Investment adviser serving a plan and related clients

U.S. Department of Labor                           Department of the Treasury
Labor Management Services Administration           Internal Revenue Service
Office of Employee Benefits Security                Washington, D.C. 20224
Washington, D.C. 20216


             May 23 1977


       Mr. Herman C. Biegel
       Lee, Toomey & Kent                                OPINION 77-44
[Recipient address omitted]                           406(a)(1)(D)
                                                      408(b)(2)

       Re:     Richard – Merrell Retirement Plan
               Exemption No. D-186

       Dear Mr. Biegel:

       This is in response to your submissions of June 18, 1975
       and February 8, 1977 on behalf of Richardson - Merrell,
       Inc. (RMI) and Piedmont Advisory Corporation (Piedmont).
       In those submissions you requested an administrative
       exemption under section 408(a) of the Employee Retirement
       Income Security Act of 1974 (the Act) and section 4975(c)(2)
       of the Internal Revenue Code of 1954 (the Code) for the
       provision of investment advisory services for a fee by
       Piedmont to the Richardson – Merrell Retirement Plan
       (the Plan), or, in the alternative, a determination that
       the described transactions did not constitute prohibited
       transactions under section 406 of the Act and section
       4975 of the Code.

       You set forth the following facts and representations.
       Piedmont is a wholly owned subsidiary of Richardson Cor-
       poration (Richcorp). Substantially all of the stock of
       Richcorp is owned by members of the Richardson family
       and trusts in which family members have interests.
       Some of these family members and trusts also own, in the
       aggregate, a substantial amount of stock in RMI. The
       Boards of Directors of RMI, Richcorp, and Piedmont
       have various members in common. The Plan has approxi-
       mately 6000 participants. Piedmont is an authorized
       employer under the Plan; approximately 10 employees of
       Piedmont participate in the Plan. Piedmont was organized
       and staffed with investment experts for the express purpose
       of furnishing investment advisory services to its clients,

                                            OPINION 77-44



2


some of whom are related parties to RMI, on a non-profit basis.
Piedmont currently provides investment advisory services
to the Plan's Investment Subcommittee which has responsibility
for managing Plan assets. The fees which Piedmont charges
its clients are determined by allocating Piedmont's costs
to each client's account based upon the asset value under
advisement for each client. The asset value under advisement
for each client is determined by including common and
preferred stock at full fair market value, bonds at 50%
of fair market value, and RMI stock at 10% of fair market
value. You represent that this formula allocates the
proportionate investment advisory services provided to
each class of assets.

You state that Piedmont has been furnishing investment advi-
sory services to the Plan under the transitional statutory
exemption contained in sections 414(c)(4) and 2003(c)(2)(D)
of the Act. Sections 414(c)(4) and 2003(c)(2)(D) of the
Act postpone until June 30, 1977, the applicability of the
prohibited transaction rules of section 406 of the Act and
section 4975 of the Code to the provision of services
between a plan and a party in interest/disqualified person
with respect to the plan if certain requirements described
in sections 414(c)(4) and 2003(c)(2)(D) are met.

In your letter of February 8, 1977, you proposed to make
certain changes in the above-described facts as they relate
to the provision of investment advisory services for a fee
by Piedmont to the Plan. The proposed factual changes are:
(1) the Board of Directors of RMI and the Board of Directors
of Piedmont will contain no directors common to both corp-
orations, (2) Piedmont will not participate in the Plan,
(3) ownership of Piedmont will be transferred to and held
by individuals none of whom will be a party in interest
or disqualified person as defined in section 3(14) of the
Act and section 4975(e)(2) of the Code with respect to the
Plan other than by reason of the provision of investment
advisory services to the Plan by Piedmont, and (4) the cost
sharing arrangement between Piedmont, RMI and the Plan will
consist solely of an annual reimbursement by RMI to Piedmont
of the annual variable expenses incurred by Piedmont which
are allocable to investment advisory services provided to
the Plan as determined by an independent certified public
accountant.

                                           OPINION 77-44


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You further state that the Plan will appoint an investment
adviser to act as a named fiduciary responsible for direct-
ing the Plan trustee with respect to Plan investments and
that it is contemplated that the Plan will name Piedmont
the investment adviser. If appointed, Piedmont will trans-
mit investment directions directly to the Plan trustee.
The Investment Subcommittee of the Plan will no longer
have any responsibility for Plan investments.

You asked for a determination whether, if the proposed
changes are made, the provision of investment advisory
services by Piedmont to the Plan will constitute a pro-
hibited transaction under the Act and the Code by virtue
of the fact that Piedmont also provides investment advisory
services to other clients who may be parties in interest
and disqualified persons with respect to the Plan.

Section 406(a) of the Act provides, in relevant part, that
a fiduciary with respect to a plan shall not cause the plan
to engage in a transaction if he knows or should know that
such transaction constitutes the direct or indirect furn-
ishing of goods, services, or facilities between the plan
and a party in interest or the direct or indirect use of
plan assets by or for the benefit of a party in interest
with respect to the plan. See also section 4975(c)(1)(A)
through (D) of the Code. The term "party in interest" is
defined in section 3(14) of the Act. The term "disqualified
person" is defined in section 4975(e)(2) of the Code. Section
406(b) of the Act prohibits a fiduciary with respect
to a plan from engaging in certain types of self-dealing
and conflicts of interest described in that section.
See also section 4975(c)(1)(E) and (F) of the Code.

If the proposed factual changes are made, then, based solely
on the representations contained in your submission, it does
not appear that the provision of investment advisory services
to the Plan by Piedmont constitutes a prohibited transaction
under section 406 of the Act and section 4975 of the
Code merely because Piedmont also provides investment
advisory services to persons who may be parties in interest
and disqualified persons with respect to the Plan. However,
if, as a matter of fact, the cost sharing arrangement
is a direct or indirect use by or for the benefit of
a party in interest or disqualified person of any assets
in the Plan, the arrangement would constitute a prohibited
transaction under section 406(a)(1)(D) of the Act and
section 4975(c)(1)(D) of the Code.

                                            OPINION 77-44

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Our response relates only to the application of section 406
of the Act and section 4975 of the Code to the proposed
transaction. It does not deal with the application of
any other provision of the Act or the Code, or the provi-
sions of any other statute, to the proposed transaction.
Specifically, our response does not deal with the applica-
tion of the fiduciary duties set forth in section 404(a)(1)
of the Act.

Sincerely,



                                  (Signed) Alan D. Lebowitz

Fred. W. Stuckwisch               Alan D. Lebowitz
Director                          Chief, Employee Plans
Office of Regulatory Standards      Prohibited Transaction
  and Exemptions                    Staff
Department of Labor               Internal Revenue Service