See
Section 3 (a) of Rev. Proc. 92-64.

PAUL. HASTINGS. JAt\fOfSKY & WALKER
In addition, the Agreement will require a

withdrawal request made for any of the reasons stated above

in clauses (1) - (6) to be accompanied-by written

notification from the Plan Administrator explaining the

reasons therefor. If the writing indicates that an employer

wants to redeem units because it is insolvent, then such

writing, in accordance wi ththe provisions stated above for

determining insolvency, will describe the procedures that

were followed in making this determination. If the writing

indicates that an employer is redeeming units because it

wants to terminate its investment management arrangement

with state street, in whole or in part, then such writing

will contain a representation from the terminating employer

naming the person to whom such money should be transferred

by state street and affirming that the assets are not to be

used for employer purposes. Under the Agreement, state

street will not be obligated to and will not release the

proceeds of a withdrawal unless an employer includes this

representation in its writing. The Agreement will also

provide that, in deciding whether to honor a withdrawal

request, state street may rely on any such writing it

reasonably believes was submitted in good faith by a

participating employer.

state street does not intend, by the foregoing

provisions to be included in the Agreement, that any

participant or beneficiary will have a vested or secured

interest in the assets of the Trust, or any claim under a

Plan, other than as a general creditor of an employer

participating in the Trust.

_II.
DISCUSSION
A. Relevant StatutorY Authoritv Under the Federal

Securi ties Laws

The federal securities laws do not expressly

provide an exemption for interests in a Section 457

governmental plan or to the plan itself, or for commingled

investment funds that permit participation by such plans.

The exemption from registration contained in Section 3 (a) (2) of the Securities Act, on its face, limits the availability

of the exemption to

a governmental plan as defined in Section 414 (d) of (the) Code which has been established by an employer

for the exclusive benefit of its employees or their

beneficiaries for ~he purpose of distributing to such

employees or their beneficiaries the corpus and income

of the funds accumulated under such plan, if under such

plan it is impossible prior to the satisfaction of all

liabilities with respect to such employees and their

beneficiaries, for any part of the corpus or income to

be used for, or diverted to, purposes other than the

exclusive benefit of such employees or their

beneficiaries . . . .

Substantially similar provisions relating to

governmental plans are contained in Section 3 (a) (12) of the Exchange Act and, by reference to Section 3 (a) (2) (C) of the

PAUL. HASTINGS. JA~OfSKY & WALKER
Securities Act, in Section 3 (c) (11) of the Investment

Company Act.

The governmental plan exemptions contained in

section 3(a) (2) of the Securities Act, Section 3(a) (12) of

the Exchange Act, and Section 3 (c) (11) of the Investment Company Act were added by the Small Business Investment

Incentive Act of 198.0 (the "1980 Amendments") .fif A

Commission Memorandum submitted to the United States Senate

in support of the 1980 Amendments, and which was later made

part of the legislative record, explained the reasons for

enacting these provisions. In pertinent part, the

Memorandum explained:

Section 414 (d) of the Internal Revenue Code provides
special tax treatment for state and local employee benefit plans, and was added to the Code in 1978 in recognition of the fact that it is often difficult if not impossible for such plans to meet all the qualification requirements of Section 401, particularly the anti-discrimination requirements of Section 401 (a) , because the statutes establishing such plans prescribe

a shorter vesting period for elected and appointed

officials than for other covered employees in

recognition of the . reality of political life. (T)he

Bill would make exemption from registration for bank

and insurance company funding of public pension plans

turn upon the plans' compliance with the substance of

Section 401 as it is material to the operation of the

securities laws, rather than on their compliance with

all the technical requirements of that Section. Thus,

it would provide an exemption from registration for

bank and insurance company funding of Section 414 (d) plans which have been established for the exclusive

purpose of providing retirement benefits to employees

§/ See Pub. L. No. 96-477, §§ 701-03, 94 Stat. 2275, 2294 96 (1980).

PAuL. HASTINGS. JANOFSKY & WALKER or their beneficiaries and whose funds are segregated

and cannot be diverted to other purposes. The two

requirements contained in the amendment are based upon

Section 401(a) (1) and Section 401(a) (2) respectively,

which are two of the three central provisions of

Section 401.If
As is evident from the foregoing, the

Congressional policy underlying the employee benefit plan

exemptions of the federal securities laws, as they relate to

governmentai plans, is that government employees generally

receive adequate protection from their employers in

connection with retirement plans established for their

exclusive benefit, and that the protections afforded by

registration under the federal securities laws are,

therefore, unnecessary. Congress assured such protection

for participants in a governmental plan relying on these

exemptions by incorporating into Section 3 (a) (2) of the Securities Act and Section 3 (a) (12) of the Exchange Act

(and, by implication, Section 3 (c) (11) of the Investment Company Act) the provisions of Sections 401 (a) (1) and

401(a) (2) of the Code. These provisions effectively require a governmental plan to be administered for the exclusive

benefit of participants, typically under trusteed or insured

1/ See 126 Cong. Rec. S 27272-74 (cum. ed. Sept. 25,

1980). The legislative history of the changes to the

employee benefit plan exemptions to add governmental plans

is recounted in Securities Act Release No. 33-6281 (Jan. 23,

1981) .

arrangements, in order to receive tax-favored treatment.

"Exclusive benefit" treatment is assured by requiring the

trustee or insurer, as the -case may be, to administer plan

assets in a way that makes it impossible to use such assets

unless the benefits owed to participants are first

satisfied.
There is no indication in the legislative history

that Congress, in describing the types of "governmental

plans" that could rely on the employee benefit plan

exemptions under the federal securities laws, attached any

particular significance to the inclusion of the clause "as

defined in section 414 (d) of (the) Code" in the text of

these exemptions. Nor is there anything, in the definition

of "governmental plan" under Section 414 (d) of the Code,

that would be relevant in distinguishing such plan from

other "governmental plans" defined elsewhere in the Code in

determining the scope of these exemptions. In fact, as a

technical matter, a "governmental plan" established by a

state (or agency or instrumentality thereof) pursuant to

Section 457 of the Code is a "governmental plan" (or, more

accurately, an "eligible deferred compensation plan")

established by such State (or agency or instrumentality

PAUL, HASTINGS. JAKOfSKY & WALKER thereof) pursuant to Section 414 (d) of the Code.~ Operationally, however, the two types of plans could be very different depending on the extent to which the Section 414 (d) plan provides for "exclusive benefit" treatment for participants under such plan and the extent to which the
Section 457 Plan, consistent with federal tax law, could
provide essentially for such treatment.
In light of the foregoing , it appears reasonable, in determining whether the employee benefit plan exemptions should be made available to Section 457 Plans and the pooled vehicles in which they invest, to focus appropriately on the extent to which "exclusive benefit" treatment would be afforded to participants in such plans under the State Street investment arrangement. B. Applvinq the "Exclusive Benefit" Clause of the

Emplovee Benefit Plan Exemptions to Section 457

Plans
A Section 457 governmental plan may not be

administered ior the "exclusive benefit" of participants, in

the way that is expressly set forth in the employee benefit

Y "Governmental plan" is defined in Section 414 (d) of the Code simply as a "plan established and maintained for its

employees by the Government of the United States, by the

government of any State or political subdivision thereof, or

by any agency or instrumentality of any of the foregoing."

The definition also includes "any plan to which the Railroad

Retirement Act of 1935 or 1937 applies . . . and any plan of

an international organization which is exempt from taxation

by reason of the International Organizations Immunities Act.

"

plan exemptions (i. e ~, by making it impossible to use plan

assets unless the benefits owed to participants are first

satisfied), without resulting in significant adverse tax

consequences to participants in such plan. As noted, in

order to qualify for favorable tax treatment, a Section 457

plan must be operated in accordance with the requirements of

Section 457 (b) (6) of the Code.
In this regard, the assets

held under such plan must remain at all times the "property

and rights" of the sponsoring employer and must be reachable

by general creditors of such employer.

The Congressional policy underlying the enactment

of Section 457 (b) (6) appears to be based mainly on the doctrine of "constructive receipt" of income. Under this

doctrine, an employee is prohibited from acquiring a present

interest in the contributions made to, or the assets held

in, a Section 457 plan. Before the enactment of Section

457, sponsors of such plans had sought and obtained

favorable rulings from ~he Internal Revenue Service allowing

employees, under certain conditions predicated on the

"constructive receipt" doctrine, to postpone their tax

liability on deferred compensation until actual receipt

under the plan. This doctrine was later incorporated into the Code in Section 457.

Al though it is possible for the assets held in a

Section 457 Plan to be used for employer purposes, we

PAUL, HASTINGS, JANOfSKY & WALKER believe that the provisions state street proposes to include

in its Investment Management Agreement will ensure that this

remains only a remote possibility, and that, as a practical

matter, such assets will be administered substantially in

accordance with the "exclusive benefit" provision of the

employee benefit plan exemptions. In this regard, the

Congressional policy::underlying these
"exemptions will not be

frustrated and will be substantially met under a state

street investment arrangement.

(1) The Aqreement Provisions will Ensure That the

Plan Will be Operated Fundamentallv for the

Benefit of Emplovees

As noted, the Agreement will contain provisions

which are intended to ensure that a Section 457 Plan

participating in the Trust will be administered for the

"exclusive benefit" of Plan participants (subject only to

the requirements of federal tax law). Under the Agreement,

the Plan document itself must provide for administering the

Plan in this manner. If the Plan document does not contain

such a provision, state street will obtain a writing to this

effect from a Plan Administrator, provided that the Plan

document does not contain any provision which, in the

opinion of state street, would be deemed inconsistent with

such treatment. These provisions, in our opinion, will ensure that, as a matter of fundamental Plan administration,

an employer will not be permitted to use Plan assets for its

own purposes.

Further- towards this end, as noted previously, the

Agreement will specify the limited cases in which the

sponsor of a Section 457 Plan participating in the Trust

will be permitted to make withdrawals from the Trust. As is

evident from examining these cases, a withdrawal will be

permitted only if it benefits a participating employee or if

it is warranted because a sponsoring employer has been

declared insolvent, after following certain procedures

described in the Agreement, or has filed a petition for

bankruptcy. In no other event will an employer be allowed

to use Plan assets. A withdrawal based upon a partial or

complete termination of the Agreement will be permitted only

if the Plan Administrator affirms in writing that the

employer does not intend to use Plan assets for its own

purposes. In the opinion of State street, these provisions

will ensure that so long as a Section 457 Plan remains

invested in the Trust, and even upon a termination of the

Agreement, an employer could not use Plan assets to meet

operating expenses.

(2) The Conqressional Policy Underlyinq the

Employee Benefit Plan Exemptions will Not Be

Frustrated
The proposed provisions to be included in the

Agreement also will ensure that the fundamental

Congressional policy underlying the employee benefit plan

exemptions of the federal securities laws would not be

frustrated-: if' a Section' 457 Plan_were to invest in the Trust. A participating Section 457 Plan will operate

substantially along the lines of a Section 414 (d)

governmental plan that is administered in accordance with

the "exclusive benefit" clause of the employee benefit plan

exemptions (except, of course, to the extent necessary to

retain tax qualification under Section 457 of the Code). In

this regard, there will always be someone (such as the Plan

Administrator, a designated trustee, or an insurer) charged

with exercising fiduciary responsibilities in seeking to

protect the interests of participants in the Plan.

Except in the unlikely event of insolvency or

bankruptcy, and so long as a Section 457 Plan sponsor

remains a "going concern", employee participation in the

Plan will be very much like participating in a Section

414 (d) governmental plan that is administered in accordance

with the "exclusive benefit" clause of the employee benefit

plan exemptions. As noted, depending on the provisions of a particular Plan, an employee, consistent with the provisions

for qualifying as a Section 457 plan, may instruct its

employer how to allocate contributions, including the

earnings thereon, among available investment options. In

addition, an employee eligible to receive benefits under the

PAUL. HASTINGS. JANOfSKY & WAlKER
Plan will receive benefits in a manner that would be

indistinguishable from the manner of paying benefits under a

Section 414 (d) governmental plan properly relying on the

employee benefit plan exemptions. The Plan Administrator,

acting on behalf of employees in such cases, would perform

his or her duties, for federal securities law purposes, in a

manner that would be indistinguishable from the performance

of such person's duties under a Section 414 (d) governmental

plan (administered in a manner that provides for "exclusive

benefit" treatment for participants) .
C. Previous No-Action Positions' Taken bv the SEe

Staff Support this Request for Relief

Our request for no-action assurance is supported

by positions taken by the Staff in several letters over the

last ten years. W In those letters, the Staff agreed not to 2/ See,~, Wells Fargo Bank, N.A. (avail. Sept. 7,

1988); North Shore Savings & Loan Association (avail. Dec.

8, 1988) Nationwide Life Insurance Company (avail. May 12,

1989); Aetna Life Insurance Company (avail. Oct. 18, 1989);

Fidelity Management Trust Company (avail. Nov. 2, 1989);

Great West Life Annuity Insurance Co. (avail. Feb. 1, 1990);

The Travelers Insurance Company (avail. Aug. 6, 1990);

Hartford Life Insurance Company (avail. Jun. 24, 1992); The

Lincoln National Life Insurance Company (avail. Oct. 26,

1992) .
In addition to the foregoing, the Staff on

previous occasions has granted no-action relief to Section

457 plans and their funding media in analogous

circumstances. See, ~, ICMA Retirement Trust (avail. Feb.

7, 1983) (offering of interests in a trust for commingled

investment of Section 457 plans exempt under Section 3 (a) (2) of the Securities Act and Section 2 (b) of the Investment

(continued. . . )

recommend enforcement action to the Commission if various

Section 457 plans sponsored by state or local governments

were to participate in collective investment funds or in

insurance company separate accounts relying on the employee

benefit plan exemptions. The Staff's position in many of

these letters, particularly the more recent, was premised on

compliance with the following general conditions:

(1) the funding vehicle will be used for no purpose

other than to fund one or more plans qualifying

under Section 401(a) or Section 404(a) (2) of the Code; (2) no assets held by the investment vehicles will be

attributable to individual retirement accounts

qualifying under Section 408 of the Code or to

retirement plans qualifying under Section 403 (b)

of the Code;

(3) in the opinion of counsel, the plan will be a

"governmental plan" within the meaning of the

employee benefit plan exemptions under the federal

securi ties laws;

(4) plan assets will not be used for any purpose other

than for the exclusive benefit of plan

participants, except that plan assets shall remain

subj ect to the claims of general creditors of the

employer to the extent necessary to preserve

qualification of the plan under Section 457 of the

Code; and

(5) the sponsor of the investment vehicle will give

directly to all plan participants, or provide to

each plan sponsor for actual distribution to all

~ (. . . continued)
Company Act as an "instrumentality" of the government) ;

Equitable Life Assurance Society (avail. Dec. 12, 1980)

(offering of interests in a group annuity contract held in

trust to Section 457 plans not subject to registration under

the Securities and Investment Company Acts) .

PAlTL. HASTINGS, JANOfSKY & WALKER participants, brochures that prominently disclose

(a) that the amounts allocated to the investment

vehicle will be subj ect to the claims of general

credi tors of the employer under current tax law,

and (b) the consequences to -participants of this

arrangement. 10/ state street will comply with each of the

foregoing conditions as well as the additional conditions

listed previously in this letter. In addition, state street

represents that employee contributions to a particular

Section 457 Plan will not be invested in securities of the

sponsoring employer or its controlled or commonly controlled

enti ties. Taken together, these conditions would serve to

bring a participating Plan as close as possible to the

operation of a Section 414 (d) governmental plan, which is

being administered exclusively for the benefit of

participants in such plan, without resulting in immediate

taxation of employees participating thereunder.

D. No Apparent Policv Reason Supports A Need for Reqistration Our request fer no-action assurance also is

supported by the absence of any cogent policy reason to

require registration of the Trust or the offering of units

therein in the circumstances. No legitimate investor

protection concern apparently will be advanced in such case.

10/ This last condition has appeared in the most recent
Section 457 no-action letters. See, ~, The Lincoln
National Life Insurance Company (avail. Oct. 26, 1992);

Hartford Life Insurance Company (avail. Jun. 24, 1992).

PAGL. HASTINGS. JANOfSKY & WALKER
First, it is questionable whether participants

will receive any more disclosure than they currently receive

if registration under the federal securities laws were

required. Under current law, an issuer of units sold in a

registered offering to Section 457 plans is required only to

deliver prospectuses to the sponsor of such plan.ll/ A

plan participant, therefore, in the case of a registered

offering, is not certain to receive a statutory prospectus.

Under the terms of this no-action request, by contrast, such

persons will be assured of receiving some disclosure since

State street has undertaken in the Agreement to deliver

brochures directly to plan participants, or to have such

brochures delivered to such persons.

Second, it is questionable whether Plan

participants would be any more protected by regulation under

the Investment Company Act than if they were invested in a

governmental plan that contained the "exclusive benefit"

clause referred to previously. As noted, the provisions

State Street proposes to include in the Agreement would

11/ We recognize, of course, that the Staff of the Division

of Investment Managément has recommended that the Commission

seek legislation to require the delivery of prospectuses to

employees in participant-directed, defined contribution

plans. See Division of Investment Management, SEC, "Pooled

Investment Vehicles for Employee Benef it Plan Assets,"

Protecting Investors: A Half Century Of Investment Company

Regulation (1992) ("Protecting Investors Report"). It is

not certain, however, whether the Division's recommendation

covers the offering of units to Section 457 plans.

require the Plan to be administered exclusively for the

benefit of participants in the Plan (subject, of course, to

the requirementsoffeder- tax law) and would require

someone, such as the Plan Administrator, to exercise

fiduciary responsibilities with respect to the assets of

such Plan. Participants in such Plan, therefore, would have

many of the substantive prntections that ordinarily would be

provided by registration under the Investment Company Act

or, at least, many of the protections afforded under a

governmental plan operated exclusively for the benefit of

participants. Regulation under the Investment Company Act

would, at best, provide marginal incremental protection to

Plan participants.

III.

REQUESTED STAFF POSITION

On the basis of the foregoing, it is our opinion

that the interests in the Trust to be issued to Section 457

Plans, in the manner described above, are exempt securities

both under Section 3 (a) (2) of the Securities Act and Section 3 (a) (12) of the Exchange Act, and that the Trust would not be required to register under the Investment Company Act by virtue of the exemption afforded by Section 3 (c) (11) thereof.

We would appreciate your advice that the staff

will not recommend to the Commission that any action be

taken if state -street ~roceedswith its proposed offering without compliance with the various registration

requirements of the federal securities laws. If, however,

the Staff considers denying our no-action request, we would

like to arrange a conference to discuss these issues. If

you require additional information, please contact the

undersigned at (202) 508-9574, or Robert E. Carlson at (213)

683-6299.
Sincerely, ~.
L0L~u ~~ --0 .. ./ wendeii' M. .~,

for Paul, Hastings, Janofsky & Walker