Securities and Exchange Commission v. Boston Financial Data Services, Inc., et al.

 
 
UNITED STATES OF AMERICA 
Before the 
SECURITIES AND EXCHANGE COMMISSION 
 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 54812 / November 22, 2006  
 
Administrative Proceeding  
File No. 3-11524 
____________________________________ 
                                                               :  
In the Matter of               : Order Approving a  
                                                             : Distribution Plan  
PILGRIM BAXTER &   : 
   ASSOCIATES, LTD.,    : 
      : 
                        Respondent.                                    :            
____________________________________: 
 
 
I.  
 
 On June 21, 2004, in the above-captioned matter, the Commission issued an Order 
instituting and simultaneously settling public administrative and cease-and-desist proceedings 
against Pilgrim Baxter & Associates, Ltd. (the “PBA Order”).  In the PBA Order, the Commission 
authorized and established a Fair Fund of $90 million in disgorgement and penalties paid by Pilgrim 
Baxter & Associates, Ltd. (“PBA”).  According to the PBA Order, the Fair Fund is to be distributed 
to investors injured by market timing in the PBHG Funds pursuant to a distribution plan to be 
developed by an Independent Distribution Consultant (the “IDC”).  In September 2004, PBA 
engaged Kenneth Lehn, Ph.D., as the IDC. 
 
 In two related matters:  Gary L. Pilgrim, Admin. Proc. File No. 3-11739 (Nov. 17, 2004) 
and Harold J. Baxter, Admin. Proc. File No. 3-11740 (Nov. 17, 2004),  the Commission issued 
two orders simultaneously instituting and settling administrative and cease-and-desist proceedings 
against the former principals of PBA, Gary L. Pilgrim (“Pilgrim”) and Harold J. Baxter 
(“Baxter”).  Among other things, the Commission authorized and established in each of these 
Orders a Fair Fund comprised of $80 million in disgorgement and penalties paid by Pilgrim and 
Baxter for distribution in accordance with the distribution plan developed by the IDC, Dr. Lehn.  
 

 
 2 
                    
 On June 6, 2006, Dr. Lehn submitted a proposed distribution plan to the Commission’s 
Office of the Secretary (the “Plan”).  The Plan provides for distribution to all eligible investors of 
their proportionate share of the disgorgement and civil penalties paid by PBA, Pilgrim, and 
Baxter to compensate such investors for injury they may have suffered as a result of market 
timing in PBHG Funds for the period spanning June 1998 through December 2001.  The 
aggregated Fair Fund includes $250 million plus any accumulated interest (the “PBA Fair 
Fund”).  Under the Plan, eligible investors in the PBHG Funds would receive a pro rata share of 
the PBA Fair Fund, calculated by Dr. Lehn as a percentage of the value of the PBHG fund held 
by an accountholder on a given day multiplied by the fund’s daily settlement proceeds.  The pro 
rata shares of the PBA Fair Fund would be determined based on information contained in PBA’s 
records, as well as records obtained from third-party intermediaries, obviating any need for a 
claims process.   
 
 In accordance with the Commission’s Rules on Fair Fund and Disgorgement Plans (the 
“Fair Fund Rules”), 17 C.F.R. § 201.1100, et seq., the Plan proposed a Fund Administrator and 
sets forth, among other things, procedures for the receipt of additional funds; categories of 
persons potentially eligible to receive proceeds from the PBA Fair Fund; procedures for 
providing notice to such persons of the existence of the fund and their potential eligibility to 
receive proceeds; procedures for the administration of the fund, including provisions for filing 
tax returns; and a proposed date for the termination of the PBA Fair Fund.   
 
Boston Financial Data Services, Inc., proposed in the Plan as the Fund Administrator, has 
not posted the bond generally required of third-parties under Fair Fund Rule 1105(c).
1
  Rather, 
the Plan incorporates several layers of protection for the PBA Fair Fund.  Among other things, 
under the Plan:  (1) the Fund Administrator will have no custody, and only restricted control, of 
the PBA Fair Fund; (2) the PBA Fair Fund will be held by the United States Department of the 
Treasury, Bureau of Public Debt (“Treasury”) until immediately before checks or wires are 
transmitted to eligible investors; (3) upon transfer from Treasury, funds will be held in an escrow 
account, separate from the assets of the bank identified in the Plan (the “Bank”), until 
presentment of a check or wire; (4) upon presentment of checks or wire instructions, funds will 
be subject to “positive pay” or similar controls before honored by the Bank; (5) no more than 
$125 million (approximately one half of the amount in the PBA Fair Fund) will be in the Bank’s 
possession at any one time; and (6) both the Bank and the Fund Administrator will maintain, 
throughout this process, insurance and/or a financial institution bond that covers errors and 
omissions, misfeasance, and fraud. 
 
 
1
  Based on one estimate provided to the staff of the Commission, the cost of a bond posted on 
behalf of the Fund Administrator for the $250 million (plus interest) Fair Fund could approach $3.4 
million.  

 
 3 
On June 30, 2006, the Commission published the Plan and issued a Notice of Proposed 
Distribution Plan and Opportunity for Comment (Exchange Act Release No. 34-54073) pursuant 
to Rule 1103 of the Fair Fund Rules, 17 C.F.R. § 201.1103.  The Notice advised interested 
parties that they could obtain a copy of the Plan at 
http://www.sec.gov/litigation/admin/34-
54073-pdp.pdf, or by submitting a written request to Catherine E. Pappas, United States 
Securities and Exchange Commission, 701 Market Street, Suite 2000, Philadelphia, PA 19106.  
The Notice also advised that all persons desiring to comment on the Plan could submit their 
comments, in writing, no later than July 31, 2006. 
 
In response to the Notice, the Spark Institute, Inc. (“Spark”), the Coalition of Mutual 
Fund Investors (“CMFI”), and Gregory D. Barnes, CPA (“Barnes”) submitted public comments 
to the Office of the Secretary.  The Commission staff engaged in subsequent communications 
with each of these commenters to discuss and more fully understand the issues that they each 
raised in their respective letters.  In general, the Spark Letter seeks relief on behalf of 
intermediaries for Non-IRA Retirement Accounts
2
 eligible for a distribution under the Plan from 
fiduciary obligations and costs that may arise from distributions under the Plan.
3
  The CMFI 
Letter, written on behalf of individual mutual fund investors, expresses concern about the Plan’s 
“outreach process,” or the procedures by which the IDC will seek individual investor information 
from omnibus account intermediaries.  The Barnes letter, written by a former investor in the 
PBHG Funds, objects to the return of any amounts to “undamaged PBHG individual 
shareholders” through the Plan’s provision for the return of undistributed (residual) amounts to 
the PBHG Funds.    
 
After careful consideration, the Commission has concluded that the Plan should be 
modified to include, among other things, additional detail concerning procedures applicable to 
Non-IRA Retirement Accounts, and approved with such modifications.  The Commission has 
further determined that, for good cause shown, the bond required under Fair Fund Rule 1105(c) 
will be waived and the time for entry of an Order approving the Plan shall be extended, nunc pro 
tunc, through the date of this Order. 
 
                    
 
2
  “Non-IRA Retirement Account” as used in the Plan and herein, means any account of an 
employee benefit plan, as such plans are defined in section 3(3) of the Employee Retirement Income 
Security Act of 1974, 29 U.S.C. 1001, et seq. (“ERISA”), which is not an Individual Retirement Account, 
whether or not the plan is subject to Title I of ERISA.   
 
3
  The Spark Letter includes three additional requests for relief.  Spark had concerns regarding the 
confidentiality of information provided by the intermediaries to the IDC, time constraints imposed on the 
provision of the data, and tax reporting issues if the IDC distributed the funds to retirement plan 
participants.  In fact, only ¶ 8.6.4.2 (¶ 8.6.5. of the Plan as modified) applies to the distribution to Non-
IRA Retirement Accounts, the intermediaries of such accounts do not provide data to the IDC, and the 
IDC will not be making any distributions to non-IRA retirement plan participants. 
 

 
 4 
II.  
 
A.  Public Comments on the Plan 
 
1.  The Spark Letter 
 
The Spark letter, dated July 31, 2006, is written on behalf of “retirement plan record 
keepers that will be responsible for gathering and providing accountholder information, making 
certain allocations, receiving distributions, and making distributions to plan participants who are 
the intended beneficiaries of a substantial portion of the distribution at issue.”  In its letter, Spark 
claims that, under the Plan and pursuant to Department of Labor (“DOL”) April 19, 2006 Field 
Assistance Bulletin (2006-01) (the “FAB”), a retirement plan record keeper that is not otherwise 
a retirement plan fiduciary must choose between assuming fiduciary obligations under ERISA 
and replicating the IDC’s calculations.
4
  Spark further claims that the complexity of the IDC’s 
calculations, and the effort and cost associated with gathering daily accountholder information 
for a 3½ year period, eliminates any possibility for a record keeper or other intermediary to use 
the IDC’s methodology and thus, fall within the Safe Harbor.  Finally, Spark claims that the Plan 
does not provide sufficient information as to what costs will be reimbursed under the Plan, 
thereby preventing intermediaries from performing the cost-benefit analysis described in the 
FAB.
5
  The Commission addresses these claims below. 
 
As is evident from the FAB, fiduciary obligations accompanying a distribution under a 
distribution plan are not new developments under the law.  Rather, these obligations arise under 
                     
4
  The FAB, in essence, provides a regulatory safe harbor to intermediaries using an IDC’s 
methodology (the “Safe Harbor”), providing:  “[i]f an IDC, as part of its distribution plan approved by the 
SEC, makes available to an intermediary or requires, as a condition to the distribution, that the 
intermediary utilize a particular methodology for allocating settlement fund proceeds among individual 
omnibus account clients, the [DOL] will, as an enforcement matter, view the application of such 
methodology to the allocation of settlement fund proceeds among individual omnibus account clients as 
satisfying the requirements of section 404(a) with respect to the methodology for allocating assets to 
employee benefit plans,” as long as such methodology is implemented prudently.  FAB at p. 3.   
 
5
  For instance, in the FAB, the DOL states:   
 
In some instances, the intermediary will be responsible both for developing and 
implementing the plan for allocating proceeds among its omnibus account clients.  As 
fiduciaries, intermediaries must be prudent in the selection of the method of allocating the 
proceeds among its clients in an omnibus account, including plans.  Prudence in such 
instances would, at a minimum, require a process by which the fiduciary chooses a 
methodology where the proceeds of the settlement would be allocated, where possible, to 
the affected clients in relation to the impact the ... [market timing] may have had on the 
particular plan.  However, prudence would also require a process by which the fiduciary 
weighs the costs and ultimate benefit to the clients associated with achieving that goal.  
 
FAB at p. 3. 
 

 
 5 
                    
pre-existing ERISA legislation and common law.
6
  In sum, assuming fiduciary duties under 
ERISA is not a new possibility for record keepers or other ERISA plan intermediaries in 
connection with a distribution of litigation proceeds.  Accordingly, requiring intermediaries to 
distribute funds in accordance with fiduciary duties is neither inappropriate nor unreasonable.   
 
Nevertheless, certain modifications to the Plan are appropriate in order to (1) assist Spark 
members and others similarly situated in understanding the Plan and complying with their 
responsibilities under the law; and (2) provide some less costly distribution alternatives in 
connection with Non-IRA Retirement Accounts and thereby increase the possibility that 
distributions will be made through the plan participant level: 
 
• To improve the clarity of the sections concerning Non-IRA Retirement Accounts, 
the existing ¶ 8.6.4.2  (“Non-IRA Retirement Accounts”) has been renumbered to 
be a separate section: ¶ 8.6.5, and “Non-IRA Retirement Account” has been 
defined (Plan, note 10); 
 
• To provide additional information to Non-IRA Retirement Accounts in order to 
facilitate intermediary preparation to distribute funds received under the Plan, and 
to distribute funds in accordance with their fiduciary, contractual, and/or legal 
obligations, the following has been added to the Plan description of distributions 
to Non-IRA Retirement Accounts: 
 
o a procedure for notifying accountholders entitled to $1000 or more of their 
respective final distribution amount in advance of distributing funds to 
those accountholders (Plan, ¶ 8.6.5.2.1); 
o language specifying the timing of distributions to such accounts (Plan, ¶ 
8.6.5.2.2);  
o a fixed cost reimbursement amount (Plan, ¶ 8.6.5.4); and  
o alternative distribution methodologies (Plan, ¶¶ 8.6.5.3.1- 8.6.5.3.2). 
 
The modifications to the Plan which provide to the intermediaries notice of a distribution 
amount in advance of any distribution, and which clarify that costs associated with Non-IRA 
Retirement Account distributions will not be reimbursed, address some of the concerns of Spark 
members and others similarly situated by enabling them to perform a precise cost benefit 
analysis, and to develop and seek approval of a distribution methodology in advance of 
performing any distribution, thereby possibly avoiding the assumption of fiduciary 
responsibility.
7
    
 
 
6
  See, e.g., FAB at p. 2 (citing ERISA and “ordinary notions of property rights”).  
7
  See FAB at p. 4 and note 8 (“If the receipt, allocation and/or distribution services of the 
intermediary, and compensation for such services, are carried out in accordance with the directions and 
approval of appropriate plan fiduciaries, the intermediary may be able to avoid fiduciary status and issues 
relating to self-dealing under ERISA.”).   
 

 
 6 
With respect to costs, the staff has obtained cost estimate information from Spark which 
indicates that the costs faced by intermediaries of Non-IRA Retirement Accounts in connection 
with a distribution pursuant to the IDC’s methodology could be substantial and significantly 
larger than those faced by intermediaries in connection with other types of omnibus accounts.  
Plan required reimbursement of these costs at or near the cost estimates provided to the staff 
simply would be cost prohibitive and unreasonable, especially in view of substantial flexibility in 
the FAB for an intermediary or plan-level fiduciary to develop a more cost efficient method of 
distribution.
8
  In the context of a fixed cost reimbursement amount, Spark has requested that any 
specified cost reimbursement upper limit approach the cost estimates provided by Spark.  Spark 
further has rejected a cost reimbursement upper limit based on the cost reimbursement sought by 
intermediaries of other types of omnibus accounts.  In view of the foregoing, and in 
consideration of Spark’s contention that unspecified cost reimbursement prevents Non-IRA 
Retirement Account intermediaries from performing with precision any requisite cost benefit 
analysis, the modification to the Plan to provide less costly alternative methodologies, and no 
cost reimbursement, is a reasonable and practical resolution.   
 
2. The CMFI Letter 
 
The CMFI comments are in furtherance of “the interests of individual mutual fund 
investors.”  In its Comment Letter dated July 31, 2006, CMFI claims that the Plan’s specified 
outreach to intermediaries for individual investor information will not sufficiently protect the 
individual investor.  Rather, CMFI suggests that the Plan should require the PBHG Funds or 
their representative to request from intermediaries, pursuant to Rule 22c-2 of the Investment 
Company Act (17 C.F.R. § 270.22c-2) (“Rule 22c-2”) the information currently sought through 
the omnibus account outreach process.  In addition, CMFI objects to the cessation of outreach 
efforts sixty days after the Plan’s approval as inadequate, proposing alternatively, six months.  
The Commission addresses these points below. 
  
Rule 22c-2(a)(2) provides that a fund or its principal underwriter must enter into a written 
agreement with each financial intermediary of the fund under which the intermediary must agree 
to “provide promptly upon request by the fund, the Taxpayer Identification Number of all 
shareholders that purchased, redeemed, transferred, or exchanged...,” along with the amount and 
dates of such transactions.  Rule 22c-2 does not, however, provide for the retention or provision 
of historical data.  Accordingly, even assuming that the PBHG Funds already have agreements in 
place with all intermediaries, Rule 22c-2, as it currently exists, cannot be used by the PBHG 
Funds or their representative to require the provision of data from 1998 through 2001.
9
  
 
                     
8
  See FAB at pp. 3-5.  “Plan-level fiduciary,” as used herein, means the retirement plan-identified 
fiduciary, trustee, or other entity authorized to distribute allocated funds directly to non-IRA retirement 
plan participants. 
 
9
  Under Rule 22c-2, funds must enter into shareholder information agreements with their 
intermediaries by April 16, 2007, and must be able to request and promptly receive shareholder identity 
and transaction information pursuant to shareholder information agreements by October 16, 2007.  See 71 
Fed. Reg. at p. 58262, § III.   
 

 
 7 
With respect to the CMFI request that the Plan provide omnibus account intermediaries 
six months in which to comply with the IDC’s request for omnibus account information, the 
Commission notes that, in anticipation of an eventual distribution, the IDC began outreach 
efforts in connection with the Plan at the end of May 2006.  Accordingly, under the Plan, which 
continues the outreach efforts through sixty days beyond the date of approval of the Plan, each 
omnibus provider will have been permitted substantially more than sixty days to comply and, in 
some instances, will have been provided with the requested six months, if not more.    
 
3. The Barnes Letter 
 
In the Barnes letter, dated September 13, 2006, Barnes objects to the return of any 
amounts to “undamaged PBHG individual shareholders” through the Plan’s provision for the 
return of undistributed (residual) amounts to the PBHG Funds and thus, current (and not 
necessarily former) accountholders.  It is anticipated at this time that this residual amount will be 
comprised of undeliverable mail for which the Fund Administrator cannot find a good address, 
and uncashed checks.  Although the residual amount cannot be predicted with any precision, the 
IDC and the Fund Administrator have informed the staff that they expect the undeliverable mail 
component of this to be minimal in view of the substantial identifying information that they have 
for each accountholder, and that, accordingly, the residual amount likely will be too small to 
justify the delay and costs of additional distributions.  Accordingly, the Commission believes 
that the existing Plan sufficiently addresses the subject of Barnes’ objection.   
 
B.  The Modifications 
 
The modifications discussed above with respect to Non-IRA Retirement Accounts, 
namely: 
• a procedure for notifying accountholders entitled to $1000 or more of their 
respective final distribution amount well in advance of distributing funds to those 
accountholders (Plan, ¶ 8.6.5.2.1); 
• language specifying the timing of distributions to such accounts (Plan, ¶ 
8.6.5.2.2);  
• a provision clarifying that costs associated with such accounts will not be 
reimbursed (Plan, ¶ 8.6.5.4); and  
• alternative, less costly, distribution methodologies (Plan, ¶¶ 8.6.5.3.1-8.6.5.3.2); 
 
do not take away any rights originally afforded to Non-IRA Retirement Accounts but, rather, 
provide to them additional details and options concerning the distribution, and facilitate their 
compliance with their responsibilities under applicable law.   
 
 The remainder of the modifications, namely: 
  
• the renumbering of the existing ¶ 8.6.4.2  (“Non-IRA Retirement Accounts”) to 
be a separate section: ¶ 8.6.5 and the inclusion of a definition of Non-IRA 
Retirement Accounts;  
• the addition of “Fund Administrator” to ¶ 8.7; and  

 
 8 
• the express exception of the Commission and the Fair Fund from the “persons” 
included in  ¶ 8.2;  
 
are generally clarifying or otherwise technical in nature. 
 
 In view of the fact that the modifications set forth herein were drafted primarily in 
response to the only comments made with respect to Non-IRA Retirement Accounts; the staff 
has addressed all public comments submitted in connection with the Plan; and the modifications 
do not take away or otherwise impair any rights originally afforded but rather add options and 
clarification, the Commission, in its discretion, does not believe these modifications require 
publication of the modified Plan. 
 
C. The Bond Requirements of Fair Fund Rule 1105(c) 
 
Fair Fund Rule 1105(c) provides: 
 
Administrator to Post Bond.  If the administrator is not a Commission employee, 
the administrator shall be required to obtain a bond in the manner prescribed in 11 
U.S. C. 322, in an amount to be approved by the Commission.  The cost of the 
bond may be paid for as a cost of administration.  The Commission may waive 
posting of a bond for good cause shown.   
 
17 C.F.R. § 201.1105(c).  The Commission believes that the risk protection provisions of the 
Plan, generally included in ¶¶ 8.3 and 8.4 of the Plan, and the high cost of bond coverage, suffice 
to constitute good cause for waiving the posting of the bond under Rule 1105(c).   
 
D. Extension of Time for Entry of Order 
 
Fair Fund Rule 1104 provides, in relevant part:  
 
The order approving or disapproving the plan should be entered within 30 days 
after the end of the final period allowed for comments on the proposed plan unless 
the Commission or the hearing officer, by written order, allows a longer period 
for good cause shown. 
 
The staff needed more than thirty days to gain a full understanding of the issues presented herein 
and make an informed recommendation to the Commission.  The Commission agrees that this 
constitutes good cause for an extension of the time provided in Rule 1104 for the entry of this 
Order.    
 
 

 
 9 
III.  
 
 Accordingly, IT IS ORDERED that: 
 
A. Pursuant to Rule 1104 of the Fair Fund Rules, 17 C.F.R. § 201.1104, that the Distribution 
Plan is modified as described above, and approved with such modification;  
 
B. Pursuant to Rule 1105 of the Fair Fund Rules, 17 C.F.R. § 201.1105(a), that Boston 
Financial Data Services, Inc. is appointed as the Administrator of the Plan in accordance 
with the terms of the Plan;  
 
C. The bond requirement of Rule 1105(c) of the Fair Fund Rules, 17 C.F.R. 201.1105(c), is 
waived for good cause shown; and 
 
D. In accordance with Rule 1104 of the Fair Fund Rules, 17 C.F.R. § 201.1104, and for good 
cause shown, the time for entering this Order approving the Plan has been extended, nunc 
pro tunc, through the date of this Order.     
 
 
 By the Commission. 
 
Nancy M. Morris 
                                                                                                Secretary            
 

UNITED STATES OF AMERICA 
Before the 

SECURITIES AND EXCHANGE COMMISSION 
 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 54812 / November 22, 2006  
 
Administrative Proceeding  
File No. 3-11524 
____________________________________ 
                                                               :  
In the Matter of               : Order Approving a  
                                                            : Distribution Plan  
PILGRIM BAXTER &   : 
   ASSOCIATES, LTD.,    : 
      : 
  Respondent.   : 
____________________________________: 
 
 

I.  
 
 On June 21, 2004, in the above-captioned matter, the Commission issued an Order 
instituting and simultaneously settling public administrative and cease-and-desist proceedings 
against Pilgrim Baxter & Associates, Ltd. (the “PBA Order”).  In the PBA Order, the Commission 
authorized and established a Fair Fund of $90 million in disgorgement and penalties paid by Pilgrim 
Baxter & Associates, Ltd. (“PBA”).  According to the PBA Order, the Fair Fund is to be distributed 
to investors injured by market timing in the PBHG Funds pursuant to a distribution plan to be 
developed by an Independent Distribution Consultant (the “IDC”).  In September 2004, PBA 
engaged Kenneth Lehn, Ph.D., as the IDC. 
 
 In two related matters:  Gary L. Pilgrim, Admin. Proc. File No. 3-11739 (Nov. 17, 2004) 
and Harold J. Baxter, Admin. Proc. File No. 3-11740 (Nov. 17, 2004),  the Commission issued 
two orders simultaneously instituting and settling administrative and cease-and-desist proceedings 
against the former principals of PBA, Gary L. Pilgrim (“Pilgrim”) and Harold J. Baxter 
(“Baxter”).  Among other things, the Commission authorized and established in each of these 
Orders a Fair Fund comprised of $80 million in disgorgement and penalties paid by Pilgrim and 
Baxter for distribution in accordance with the distribution plan developed by the IDC, Dr. Lehn.  
 



 

 2 

                    

 On June 6, 2006, Dr. Lehn submitted a proposed distribution plan to the Commission’s 
Office of the Secretary (the “Plan”).  The Plan provides for distribution to all eligible investors of 
their proportionate share of the disgorgement and civil penalties paid by PBA, Pilgrim, and 
Baxter to compensate such investors for injury they may have suffered as a result of market 
timing in PBHG Funds for the period spanning June 1998 through December 2001.  The 
aggregated Fair Fund includes $250 million plus any accumulated interest (the “PBA Fair 
Fund”).  Under the Plan, eligible investors in the PBHG Funds would receive a pro rata share of 
the PBA Fair Fund, calculated by Dr. Lehn as a percentage of the value of the PBHG fund held 
by an accountholder on a given day multiplied by the fund’s daily settlement proceeds.  The pro 
rata shares of the PBA Fair Fund would be determined based on information contained in PBA’s 
records, as well as records obtained from third-party intermediaries, obviating any need for a 
claims process.   
 
 In accordance with the Commission’s Rules on Fair Fund and Disgorgement Plans (the 
“Fair Fund Rules”), 17 C.F.R. § 201.1100, et seq., the Plan proposed a Fund Administrator and 
sets forth, among other things, procedures for the receipt of additional funds; categories of 
persons potentially eligible to receive proceeds from the PBA Fair Fund; procedures for 
providing notice to such persons of the existence of the fund and their potential eligibility to 
receive proceeds; procedures for the administration of the fund, including provisions for filing 
tax returns; and a proposed date for the termination of the PBA Fair Fund.   
 

Boston Financial Data Services, Inc., proposed in the Plan as the Fund Administrator, has 
not posted the bond generally required of third-parties under Fair Fund Rule 1105(c).1  Rather, 
the Plan incorporates several layers of protection for the PBA Fair Fund.  Among other things, 
under the Plan:  (1) the Fund Administrator will have no custody, and only restricted control, of 
the PBA Fair Fund; (2) the PBA Fair Fund will be held by the United States Department of the 
Treasury, Bureau of Public Debt (“Treasury”) until immediately before checks or wires are 
transmitted to eligible investors; (3) upon transfer from Treasury, funds will be held in an escrow 
account, separate from the assets of the bank identified in the Plan (the “Bank”), until 
presentment of a check or wire; (4) upon presentment of checks or wire instructions, funds will 
be subject to “positive pay” or similar controls before honored by the Bank; (5) no more than 
$125 million (approximately one half of the amount in the PBA Fair Fund) will be in the Bank’s 
possession at any one time; and (6) both the Bank and the Fund Administrator will maintain, 
throughout this process, insurance and/or a financial institution bond that covers errors and 
omissions, misfeasance, and fraud. 
 

 
1  Based on one estimate provided to the staff of the Commission, the cost of a bond posted on 
behalf of the Fund Administrator for the $250 million (plus interest) Fair Fund could approach $3.4 
million.  



 

 3 

On June 30, 2006, the Commission published the Plan and issued a Notice of Proposed 
Distribution Plan and Opportunity for Comment (Exchange Act Release No. 34-54073) pursuant 
to Rule 1103 of the Fair Fund Rules, 17 C.F.R. § 201.1103.  The Notice advised interested 
parties that they could obtain a copy of the Plan at http://www.sec.gov/litigation/admin/34-
54073-pdp.pdf, or by submitting a written request to Catherine E. Pappas, United States 
Securities and Exchange Commission, 701 Market Street, Suite 2000, Philadelphia, PA 19106.  
The Notice also advised that all persons desiring to comment on the Plan could submit their 
comments, in writing, no later than July 31, 2006. 

 
In response to the Notice, the Spark Institute, Inc. (“Spark”), the Coalition of Mutual 

Fund Investors (“CMFI”), and Gregory D. Barnes, CPA (“Barnes”) submitted public comments 
to the Office of the Secretary.  The Commission staff engaged in subsequent communications 
with each of these commenters to discuss and more fully understand the issues that they each 
raised in their respective letters.  In general, the Spark Letter seeks relief on behalf of 
intermediaries for Non-IRA Retirement Accounts2 eligible for a distribution under the Plan from 
fiduciary obligations and costs that may arise from distributions under the Plan.3  The CMFI 
Letter, written on behalf of individual mutual fund investors, expresses concern about the Plan’s 
“outreach process,” or the procedures by which the IDC will seek individual investor information 
from omnibus account intermediaries.  The Barnes letter, written by a former investor in the 
PBHG Funds, objects to the return of any amounts to “undamaged PBHG individual 
shareholders” through the Plan’s provision for the return of undistributed (residual) amounts to 
the PBHG Funds.    

 
After careful consideration, the Commission has concluded that the Plan should be 

modified to include, among other things, additional detail concerning procedures applicable to 
Non-IRA Retirement Accounts, and approved with such modifications.  The Commission has 
further determined that, for good cause shown, the bond required under Fair Fund Rule 1105(c) 
will be waived and the time for entry of an Order approving the Plan shall be extended, nunc pro 
tunc, through the date of this Order. 

 

                     
2  “Non-IRA Retirement Account” as used in the Plan and herein, means any account of an 
employee benefit plan, as such plans are defined in section 3(3) of the Employee Retirement Income 
Security Act of 1974, 29 U.S.C. 1001, et seq. (“ERISA”), which is not an Individual Retirement Account, 
whether or not the plan is subject to Title I of ERISA.   
 
3  The Spark Letter includes three additional requests for relief.  Spark had concerns regarding the 
confidentiality of information provided by the intermediaries to the IDC, time constraints imposed on the 
provision of the data, and tax reporting issues if the IDC distributed the funds to retirement plan 
participants.  In fact, only ¶ 8.6.4.2 (¶ 8.6.5. of the Plan as modified) applies to the distribution to Non-
IRA Retirement Accounts, the intermediaries of such accounts do not provide data to the IDC, and the 
IDC will not be making any distributions to non-IRA retirement plan participants. 
 

http://www.sec.gov/litigation/admin/2006/34-54073-pdp.pdf
http://www.sec.gov/litigation/admin/2006/34-54073-pdp.pdf


 

 4 

II.  
 
A.  Public Comments on the Plan 
 

1.  The Spark Letter 
 
The Spark letter, dated July 31, 2006, is written on behalf of “retirement plan record 

keepers that will be responsible for gathering and providing accountholder information, making 
certain allocations, receiving distributions, and making distributions to plan participants who are 
the intended beneficiaries of a substantial portion of the distribution at issue.”  In its letter, Spark 
claims that, under the Plan and pursuant to Department of Labor (“DOL”) April 19, 2006 Field 
Assistance Bulletin (2006-01) (the “FAB”), a retirement plan record keeper that is not otherwise 
a retirement plan fiduciary must choose between assuming fiduciary obligations under ERISA 
and replicating the IDC’s calculations.4  Spark further claims that the complexity of the IDC’s 
calculations, and the effort and cost associated with gathering daily accountholder information 
for a 3½ year period, eliminates any possibility for a record keeper or other intermediary to use 
the IDC’s methodology and thus, fall within the Safe Harbor.  Finally, Spark claims that the Plan 
does not provide sufficient information as to what costs will be reimbursed under the Plan, 
thereby preventing intermediaries from performing the cost-benefit analysis described in the 
FAB.5  The Commission addresses these claims below. 

 
As is evident from the FAB, fiduciary obligations accompanying a distribution under a 

distribution plan are not new developments under the law.  Rather, these obligations arise under 

                     
4  The FAB, in essence, provides a regulatory safe harbor to intermediaries using an IDC’s 
methodology (the “Safe Harbor”), providing:  “[i]f an IDC, as part of its distribution plan approved by the 
SEC, makes available to an intermediary or requires, as a condition to the distribution, that the 
intermediary utilize a particular methodology for allocating settlement fund proceeds among individual 
omnibus account clients, the [DOL] will, as an enforcement matter, view the application of such 
methodology to the allocation of settlement fund proceeds among individual omnibus account clients as 
satisfying the requirements of section 404(a) with respect to the methodology for allocating assets to 
employee benefit plans,” as long as such methodology is implemented prudently.  FAB at p. 3.   
 
5  For instance, in the FAB, the DOL states:   
 

In some instances, the intermediary will be responsible both for developing and 
implementing the plan for allocating proceeds among its omnibus account clients.  As 
fiduciaries, intermediaries must be prudent in the selection of the method of allocating the 
proceeds among its clients in an omnibus account, including plans.  Prudence in such 
instances would, at a minimum, require a process by which the fiduciary chooses a 
methodology where the proceeds of the settlement would be allocated, where possible, to 
the affected clients in relation to the impact the … [market timing] may have had on the 
particular plan.  However, prudence would also require a process by which the fiduciary 
weighs the costs and ultimate benefit to the clients associated with achieving that goal.  

 
FAB at p. 3. 
 



 

 5 

                    

pre-existing ERISA legislation and common law.6  In sum, assuming fiduciary duties under 
ERISA is not a new possibility for record keepers or other ERISA plan intermediaries in 
connection with a distribution of litigation proceeds.  Accordingly, requiring intermediaries to 
distribute funds in accordance with fiduciary duties is neither inappropriate nor unreasonable.   

 
Nevertheless, certain modifications to the Plan are appropriate in order to (1) assist Spark 

members and others similarly situated in understanding the Plan and complying with their 
responsibilities under the law; and (2) provide some less costly distribution alternatives in 
connection with Non-IRA Retirement Accounts and thereby increase the possibility that 
distributions will be made through the plan participant level: 

 
• To improve the clarity of the sections concerning Non-IRA Retirement Accounts, 

the existing ¶ 8.6.4.2  (“Non-IRA Retirement Accounts”) has been renumbered to 
be a separate section: ¶ 8.6.5, and “Non-IRA Retirement Account” has been 
defined (Plan, note 10); 

 
• To provide additional information to Non-IRA Retirement Accounts in order to 

facilitate intermediary preparation to distribute funds received under the Plan, and 
to distribute funds in accordance with their fiduciary, contractual, and/or legal 
obligations, the following has been added to the Plan description of distributions 
to Non-IRA Retirement Accounts: 

 
o a procedure for notifying accountholders entitled to $1000 or more of their 

respective final distribution amount in advance of distributing funds to 
those accountholders (Plan, ¶ 8.6.5.2.1); 

o language specifying the timing of distributions to such accounts (Plan, ¶ 
8.6.5.2.2);  

o a fixed cost reimbursement amount (Plan, ¶ 8.6.5.4); and  
o alternative distribution methodologies (Plan, ¶¶ 8.6.5.3.1- 8.6.5.3.2). 

 
The modifications to the Plan which provide to the intermediaries notice of a distribution 

amount in advance of any distribution, and which clarify that costs associated with Non-IRA 
Retirement Account distributions will not be reimbursed, address some of the concerns of Spark 
members and others similarly situated by enabling them to perform a precise cost benefit 
analysis, and to develop and seek approval of a distribution methodology in advance of 
performing any distribution, thereby possibly avoiding the assumption of fiduciary 
responsibility.7    

 

 
6  See, e.g., FAB at p. 2 (citing ERISA and “ordinary notions of property rights”).  

7  See FAB at p. 4 and note 8 (“If the receipt, allocation and/or distribution services of the 
intermediary, and compensation for such services, are carried out in accordance with the directions and 
approval of appropriate plan fiduciaries, the intermediary may be able to avoid fiduciary status and issues 
relating to self-dealing under ERISA.”).   
 



 

 6 

With respect to costs, the staff has obtained cost estimate information from Spark which 
indicates that the costs faced by intermediaries of Non-IRA Retirement Accounts in connection 
with a distribution pursuant to the IDC’s methodology could be substantial and significantly 
larger than those faced by intermediaries in connection with other types of omnibus accounts.  
Plan required reimbursement of these costs at or near the cost estimates provided to the staff 
simply would be cost prohibitive and unreasonable, especially in view of substantial flexibility in 
the FAB for an intermediary or plan-level fiduciary to develop a more cost efficient method of 
distribution.8  In the context of a fixed cost reimbursement amount, Spark has requested that any 
specified cost reimbursement upper limit approach the cost estimates provided by Spark.  Spark 
further has rejected a cost reimbursement upper limit based on the cost reimbursement sought by 
intermediaries of other types of omnibus accounts.  In view of the foregoing, and in 
consideration of Spark’s contention that unspecified cost reimbursement prevents Non-IRA 
Retirement Account intermediaries from performing with precision any requisite cost benefit 
analysis, the modification to the Plan to provide less costly alternative methodologies, and no 
cost reimbursement, is a reasonable and practical resolution.   

 
2. The CMFI Letter 

 
The CMFI comments are in furtherance of “the interests of individual mutual fund 

investors.”  In its Comment Letter dated July 31, 2006, CMFI claims that the Plan’s specified 
outreach to intermediaries for individual investor information will not sufficiently protect the 
individual investor.  Rather, CMFI suggests that the Plan should require the PBHG Funds or 
their representative to request from intermediaries, pursuant to Rule 22c-2 of the Investment 
Company Act (17 C.F.R. § 270.22c-2) (“Rule 22c-2”) the information currently sought through 
the omnibus account outreach process.  In addition, CMFI objects to the cessation of outreach 
efforts sixty days after the Plan’s approval as inadequate, proposing alternatively, six months.  
The Commission addresses these points below. 

  
Rule 22c-2(a)(2) provides that a fund or its principal underwriter must enter into a written 

agreement with each financial intermediary of the fund under which the intermediary must agree 
to “provide promptly upon request by the fund, the Taxpayer Identification Number of all 
shareholders that purchased, redeemed, transferred, or exchanged…,” along with the amount and 
dates of such transactions.  Rule 22c-2 does not, however, provide for the retention or provision 
of historical data.  Accordingly, even assuming that the PBHG Funds already have agreements in 
place with all intermediaries, Rule 22c-2, as it currently exists, cannot be used by the PBHG 
Funds or their representative to require the provision of data from 1998 through 2001.9  

 
                     
8  See FAB at pp. 3-5.  “Plan-level fiduciary,” as used herein, means the retirement plan-identified 
fiduciary, trustee, or other entity authorized to distribute allocated funds directly to non-IRA retirement 
plan participants. 
 
9  Under Rule 22c-2, funds must enter into shareholder information agreements with their 
intermediaries by April 16, 2007, and must be able to request and promptly receive shareholder identity 
and transaction information pursuant to shareholder information agreements by October 16, 2007.  See 71 
Fed. Reg. at p. 58262, § III.   
 



 

 7 

With respect to the CMFI request that the Plan provide omnibus account intermediaries 
six months in which to comply with the IDC’s request for omnibus account information, the 
Commission notes that, in anticipation of an eventual distribution, the IDC began outreach 
efforts in connection with the Plan at the end of May 2006.  Accordingly, under the Plan, which 
continues the outreach efforts through sixty days beyond the date of approval of the Plan, each 
omnibus provider will have been permitted substantially more than sixty days to comply and, in 
some instances, will have been provided with the requested six months, if not more.    

 
3. The Barnes Letter 
 
In the Barnes letter, dated September 13, 2006, Barnes objects to the return of any 

amounts to “undamaged PBHG individual shareholders” through the Plan’s provision for the 
return of undistributed (residual) amounts to the PBHG Funds and thus, current (and not 
necessarily former) accountholders.  It is anticipated at this time that this residual amount will be 
comprised of undeliverable mail for which the Fund Administrator cannot find a good address, 
and uncashed checks.  Although the residual amount cannot be predicted with any precision, the 
IDC and the Fund Administrator have informed the staff that they expect the undeliverable mail 
component of this to be minimal in view of the substantial identifying information that they have 
for each accountholder, and that, accordingly, the residual amount likely will be too small to 
justify the delay and costs of additional distributions.  Accordingly, the Commission believes 
that the existing Plan sufficiently addresses the subject of Barnes’ objection.   

 
B.  The Modifications 
 

The modifications discussed above with respect to Non-IRA Retirement Accounts, 
namely: 

• a procedure for notifying accountholders entitled to $1000 or more of their 
respective final distribution amount well in advance of distributing funds to those 
accountholders (Plan, ¶ 8.6.5.2.1); 

• language specifying the timing of distributions to such accounts (Plan, ¶ 
8.6.5.2.2);  

• a provision clarifying that costs associated with such accounts will not be 
reimbursed (Plan, ¶ 8.6.5.4); and  

• alternative, less costly, distribution methodologies (Plan, ¶¶ 8.6.5.3.1-8.6.5.3.2); 
 

do not take away any rights originally afforded to Non-IRA Retirement Accounts but, rather, 
provide to them additional details and options concerning the distribution, and facilitate their 
compliance with their responsibilities under applicable law.   
 
 The remainder of the modifications, namely: 
  

• the renumbering of the existing ¶ 8.6.4.2  (“Non-IRA Retirement Accounts”) to 
be a separate section: ¶ 8.6.5 and the inclusion of a definition of Non-IRA 
Retirement Accounts;  

• the addition of “Fund Administrator” to ¶ 8.7; and  



 

 8 

• the express exception of the Commission and the Fair Fund from the “persons” 
included in  ¶ 8.2;  

 
are generally clarifying or otherwise technical in nature. 
 
 In view of the fact that the modifications set forth herein were drafted primarily in 
response to the only comments made with respect to Non-IRA Retirement Accounts; the staff 
has addressed all public comments submitted in connection with the Plan; and the modifications 
do not take away or otherwise impair any rights originally afforded but rather add options and 
clarification, the Commission, in its discretion, does not believe these modifications require 
publication of the modified Plan. 

 
C. The Bond Requirements of Fair Fund Rule 1105(c) 

 
Fair Fund Rule 1105(c) provides: 
 
Administrator to Post Bond.  If the administrator is not a Commission employee, 
the administrator shall be required to obtain a bond in the manner prescribed in 11 
U.S. C. 322, in an amount to be approved by the Commission.  The cost of the 
bond may be paid for as a cost of administration.  The Commission may waive 
posting of a bond for good cause shown.   
 

17 C.F.R. § 201.1105(c).  The Commission believes that the risk protection provisions of the 
Plan, generally included in ¶¶ 8.3 and 8.4 of the Plan, and the high cost of bond coverage, suffice 
to constitute good cause for waiving the posting of the bond under Rule 1105(c).   
 
D. Extension of Time for Entry of Order 

 
Fair Fund Rule 1104 provides, in relevant part:  
 
The order approving or disapproving the plan should be entered within 30 days 
after the end of the final period allowed for comments on the proposed plan unless 
the Commission or the hearing officer, by written order, allows a longer period 
for good cause shown. 

 
The staff needed more than thirty days to gain a full understanding of the issues presented herein 
and make an informed recommendation to the Commission.  The Commission agrees that this 
constitutes good cause for an extension of the time provided in Rule 1104 for the entry of this 
Order.    
 
 



 

 9 

III.  
 
 Accordingly, IT IS ORDERED that: 
 

A. Pursuant to Rule 1104 of the Fair Fund Rules, 17 C.F.R. § 201.1104, that the Distribution 
Plan is modified as described above, and approved with such modification;  

 
B. Pursuant to Rule 1105 of the Fair Fund Rules, 17 C.F.R. § 201.1105(a), that Boston 

Financial Data Services, Inc. is appointed as the Administrator of the Plan in accordance 
with the terms of the Plan;  

 
C. The bond requirement of Rule 1105(c) of the Fair Fund Rules, 17 C.F.R. 201.1105(c), is 

waived for good cause shown; and 
 

D. In accordance with Rule 1104 of the Fair Fund Rules, 17 C.F.R. § 201.1104, and for good 
cause shown, the time for entering this Order approving the Plan has been extended, nunc 
pro tunc, through the date of this Order.     

 
 
 By the Commission. 

 
Nancy M. Morris 

        Secretary 
 


	SECURITIES EXCHANGE ACT OF 1934