DOL Advisory Opinion 2003-09A
Rev. 09/11/03, E-mail Alert 2003-17

The DOL issued Advisory Opinion 2003-09A on June 25, 2003. It permits a directed trustee who provides bundled services to receive 12b-1 and sub transfer fees from mutual funds, including Proprietary Funds, based upon the specific fact set presented in the Advisory Opinion. In this opinion, the investment advisers were affiliates of the trust company. Below are key points from the opinion, quotes are directly from the opinion. A link to the actual AO is provided at the end of the summary.

The facts of the Opinion were as follows:

Company Requesting the Advisory Opinion:
The opinion was requested by ABN AMRO Trust Services Company (AATSC). AATSC is a state chartered trust company and is a wholly owned subsidiary of Alleghany Asset Management Company (Allegany). Allegany also is the parent of several institutional investment advisers who offer Proprietary Funds.

Client's Independent Fiduciary or Participant-Directed Selection of the Investments
The decision to invest in Proprietary Funds is made by the client plan fiduciary or participant who is independent of the trust company and its affiliates. Many other mutual fund families will be available for the plan fiduciary to select. There is a requirement to choose at least one Proprietary Fund. However, the client is free to select funds other than those listed by AATSC. Other than the one Proprietary Fund, funds without 12b-1 fees may be selected.

Proprietary Fund Disclosures Were Provided with Proposal to All Prospective Clients
With every proposal, the trustee provided specific disclosures (see AO link provided below) regarding each Proprietary Fund offered. Thus, enabling the investment fiduciary to make an informed decision as to the what was the cost involved in utilizing the services of this trustee (and its bundled services) in advance of deciding to use these bundled services.

Arm's Length Negotiations; Bundled Cost Affected by Client's Choice of Investment Vehicles
All potential clients are free to accept, reject or further negotiate a bundled service arrangement from AATSC. The engagement of AATSC results from arm's length negotiations between a potential client and AATSC. The Client Plan’s choice of investment vehicles affects the cost of engaging AATSC to provide Plan Services. For example, if Client Plan fiduciaries choose to direct investment into four Proprietary Funds, the cost of Plan Services would be less than if they had chosen two Proprietary Funds. Choosing only one Proprietary Fund would be quoted a higher price for bundled services, because AATSC would expect to cover less of the cost of providing Plan Services from asset management revenue.

Client Removal of Proprietary Fund Affects Profit, May Entail Fee Change
The administrative fee charged is reduced by the increased number of proprietary funds used. However, if a client eliminated a proprietary fund that it had been using, the trustee reserved the right to withdraw or make an offer to renegotiate the fee for Plan Services. AATSC may propose a fee adjustment upon sixty days’ written notice. Either party can terminate a bundled service arrangement without cause, upon at least thirty days’ advance written notice.

The Request to the DOL
"You ask whether AATSC’s receipt of 12b-1 and subtransfer agency fees from mutual funds, including those Proprietary Funds the investment advisers of which are affiliates of AATSC, for services in connection with investment by employee benefit plans in the mutual funds, would violate section 406(b)(1) and 406(b)(3) of ERISA when the decision to invest in such funds is made by an employee benefit plan fiduciary who is independent of AATSC and its affiliates."

The Basis for the Ruling
Although the DOL held that AATSC is a party-in-interest and a fiduciary:

a. the ERISA exemption for contracting or making reasonable arrangements with a party in interest, including a fiduciary, for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid would apply;

b. pursuant to the Client Plan’s arrangement with AATSC and consistent with 29 CFR 2550.408b-2(c), the Client Plan may terminate a bundled service arrangement without cause and without penalty, upon at least thirty days’ advance written notice.;

c. the fiduciary does not use any of the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary;

d. a Client Plan fiduciary, independent of AATSC or its affiliates, selects the Client Plan’s investment options; AATSC has no role with respect to the selection of investment options (beyond requiring, as a condition of initial engagement of AATSC as a bundled service provider, that at least one Proprietary Fund is offered by a Client Plan for investment).

The DOL AO Ruling
The DOL states that, provided the above requirements (a, b, c and d) are met, AATSC’s receipt of 12b-1 or sub transfer fees from mutual funds, including the Proprietary Funds of affiliates of AATSC, will not violate ERISA when the decision to invest in such funds is made by a fiduciary who is independent of AATSC and its affiliates, or by participants of such employee benefit plans.

DOL Advisory Opinion 2003-09A