Proposed Exemptions; Novo Nordisk Bioindustrials, Inc. 401(k) Thrift Plan, et al.

Federal RegisterMay 25, 1994

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-9661, et al.]

Proposed Exemptions; Novo Nordisk Bioindustrials, Inc. 401(k)

Thrift Plan, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restrictions of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

406(b) of the Act, requests for hearing within 45 days from the date of

publication of this Federal Register Notice. Comments and request for a

hearing should state: (1) The name, address, and telephone number of

the person making the comment or request, and (2) the nature of the

person's interest in the exemption and the manner in which the person

would be adversely affected by the exemption. A request for a hearing

must also state the issues to be addressed and include a general

description of the evidence to be presented at the hearing. A request

for a hearing must also state the issues to be addressed and include a

general description of the evidence to be presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, NW., Washington, DC

20210. Attention: Application No. stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

Novo Nordisk Bioindustrials, Inc. 401(k) Thrift Plan (the Plan) Located

in Danbury, Connecticut; Proposed Exemption

[Application No. D-9661]

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR part

2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the

Code shall not apply to (1) the proposed interest-free loan to the Plan

(the Loan) by Novo Nordisk Bioindustrials, Inc. (the Employer), a party

in interest with respect to the Plan, and (2) the Plan's potential

repayment of the Loan upon the receipt by the Plan of payments under

Guaranteed Investment Contract No. GA-4607 (the GIC) issued by Mutual

Benefit Life Insurance Company (MBL); provided the following conditions

are satisfied:

(A) No interest or expenses are paid by the Plan in connection with

the proposed transaction;

(B) The Loan is made to reimburse the Plan for amounts invested

with MBL under the terms of the GIC;

MBL, its successors, or any other responsible third parties; and

(D) Repayment of the Loan is waived with respect to the amount by

which the Loan exceeds GIC proceeds.

Summary of Facts and Representations

1. The Employer, a New York corporation with its corporate

headquarters in Danbury, Connecticut, is a wholly owned subsidiary of

Novo Nordisk A/S, a Danish Corporation. The Plan is a profit sharing

plan which includes a cash or deferred arrangement under section 401(k)

of the Code, and which provides for Employer matching contributions and

additional Employer discretionary profit sharing contributions. The

Plan provides for participant direction with respect to employee

contributions and Employer matching contributions to the Plan. The Plan

participants have the option of investing in any of five investment

funds: the GIC Fund, the First Union Managed Bond Portfolio, the First

Union Balanced Portfolio, The Diversified Equity Fund, and the Novo

American Depository Receipt Fund. Participants have the right to change

their investments within and among the funds on a daily basis, except

that participants may no longer transfer amounts into or out of the GIC

Fund to the extent that their account balance in that Fund is

attributable to the GIC issued by MBL. As of December 31, 1993, the

Plan had approximately 225 participants and total assets of

approximately $5,600,000. The Plan's trustee is First Union Bank of

North Carolina.

2. The applicant represents that the GIC acquired from MBL was

effective with respect to amounts deposited during 1987. The terms of

the GIC provided for interest to be credited at the rate of 8.10% per

annum until December 31, 1988, and thereafter at the rate of 7.55% per

annum until the maturity date of December 31, 1991.

3. On July 16, 1991, MBL was placed into rehabilitation proceedings

by the New Jersey Commissioner of Insurance. Consequently, MBL has

suspended payments on its guaranteed investment contracts, including

the GIC held by the Plan. This situation has prevented participants

from exercising their rights under the Plan to request distributions,

loans, and investment transfers with respect to amounts currently

invested in the GIC.1 As of December 31, 1991, the GIC had a total

accumulated book value of $578,916.34.2 The Employer seeks an

exemption to permit the Employer to make the Loan to the Plan in the

amount due the Plan under the GIC, plus interest through the date of

the Loan. The Loan will be made pursuant to a written agreement between

the Employer and the Plan (the Agreement) incorporating the terms of

the extension of credit and its repayment. The Employer represents that

it wishes to enter into the proposed transaction in order to protect

the Plan participants from the effects of a prolonged rehabilitation

process and from any potential loss resulting from MBL's inability to

meet its obligations under the GIC. The Employer further represents

that the Loan will enable the Plan to make timely payments under the

GIC and, therefore, enable the Plan participants to exercise their

rights under the Plan to request distributions, loans, and investment

transfers with respect to amounts currently invested in the GIC. The

Employer also represents that the Loan will be non-interest bearing and

the Plan will not incur any expenses in connection with the proposed

transaction.

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\1\The Department notes that the decisions to acquire and hold

the GIC are governed by the fiduciary responsibility requirements of

Part 4, Subtitle B, Title I of the Act. In this regard, the

Department is not herein proposing relief for any violations of Part

4 which may have arisen as a result of the acquisition and holding

of the GIC issued by MBL.

\2\Total accumulated book value is defined as the amount

deposited under the GIC, plus interest at the guaranteed interest

rate.

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4. The proposed Loan will be made in one lump-sum payment equal to

the amounts deposited under the GIC, adjusted as follows: (1) Interest

is calculated at the guaranteed interest rate under the terms of the

GIC until December 31, 1991, the maturity date; and (2) the post-

maturity interest rates will be calculated as follows:

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On first

$300,000 of7/ On amount over

16/91 value $300,000

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1992.................................... 5.75 4.00

1993.................................... 5.25 3.50

1/1/94-Loan Date\3\..................... 5.10 3.50

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\3\The Employer represents that the Loan will be made as soon as

administratively practicable following the publication in the Federal

Service of a favorable closing agreement covering the tax and

qualified plan issues involved in the proposed extension of credit to

the Plan.

It is represented that the proposed rate of interest for periods after

the maturity date are the rates that would apply to the GIC for those

periods according to the proposed plan of rehabilitation set forth by

the Superior Court of New Jersey. Any proceeds paid from the GIC and

received by the Plan on or before the Loan date will be subtracted from

the book value.

5. Repayment of the Loan under the Agreement is limited to payments

made to the Plan by or on behalf of MBL or its successor. No other Plan

assets will be available for repayment of the Loan. If the payments by

or on behalf of MBL are not sufficient to fully repay the Loan, the

Agreement provides that the Employer will have no recourse against the

Plan, or against any participants or beneficiaries of the Plan, for the

unpaid amount.

6. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 408(a) of the Act

because: (1) The Loan will enable the Plan to recover the total

accumulated book value of the GIC as of the date of maturity, plus

interest thereafter; (2) The Plan will pay no interest nor incur any

expenses with respect to the Loan; (3) Repayment of the Loan will be

restricted to payments made by or on behalf of MBL and no other Plan

assets will be involved; and (4) Repayment of the Loan will be waived

to the extent the Plan recoups less from the payments by or on behalf

of MBL than the total amount of the Loan.

FOR FURTHER INFORMATION CONTACT: Ms. Virginia J. Miller of the

Department, telephone (202) 219-8971. (This is not a toll-free number.)

Hollingsworth & Vose Company Savings Plan (the Plan) Located in East

Walpole, Massachusetts; Proposed Exemption

[Application No. D-9677]

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the

Code, shall not apply to the August 26, 1992 loan (the Loan) of

$188,000 to the Plan by Hollingsworth & Vose Company (H&V), provided

the following conditions were satisfied: (a) No interest or expense was

incurred by the Plan with respect to the Loan; (b) the Loan enabled the

Plan to effect the transfer of amounts held in participant accounts to

new investments made available under the Plan; (c) accounts transferred

from the Plan's GIC Fund were credited with amounts representing the

allocable principal deposit in the GIC Fund plus accrued interest at

the GIC Fund rate; (d) accounts which remained invested in the GIC Fund

continued to receive interest at the same rate; and (e) repayment of

the Loan was restricted to amounts held in or allocated to the GIC

Fund, and no other plan assets were used for that purpose. Effective

Dates: If the proposed exemption is granted, the exemption will be

effective from August 26, 1992 through November 10, 1992.

Summary of Facts and Representations

1. H&V is a corporation organized under the laws of the

Commonwealth of Massachusetts engaged in the manufacture of technical

and industrial papers and nonwoven fabrics. The Plan is a profit

sharing plan which contains a cash or deferred arrangement under

section 401(k) of the Code. The Plan is administered by the Savings

Plan Committee (the Committee) of H&V. Under the Plan, participating

employees make elective contributions pursuant to salary reduction

agreements. H&V makes matching contributions not in excess of 6% of the

participant's compensation. The Plan had approximately 47 participants

who were affected by the subject transaction, and at the time of the

transaction had assets with an approximate aggregate fair market value

of $2,767,369. The Plan currently has assets of approximately

$4,361,700.

2. Contributions under the Plan are allocated to the accounts of

individual participants (the Accounts). The Accounts are invested at

the direction of participants in one or more of the investment options

available under the Plan. Investment directions may be made or changed

as of January 1 and July 1 of each Plan year and remain in effect until

changed by the participant.

3. Prior to July, 1992, two investment funds were available to

participants, the Guaranteed Investment Contract Fund (the GIC Fund)

and the Fidelity Equity Income Fund. The investments held in the GIC

Fund at that time consisted of four contracts: (i) Fidelity Group

Trust, at 8.33%, maturing on March 31, 1993; (ii) Vanguard Fixed Rate

GIC Trust II-90, at 8.17%, maturing March 31, 1993; (iii) Vanguard

Fixed Rate GIC Trust II-91, at 7.45%, maturing on March 31, 1994; and

(iv) Principal Group Annuity Contract No. GA 4-3031, at 6.53%, maturing

on March 31, 1995. Participants who invested in the GIC Fund received

interest at a combined rate calculated as the average of the rates on

open GICs held in the Fund, weighted in proportion to the amounts

allocated to each such GIC.

4. In September, 1991, the Committee began discussing the

possibility of expanding investment options under the Plan in order to

give participants greater flexibility and diversity of choice among

investments with respect to appropriate levels of risk and return. On

April 16, 1992, the Committee resolved to offer four investment

options, effective as of July 1, 1992. These were to be the GIC Fund,

the Fidelity Equity Income Fund and two additional options, the

Fidelity Growth and Income Fund and the Value Line U.S. Government

Securities Fund. Participants were informed of the additional options

by notice from the Committee on May 26, 1992.

5. The Committee subsequently received and processed directions

from participants for changes in investments as of the July 1, 1992

change date. The new investment directions required the transfer of

$258,572 held in the GIC Fund, or approximately 10% of Plan assets, to

other investment options.

6. Because of restrictions under the GICs, however, the Plan was

unable to redeem its interest in the contracts to effect the transfer

of amounts to other investments as directed by participants.

Specifically, under the Principal Group GIC, Principal could terminate

the contract if withdrawals were made prior to the maturity date. H&V

understood that similar restrictions applied under the other GICs held

in the GIC Fund (although in fact there were no comparable restrictions

on the Vanguard GICs).

7. To enable participants whose Accounts were invested in the GIC

Fund to make use of the new investment options and to protect

participants from incurring penalties for premature withdrawals from

the GICs, the Committee resolved to advance funds to the Plan. On

August 26, 1992, $188,000 was wire transferred by H&V to the Plan. The

$188,000 was invested in equity funds in accordance with the directions

of those participants whose account balances in the GIC Fund could not

otherwise be transferred.

8. Subsequent to the advance of funds, H&V was advised that the

transaction might constitute a prohibited transaction under section 406

of the Act and section 4975 of the Code. H&V therefore took immediate

action in an attempt to put the Plan in the position in which it would

have been had the transaction not occurred. The Committee determined

that under the Vanguard GICs, funds could be transferred at that time

without penalties to participants. Allocations to the GIC Fund made by

participants in September and October, 1992 were applied, together with

a partial liquidation principally of the Vanguard Fixed Rate Trust II-

91, to repay to H&V the amount that had been advanced to the Plan.

Specifically, $163,548 was repaid to H&V on November 10, 1992, and

$24,452 was retained by the Plan and used as an offset for

contributions which would have otherwise been made by H&V.

9. Under the terms of the Plan, the amounts repaid to H&V would

have been invested in the open GICs held in the GIC Fund, had the Loan

not been made. The money that was in the GIC Fund prior to the Loan

remained in the GIC Fund because it could not be transferred out

without penalty. Thus, the subsequent allocations could be used to

repay the Loan to H&V, and the GIC Fund remained in the same position

it would have been in had the Loan by H&V not been made. The entire

effect of the Loan and repayment to H&V was thus to provide liquidity

to the GIC Fund in order to make transfers to other investment funds as

directed by participants. The transaction was corrected within 90 days.

No interest or other expense was paid by the Plan. Participants who did

not transfer amounts from the GIC Fund as of the July 1, 1992 change

date continued to receive the same return on their investment in the

Fund. Participants who later invested in the GIC Fund received the same

return they would have received if the subject transaction had not

occurred.

10. In summary, the applicant represents that the subject

transaction satisfied the criteria contained in section 408(a) of the

Act for the following reasons: (a) The Loan enabled the Plan to effect

the transfer of amounts held in participant Accounts without penalty to

new investments made available under the Plan; (b) Accounts transferred

from the GIC Fund were credited with amounts representing the allocable

principal deposit in the fund plus accrued interest at the Fund rate;

receive interest at the same rate; (d) no interest or other expense was

incurred by the Plan with respect to the Loan; (e) the applicant undid

the Loan as soon as it realized that the Loan constituted a prohibited

transaction, with repayment of the loan taking place within 90 days of

the making of the Loan; and (f) repayment of the loan was restricted to

amounts held in or allocated to the GIC Fund, and no other Plan assets

were used for that purpose.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

telephone (202) 219-8881. (This is not a toll-free number.)

Western Capital Investment Corporation Employees' Retirement Fund (the

Plan) Located in Denver, CO ; Proposed Exemption

[Application No. D-9489]

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR part

2570, subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption

is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code by reason of section 4975(c)(1)(A) through (E) of the

Code, shall not apply to the cash sale by the Plan, on December 27,

1990, of certain of its assets (the Assets) to Bank Western, a Federal

Savings Bank (Bank Western), the principal subsidiary of the Plan's

former sponsor and a party in interest with respect to the Plan.

The proposed exemption is conditioned on the following

requirements: (1) The sale represented a one-time transaction for cash;

(2) the sales price for each Asset was based upon its fair market value

as determined by a qualified, independent appraisal; (3) the Plan did

not pay any fees or commissions in connection with the sale; and (4)

CNB files a Form 5330 with the Internal Revenue Service (the Service)

and pays any applicable excise taxes that may be due on any of the

Assets within 90 days of the publication in the Federal Register of the

notice granting the exemptive relief herein.

EFFECTIVE DATE: If granted, this proposed exemption will be effective

December 27, 1990.

Summary of Facts and Representations

1. The Plan is a profit sharing plan with section 401(k) features.

As of December 31, 1990, the Plan had net assets available for benefits

of $13,393,318 and 709 participants. The trustees of the Plan (the

Trustees) and the decisionmakers with respect to Plan investments as of

December 31, 1990 were David G. Brewick, Robert P. Easterly, James C.

Ford, Robert B. Stailey and Deloris P. Wolf.4

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\4\The Plan's current trustee and decisionmaker with respect to

Plan investments is First Trust National Association.

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2. The Plan was formerly sponsored by Western Capital Investment

Corporation (WCIC) of Denver, Colorado and its affiliated companies.

WCIC was a unitary savings and loan holding company whose primary asset

was the sole ownership of Bank Western. On December 18, 1992, WCIC was

merged into CNB, a wholly owned subsidiary of First Bank System, Inc.

(First Bank System) of Minneapolis, Minnesota. As a result of the

merger, the employees of Bank Western currently participate in the

First Bank System employee benefit plans, including its retirement

plans. It is anticipated that when First Bank System receives a

favorable determination letter with respect to amendments to the Plan,

it will be merged into the First Bank System 401(k) Plan.

3. Formerly included in the investment portfolio of the Plan were

the following Assets having an aggregate cost in excess of $5.7

million:

a. A $2,537,594 Investment in Government National Mortgage

Association Pools (the GNMA Pools).

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Amount of Income Servicing

Pool No. Investment received fees Sellers

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058683........................... $53,063 ........... ...........

126677........................... 13,512 ........... ...........

128606........................... 44,280 $22,213 $0 Merrill Lynch Govt. Securities Inc.

1131............................. 250,000 169,421 0 Bosworth Sullivan & Co., Inc.

1326............................. 1,000,000 84,025 0 Bank of New York.

103497........................... 118,302 31,998 ...........

131756........................... 48,244 11,201 ...........

000460........................... 557,576 194,777 ........... Drexel, Burnham, Lambert.

000479........................... 452,617 171,783 0

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Totals..................... $2,537,594 $685,418 $0

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The Plan acquired its interests in the GNMA Pools between 1972 and

1986 from unrelated parties for a total purchase price of $2,537,594.

Each of the GNMA Pool certificates featured monthly pass-throughs of

principal and interest. Such investments had interest rates ranging

from 6\1/2\ percent to 12 percent and were to mature between January 1,

2002 and December 20, 2019. Through December 31, 1990, the Plan

received total income of $685,417 with respect to its interests in the

GNMA Pools. In addition, the Plan paid no servicing fees in connection

with these investments nor were any restrictions placed on their sale

or transfer.

b. A $75,000 Investment in a Merrill Lynch Collateralized Mortgage

Obligation III-A (the CMO).

------------------------------------------------------------------------

Income Servicing

Amount of investment received fees

------------------------------------------------------------------------

$75,000....................................... $7,688 $0

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In January 1987, the Plan acquired an interest in the CMO for

$75,000. The CMO was secured by single family residential mortgage

loans, carried a stated interest rate of 7 percent per annum and had a

maturity date of September 20, 2016. Through December 31, 1990, the

Plan received total income of $7,688 with respect to the CMO

investment. In addition, the Plan paid no servicing fees in connection

with this investment nor were there any restrictions placed on the sale

or transfer of the CMO.

c. A $29,027 Investment in Two Mobile Home Loans (the Mobile Home

Loans).

------------------------------------------------------------------------

Income Servicing

Loan Investment received fees

------------------------------------------------------------------------

Lorenzo.......................... $11,067 ........... ...........

Gruber........................... 17,960 ........... ...........

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Total...................... $29,027 $14,423 $1,571

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The Plan acquired its first Mobile Home Loan from Shelter America

Corporation (SAC), a party in interest, on April 25, 1985. The

acquisition price paid by the Plan was $11,067. This amount reflected

the outstanding principal balance of the loan. The borrowers, Andrew

and Katherine Lorenzo, were not parties in interest. When purchased by

the Plan, the Lorenzo Mobile Home Loan carried an interest rate of 13

percent per annum and a maturity of 144 months. The collateral for the

Lorenzo Mobile Home Loan was a first lien on a 1977 Liberty, Liberator

(14 x 60 foot) mobile home. No restrictions were placed on the sale or

transfer of this loan.

The Plan acquired its second Mobile Home Loan from SAC on July 8,

1986 for $17,960, which represented the outstanding principal balance

of such loan. The borrowers, James and Lauretta Gruber, were unrelated

parties. At the time of purchase by the Plan, the Gruber Mobile Home

Loan had an outstanding balance of $17,960 and bore interest at the

coupon rate of 12.95 percent. The loan had a maturity of 180 months and

was secured by a first lien interest on a Central Homes (26 x 44 foot)

double-wide mobile home. The Plan could sell or transfer this loan

without any restrictions.5

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\5\The applicant states that no documentation exists which would

define the investment criteria used by the Plan's Trustees in

selecting the Mobile Home Loans as Plan investments. The applicant

represents that at the time these investments were made, both Bank

Western and SAC were actively investing in mobile home loans such

that the Trustees thought these loans would be sound investments for

the Plan due to their high rates of return.

Accordingly, the Department notes that the decisions by the

Trustees to have the Plan acquire and hold the Mobile Home Loans are

governed by the fiduciary responsibility requirements of part 4,

Subtitle B, Title I of the Act. In this regard, the Department is

not proposing, nor is the applicant requesting exemptive relief for

any violations of part 4 which may have arisen as a result of the

Plan's acquisition and holding of the Mobile Home Loans (see

Representation 7).

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The applicant notes that while the Plan held the Mobile Home Loans,

the Lorenzos and the Grubers were occasionally delinquent. However, the

applicant explains that, in all instances, the borrowers quickly

corrected these delinquencies and the loans were current at the time of

the sale transaction described herein.

The Plan received total investment income of $14,423 in connection

with its investment in the Mobile Home Loans. The Plan also paid

servicing fees to SAC with respect to the administration of the Mobile

Home Loans. Such servicing fees were based on the receipt of a flat 11

percent interest rate. Income received above that rate was retained by

SAC. Through December 31, 1988, the Plan recorded servicing fees of

$1,571. Following this date, the reporting system was changed and the

only entries that appeared were recordings of net interest income

received by the Plan. No other fees were paid by the Plan in connection

with this investment.

d. A $1,003,958 Investment in a Package of Residential Mortgage

Loans (the Residential Mortgage Loans).

------------------------------------------------------------------------

Amount of Income Servicing

Loan investment received fees

------------------------------------------------------------------------

20 Loans......................... $1,003,958 $265,837 $11,090

------------------------------------------------------------------------

On March 5, 1987, the Plan purchased 20 residential mortgage loans

from an unrelated party, Capitol Federal Savings of Denver, Colorado

(Capitol Federal), for an aggregate cost of $1,003,958. Each of the

Residential Mortgage Loans bore interest at the rate of 9.25 percent

and had maturities of 360 months. The collateral for the Residential

Mortgage Loans was a first lien on residential property. None of the

borrowers were parties in interest. Although occasional delinquencies

occurred with respect to the Residential Mortgage Loans, none ever went

into foreclosure. In addition, there were no restrictions placed on the

Plan's sale or transfer of these loans.

Capitol Federal serviced the Residential Mortgage Loans on behalf

of the Plan for a total servicing fee of $11,090. The total income

received by the Plan with respect to this investment was $265,837.

e. A $2,089,978 Investment in Four Pools of ``Whole'' Loans (the

Whole Loans)6.

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\6\The applicant represents that the acquisition of a Whole Loan

by an investor (a mortgage loan in this exemption request) involves

the purchase of the loan with all of the underlying benefits and

risks. The applicant explains that the purchaser receives all

principal and interest payments as the borrower makes the payments.

The applicant further explains that a Whole Loan is not part of a

larger pool of loans nor does it contain special guarantees as do

GNMA investments.

------------------------------------------------------------------------

Amount of Income Servicing

Loan No. investment received fees

------------------------------------------------------------------------

Block 1.......................... $152,578 $134,783 $0

Block 2.......................... 818,719 514,372 34,495

Block 3.......................... 686,318 557,675 83,010

Block 4.......................... 432,363 281,961 4,785

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Total...................... $2,089,978 $1,488,791 $122,290

------------------------------------------------------------------------

The Plan acquired the Whole Loans in four blocks for an aggregate

purchase price of $2,089,978. The Plan earned $1,488,791 in income with

respect to this investment and it paid total servicing fees of

$122,290. The loans underlying the Whole Loan Blocks represented first

lien interests on residential property and had coupon rates ranging

from 6.375 percent to 9 percent. None of the individual borrowers was a

party in interest with respect to the Plan. No delinquencies, other

than occasional late payments, were ever documented with respect to the

Whole Loans. Further, no restrictions were ever placed on the sale of

transfer of this investment.

(1) Whole Loan Block #1 consisted of nine loans which the Plan

purchased from the Mellon National Mortgage Corporation of Colorado

Profit Sharing Plan Trust, an unrelated entity, on November 16, 1979

for $152,578. The total income received by the Plan with respect to

this investment was $134,783. Whole Loan Block #1 was serviced by Bank

Western, without the receipt of compensation.

(2) Whole Loan Block #2 represented a 90 percent interest in

thirteen loans which the Plan purchased for $818,719 on July 8, 1977

from Midland Federal Savings and Loan Association (Midland Federal) of

Denver, located in Denver, Colorado. Midland Federal, which was not a

party in interest at the time of the investment, retained a 10 percent

remainder interest in Whole Loan Block #2 and it also serviced such

loans on behalf of the Plan until its merger with Bank Western in 1984.

Servicing fees totaling $34,495 were paid to Midland Federal and Bank

Western in connection with this investment.\7\ In addition, the Plan

received total income of $514,372.

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\7\The Department is not proposing any exemptive relief herein

beyond that provided in section 408(b)(2) of the Act with respect to

the servicing of Whole Loan Block #2 by Bank Western. The applicant

states that the agreement between the Plan and Midland Federal at

the time these Whole Loans were purchased stipulated that the Plan

would earn 8.75 percent and that the servicer would retain the full

coupon rate. According to the applicant, the coupon rates ranged

from 9 percent to 9.5 percent. When Midland Federal merged with Bank

Western, applicant explains that the Plan continued to receive the

agreed upon 8.75 percent and Bank Western continued to receive the

full coupon rate.

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(3) Whole Loan Block #3 represented a 90 percent interest in

seventeen loans which were acquired by the Plan on January 27, 1978

from an unrelated party, First Federal Savings and Loan Association of

Denver (First Federal), located in Denver, Colorado. The total cost of

the Plan's investment in Whole Loan Block #3 was $686,318. First

Federal retained the 10 percent remainder interest of such investment

and serviced Whole Loan Block #3 on behalf of the Plan in return for an

aggregate servicing fee of $83,010. The total income received by the

Plan over the life of this investment was $557,675.

(4) Whole Loan Block #4 represented a 90 percent interest in

seventeen loans which the Plan acquired from an unrelated party,

Littleton National Bank (Littleton) of Littleton, Colorado on December

1, 1976. The total cost of the Plan's investment in Whole Loan Block #4

was $432,363. Littleton retained a 10 percent interest in Whole Loan

Block #4 and serviced such investment on behalf of the Plan for a total

servicing fee of $4,785. The total income paid to the Plan in

connection with Whole Loan Block #4 was $281,961.

4. On July 23, 1990, the Board of Directors of WCIC adopted a

Restated Employees' Retirement Fund Agreement which covered employees

of WCIC and its related companies. The Plan then became a section

401(k) cash or deferred compensation plan effective January 1, 1991. In

the process of converting the Plan, the Trustees determined that they

should seek outside investment expertise and provide participants with

a choice of investment vehicles. Therefore, in October 1990, the

Trustees selected Brinson Partners, Inc. (Brinson) of Chicago, Illinois

to manage the alternative investment vehicles to be offered to

participants. In addition, an existing block of WCIC stock was

delivered to Brinson to dispose of at its discretion.\8\ Other than the

WCIC stock, the goal of the Trustees was to liquidate all of the Plan's

other assets and to deliver cash to Brinson which would be invested at

the direction of the participants.

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\8\The applicant represents that such stock constitutes

qualifying employer securities within the meaning of section

407(d)(5) of the Act. However, the Department expresses no opinion,

herein, on whether the stock satisfied the terms and conditions of

section 407(d)(5) of the Act.

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From October 1990 through the end of 1990, the Trustees proceeded

to liquidate the Plan's investments. The bulk of the liquidations took

place in December 1990. However, certain of the Plan's assets,

including the subject Assets, were difficult to sell, primarily due to

their small investment size and high servicing costs. Therefore, the

Trustees believed their only alternative was to sell the Assets to Bank

Western. Thus, the trades were arranged on December 27, 1990. The Plan

paid no fees or commissions to Bank Western in connection with the

sale.

5. The following Asset Summary Table reflects, in pertinent part,

the status of the Assets at the time of the December 1990 sale. In

addition, the table shows the Asset sales that have been exempted by

the Department and discussed further herein in Representation 7.

Presented below are descriptions of the Assets as summarized in the

table.

Asset Summary Table

--------------------------------------------------------------------------------------------------------------------------------------------------------

Servicing Return of Gross

Investment Income fees principle Balance FMV return Net gain

--------------------------------------------------------------------------------------------------------------------------------------------------------

GNMA Pools...................................... $2,537,594 $685,418 $0 $1,090,061 $1,447,533 $1,459,094 $3,234,573 $696,979

CMO............................................. 75,000 7,688 0 48,828 26,172 24,519 81,035 6,035

Mobile Home Loans............................... 29,027 14,423 1,571 4,428 24,599 23,143 40,423 11,396

Res. Mtge. Loans................................ 1,003,958 265,837 11,090 497,032 506,926 488,497 1,240,276 236,318

Whole Loans..................................... 2,089,978 1,488,791 122,290 1,559,696 530,282 507,698 3,433,895 1,343,917

Subtotals....................................... 5,735,557 2,456,157 134,951 3,200,045 2,535,512 2,502,951 8,031,773 2,294,645

Less Mobile Home Loans.......................... 29,027 14,423 1,571 4,428 24,499 23,143 40,423 11,396

-------------------------------------------------------------------------------------------------------

Totals.................................... 5,706,530 2,441,734 133,380 3,195,617 2,510,913 2,479,808 7,991,350 2,283,249

--------------------------------------------------------------------------------------------------------------------------------------------------------

(1) Return of Principal is determined by subtracting the Principal Balance as of 12/21/90 from the amount of the Investment. (2) Gross Return includes

the sum of Return of Principal, Income and the FMV of the Investment as of 12/31/90 less Servicing Fees. (3) Net Gain is determined by subtracting

Gross Return from the Investment amount.

a. The GNMA Pools

As the Asset Summary Table shows, the Plan received $685,418 in

income with respect to its investment of $2,537,594 in the GNMA Pools

as well as a return of principal of $1,090,061. At the time of the

December sale, the GNMA Pools had an outstanding principal balance of

$1,447,533. Bank Western paid the Plan $1,459,094. Thus, the gross

return to the Plan with respect to the GNMA Pools was $3,234,573 and

the net gain realized for this investment was $696,979.

In valuing the GNMA Pools, it is represented that the Trustees

obtained estimated fair market prices by telephone from several

unrelated appraisers. However, the applicant states that none of these

dealers was willing to buy the securities at the prices quoted to due

to their small aggregate balance. Bank Western ultimately purchased the

interests held by the Plan in GNMA Pools A, C and D for a total cash

acquisition price of $1,409,709 based upon market quotations that were

obtained by the Trustees on December 27, 1990 from an unrelated source,

``Bloomberg Financial Markets, Commodity News'' (the Bloomberg

System).9 The Plan's investment in GNMA Pool B was valued at

$49,385 on or about December 20, 1990 by the Denver, Colorado office of

Prudential Securities, Inc. (formerly, Prudential-Bache Securities,

Inc.), another unrelated appraiser.

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\9\According to the applicant, the Bloomberg System is a

national information and pricing data-based system which provides

current market analysis and pricing information on most financial

markets and instruments, including GNMA Pools.

---------------------------------------------------------------------------

b. The CMO

As of December 1990, the Plan had received interest income of

$7,688 with respect to its $75,000 investment in the CMO as well as a

return of principal of $48,428. Also as of December 1990, the CMO had a

remaining balance plus accrued interest of $26,172. Thus, the gross

return to the Plan with respect to this investment was $81,035. In

addition, the Plan realized a net gain of $6,035.

According to the applicant, the Denver office of Merrill Lynch, an

unrelated party, determined that, as of December 19, 1990, the CMO

would trade for 93 percent of its outstanding balance and it attempted

to sell the CMO for that price but to no avail. Therefore, Bank Western

purchased the asset for 93.6875 percent of its par value of $26,172 or

$24,519.

c. The Mobile Home Loans

As of December 28, 1990, the Plan had received $14,423 in income

with respect to its $29,027 investment in the two Mobile Home Loans and

a return of principal of $4,428. The Plan also had paid total servicing

fees of $1,571 with respect to such investment. At the time of the

December sale, the Mobile Home Loans had an outstanding principal

balance of $24,599 and Bank Western paid the Plan a total sales price

of $23,143. Thus, the Plan received a gross return of $40,423 for this

investment and it realized a net gain of $11,396.

According to the applicant, there was no independent appraisal of

the Mobile Home Loans in order to determine their fair market value.

Instead, SAC, Bank Western's affiliate, calculated the fair market

value of the Mobile Home Loans by discounting them to yield a market

rate of return equal to the current quoted rate for new mobile home

loans.

d. The Residential Mortgage Loans

Of its investment of $1,003,958 in the Residential Mortgage Loans,

the Plan received net income of $254,747 and a return of principal of

$497,032. The Plan also paid servicing fees totaling $11,090. On

December 27, 1990, Bank Western paid the Plan $488,497 for the

Residential Mortgage Loans which had, at that time, an outstanding

principal balance plus accrued interest of $506,926. Thus, the Plan

received a gross return of $1,240,276 with respect to this investment

and a net gain of $236,318.

According to the applicant, the method for computing the sales

price for the Residential Mortgage Loans required that the Plan

administrator obtain the current market yield for Federal Home Loan

Mortgage Corporation (FHLMC) purchases from Telerate, an independent

information and pricing service regularly used by Bank Western in

establishing quoted rates for new loan obligations. The Plan

administrator then obtained pricing information from the Financial

Publishing Company tables using a twelve year prepayment assumption.

The price in the Financial Publishing tables resulted from discounting

the net yield on the loans at the required FHLMC whole loan market

yield.

e. The Whole Loans

With respect to the Whole Loans in which the Plan had made a total

investment of $2,089,978, $1,488,791 represented total income received

and $122,290 represented the amount paid in servicing fees. The Plan

also received a return of principal of $1,559,696 for this investment.

At the time of the December 1990 sale, the Whole Loans had an

outstanding principal balance plus accrued interest of $530,282. On the

date of the sale, Bank Western paid the Plan $507,698 for the Whole

Loans. Thus, the gross return to the Plan with respect to the Whole

Loans was $3,433,895 and the net gain realized was $1,343,917.

According to the applicant, the method established for calculating

the selling price for the Whole Loans was similar to that utilized to

value the Residential Mortgage Loans except that due to the age of the

Whole Loans, current market yields were not used. Therefore, the Plan

administrator valued the Whole Loans by referring to the yield on GNMA

9.5 percent securities as reported in the Wall Street Journal because

such securities were believed to be representative of the age of the

loans in these pools. The Plan administrator then discounted the net

yield on the Whole Loans and determined the price for the Whole Loans

from the Financial Publishing Company tables.

6. Upon realizing that the aforementioned transactions were

prohibited transactions in violation of the Act, Bank Western offered

to sell all of the Assets back to the Plan. However, the Trustees

determined that because of the limited liquidity of the Assets and

their investment performance, the Plan would only repurchase those

Assets which it could sell at a higher price than that paid by Bank

Western. Consequently, the Plan repurchased GNMA Pool C for $965,181,

which was the same price that Bank Western had paid.10 This Asset

was subsequently sold by the Trustees to an unrelated party for

$996,154.

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\1\0The applicant represents that the repurchase by the Plan of

its interest in GNMA Pool C from Bank Western constitutes

``correction'' within the meaning of section 4941 of the Code.

Whether the subject repurchase by the Plan represents actual

correction of the prior prohibited transaction is a determination

that is within the jurisdiction of the Service.

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7. CNB, as successor in interest to Bank Western, requests an

administrative exemption from the Department with respect to Bank

Western's past purchase from the Plan of interests in the GNMA Pools,

the CMO, the Residential Mortgage Loans and the Whole Loans for an

aggregate cost of $2,479,808 as shown in the Asset Summary Table. CNB

acknowledges that the (a) the Plan's acquisition of the Mobile Home

Loans which were obtained from SAC, (b) the servicing of the Mobile

Home Loans by SAC for a fee, and (c) the subsequent sale of the Mobile

Home Loans by the Plan to Bank Western resulted in prohibited

transactions in violation of the Act. Therefore, CNB is not requesting

exemptive relief with respect to any transactions involving the Mobile

Home Loans nor is the Department granting exemptive relief with respect

to such loans. To the extent the resale by Bank Western of its interest

in GNMA Pool C constituted a correction within the meaning of the Code,

CNB is not requesting exemptive relief.

8. Bank Western represents that on October 28, 1992, it filed a

Form 5330 with the Service and it paid total excise taxes of $126,776

that were assessed on the Assets it acquired from the Plan. CNB, as

successor in interest to Bank Western, states that it will pay any

additional excise taxes that may be owed to the Service within 90 days

of the publication in the Federal Register of the notice granting the

exemptive relief herein.

9. In summary, it is represented that the transaction satisfies the

statutory criteria for an exemption under section 408(a) of the Act

because: (a) The sale represented a one-time transaction for cash; (b)

the sales price for each Asset was based upon its fair market value as

determined by a qualified, independent appraisal; (c) the Plan did not

pay any fees or commissions in connection with the sale; and (d) CNB

will file a Form 5330 with the Service and pay any applicable excise

taxes that may be due on any of the Assets within 90 days of the

publication in the Federal Register of the notice granting the

exemptive relief herein.

Notice to Interested Persons

Notice of the proposed exemption will be given to all interested

persons within 30 days of the publication of the notice of pendency in

the Federal Register. Such notice will be given to interested persons

by first class mail and will include a copy of the notice of proposed

exemption as published in the Federal Register. The notice will also

inform interested persons of their right to comment on and/or to

request a public hearing with respect to the proposed exemption.

Comments with respect to the proposed exemption are due within 60 days

after the date of publication of this exemption in the Federal

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,

telephone (202) 219-8881. This is not a toll-free number.

Batterymarch Financial Management (BFM) Located in Boston,

Massachusetts; Proposed Exemption

[Application No. D-9230]

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990). If the exemption is granted, the restrictions

of section 406(b)(2) of the Act shall not apply to the proposed cross-

trading of equity securities between various accounts managed by BFM

(the Accounts) where at least one Account involved in any cross-trade

is an employee benefit plan account (Plan Account) for which BFM acts

as a fiduciary.

Conditions and Definitions

This proposed exemption is subject to the following conditions:

1. (a) Each Plan Account's participation in the cross-trade program

is subject to BFM's receipt of a written authorization executed in

advance by a qualified Plan fiduciary, which is independent of BFM and

its Affiliates (the Independent Fiduciary).

(b) The authorization referred to in paragraph (a) is terminable at

will, without penalty to the Plan Account, upon receipt by BFM of

written notice of termination.

account representative, which must be an Independent Fiduciary in the

case of a Plan Account (collectively, an Independent Account

Representative) must be furnished with any reasonable available

information necessary for the Independent Account Representative to

determine whether the authorization should be made, including (but not

limited to) a copy of the proposed and final exemption, an explanation

of how the authorization may be terminated, a description of BFM's

cross-trade practices, and any other information requested by the

Independent Account Representative.

2. Each cross-trade transaction must satisfy the following:

(a) The cross-trade opportunity must be triggered as a result of an

Account participating in the program experiencing a need to sell equity

securities arising from one of the following three circumstances:

(i) the Independent Account Representative specifically directs

that all of the assets in the Account be liquidated;

(ii) the Independent Account Representative specifically directs

that a portion of the Account be liquidated and the selection of the

particular equity securities to be sold is made either by the

Independent Account Representative or by an optimization program used

by BFM (the Optimization Program) which operates, pursuant to certain

prescribed objective criteria, to automatically generate an optimal

portfolio for such Accounts; or

(iii) the application of the Optimization Program to the specific

investment objectives and restrictions established by the Independent

Account Representative requires the sale of a security which is

otherwise ranked by BFM as a buy or a hold for all relevant Accounts

under the Stock Evaluation Process.

(b) With respect to each cross-trade opportunity triggered under

paragraph 2(a), the Optimization Program used by BFM must determine, in

the ordinary course of its considering all available equity securities

in the applicable universe, that another Account or Accounts

participating in the program should purchase some or all of the

available equity securities.

business days of the ``triggering event'' giving rise to the cross-

trade opportunity described in paragraph 2(a) above.

(d) The cross-trade transaction must be effected through a broker

which is unaffiliated with BFM and its Affiliates.

(e) The Independent Account Representative of each Account engaging

in a cross-trade transaction must be provided with a written

confirmation of the cross-trade transaction within 10 days after the

completion of the transaction. The confirmation must set forth:

(i) The particular equity securities involved;

(ii) The number of shares involved;

(iii) The price at which the transaction was executed; and

(iv) The specific triggering event, identified above in paragraph

2(a), which caused the cross-trade transaction to occur.

3. (a) Each cross-trade must be effected at the closing price for

the equity securities involved on the date of the transaction, as

quoted by the exchange on which such securities are principally traded

or by the NASDAQ National Market System (NASDAQ). In the case of

domestic equity securities traded over-the-counter, other than those

traded on NASDAQ, the price must be the mean between the closing daily

``bid'' and ``asked'' prices on the date of the transactions, obtained

from recognized independent sources, unless such securities have

actually traded within 24 hours of the cross-trade transaction in which

case the price must be the last sale price for the securities. If more

than one source is used by BFM to price a particular domestic equity

security traded over-the-counter, then the price must be equal to the

average of the highest current independent bid and lowest current

independent offer obtained from such sources. No foreign equity

securities, other than those traded on a recognized foreign securities

exchange for which market quotations are readily available, shall be

cross-traded by the Accounts.

(b) The equity securities involved in the cross-trade are those for

which there is a generally recognized market with adequate pricing

information to enable BFM to use the Optimization Program for the

Accounts in the transaction.

aggregate average daily trading volume of the equity securities which

are the subject of the transaction for the week immediately preceding

the completion of the transaction.

4. For any cross-trade opportunity where equity securities

available for sale from a Selling Account may be sold to more than one

Buying Account, each cross-trade opportunity shall be allocated first

to the Buying Account which is ranked by the Optimization Program as

being furthest from optimality, measured on a numerical basis at the

time of the transaction, until such Account is brought up to par with

the Account which is next furthest from optimality. Such Accounts shall

then be allocated cross-trade opportunities on a pro rata basis until

the Accounts are brought up to the level of the next Account which is

furthest from optimality. This allocation process shall continue until

all cross-trade opportunities involving the equity securities in

question are exhausted.

5. (a) BFM furnishes the Independent Fiduciary for each Plan

Account participating in the cross-trade program at least once every

three months, and not later than 45 days following the period to which

it related, a report disclosing:

(i) A list of all cross-trade transactions engaged in on behalf of

the Plan Account during the period; and

(ii) With respect to each cross-trade transaction, the actual price

used to effect the transaction and the identity of the pricing source,

as well as the highest and lowest reported prices at which the equity

securities involved in the transaction were traded on the date of such

transaction.

(b) The authorizing Independent Fiduciary for each Plan Account

participating in the program is furnished with a summary report at

least once per year. The summary must be furnished within 45 days after

the end of the period to which it relates, and must contain the

following:

(i) A description of the total amount of the Plan Account's assets,

by type of equity security, involved in cross-trade transactions during

the period;

(ii) A description of BFM's cross-trade practices, if such

practices have changed materially during the period covered by the

summary;

(iii) A statement that the Independent Fiduciary's authorization of

cross-trade transactions may be terminated upon receipt by BFM of the

Independent Fiduciary's written notice to that effect; and

(iv) A statement that the Independent Fiduciary's authorization of

the Plan Account's participation in the cross-trade program will

continue in effect unless it is terminated.

6. The cross-trade transaction does not involve assets of any

employee benefit plan established or maintained by BFM or any of its

Affiliates (Batterymarch Plan).

7. Each employee benefit plan comprising a Plan Account that

participates in the cross-trading program must have total assets equal

to at least $25 million. In the case of multiple employee benefit plans

maintained by a single employer or controlled group of employers, the

$25 million requirement may be met by aggregating the assets of such

plans if the assets are commingled for investment purposes in a single

master trust.

8. BFM receives no fee or other compensation (other than its agreed

investment management fee) with respect to any cross-trade transaction.

9. BFM is a discretionary investment manager with respect to Plan

Accounts participating in the cross-trade program and does not cause

any Plan Account to purchase or sell equity securities with another

Account in order to merely track or replicate the portfolio of an

independently maintained third party index.

10. For purposes of this proposed exemption:

(a) ``Account'' means a Plan Account or a Non-Plan Account;

(b) ``Affiliate'' means any person directly or indirectly through

one or more intermediaries, controlling, controlled by, or under common

control with Batterymarch;

equity securities in a cross-trade transaction;

(d) ``Cross-trade transaction'' means a purchase and sale of equity

securities between Accounts for which BFM or an Affiliate is acting as

a trustee or investment manager;

(e) ``Plan Account'' means an Account managed by BFM consisting of

assets of one or more employee benefit plans which are subject to the

Act;

(f) ``Independent Account Representative'' means the authorized

representative of the Account. In the case of a Plan Account, the

Independent Account Representative must be an Independent Fiduciary

authorized to act for the Plan Account;

(g) ``Non-Plan Account'' means an Account managed by BFM consisting

of assets of clients which are not employee benefit plans subject to

the Act;

(h) ``Selling Account'' means the Account which seeks to sell its

equity securities in a cross-trade transaction; and

(i) The ``Optimization Program'' means a computer program developed

by a third party, independent of BFM and its Affiliates, which BFM uses

pursuant to a license agreement and which utilizes objective

mathematical formulas to construct ``optimal'' portfolios for each

Account.

Summary of Facts and Representations

1. BFM is a business trust organized under the laws of the

Commonwealth of Massachusetts and registered as an investment adviser

pursuant to the Investment Advisers Act of 1940, as amended. BFM

currently manages on a discretionary basis approximately $7 billion in

assets, of which approximately $4 billion consists of assets of Plan

Accounts.

2. BFM represents that there are certain circumstances when it is

required to liquidate all or a portion of the equity securities in an

Account for which it acts as an investment manager. BFM proposes to

cross-trade equity securities between the Accounts in situations where

the decision to sell equity securities from the Selling Account is made

either directly by the Independent Account Representative or by

operation of a pre-established contractual obligation established by

the Independent Account Representative. In the case of a Plan Account,

the Independent Account Representative must be an authorized

Independent Fiduciary. In all cross-trade situations, the decision as

to the particular equity securities to be sold at the time of the

transaction will be made either by the Independent Account

Representative or by operation of the Optimization Program utilized by

BFM. In the case of all Accounts, the Independent Account

Representative will be a person which is unrelated to BFM and its

Affiliates. Cross-trade transactions will not involve assets of any

Batterymarch Plan.

3. BFM states that a cross-trade opportunity, pursuant to the

requested exemption, will arise only if the need to sell equity

securities from a Selling Account occurs as a result of one of the

following ``trigger events''.

(a) The Independent Account Representative directs that all of the

assets in the Account be liquidated. In such cases, both the decision

to sell equity securities from the Selling Account and the decision

regarding the particular equity securities to be sold will be made by

the Independent Account Representative.

(b) The Independent Account Representative directs that a portion

of the Account be liquidated. In such instances, the decision to sell

equity securities from the Selling Account will be made by the

Independent Account Representative. However, the determination of the

particular equity securities to be sold by the Selling Account will be

made either by the Independent Account Representative or by the

Optimization Program (as described below).

Independent Account Representative for the Selling Account require that

a particular security or a particular type of security be sold.

Whenever a choice must be made as to particular equity securities to be

sold, the Optimization Program will select the equity securities from

the Account's holdings in a manner calculated to best bring the Account

into compliance with the applicable investment restrictions.

BFM states that for all ``trigger events'' described above the

selection of the specific equity securities to be sold by the Selling

Account through the operation of the Optimization Program will involve

an automatic mechanical process, pursuant to certain prescribed

investment restrictions and objectives from an Independent Account

Representative, and will not involve any exercise of investment

discretion by BFM.

With respect to each potential cross-trade transaction, the

Optimization Program will determine, in the ordinary course of its

considering all available equity securities in the applicable universe,

that another Account or Accounts participating in the program should

purchase some or all of the available equity securities. In addition,

each cross-trade transaction will occur within three business days from

the occurrence of the triggering event which establishes the cross-

trade opportunity.

4. BFM represents that there are two fundamental components to its

investment process--the Stock Evaluation Process and the Portfolio

Construction Process.

With respect to the Stock Evaluation Process, BFM evaluates all of

the equity securities in the applicable universe by applying a variety

of objective criteria and mathematical computations to rank the equity

securities and characterize each security with a ``buy'', a ``hold'',

or a ``sell'' classification. BFM states that it does exercise some

degree of discretion in the Stock Evaluation Process portion of the

investment process. For example, BFM selects the particular strategic

themes that are utilized from time to time in this process.11

However, BFM states that the Stock Evaluation Process and the strategic

themes used at a particular time are applied in exactly the same

fashion for all Accounts which have directed BFM to invest in a

particular universe of securities. Thus, the exact same stock rankings

and buy-hold-sell classifications are applied uniformly for each

security in every Account within such universe. The Stock Evaluation

Process will never, in and of itself, give rise to direct cross-trade

opportunities because the results of the Stock Evaluation Process will

be the same for every Account in the particular universe. BFM states

that it is only in the second part of the overall investment process

(i.e. the Portfolio Construction Process), when the specific investment

objectives and restrictions which have been established by the

Independent Account Representative for the Account are overlaid against

the results of the Stock Evaluation Process, that differences appear

for the various Accounts within a particular universe.

---------------------------------------------------------------------------

\1\1Some of the strategic themes which have been utilized by BFM

include the following: (a) Acid Cash--stocks of companies with high

cash flow, measured by changes in corporate liquidity relative to

market price; (b) Buybacks--stocks of companies that have announced

intentions of buying back a meaningful percentage of their own

stock; (c) High Yield--stocks of companies with above average yields

relative to the overall market and within their own industries; (d)

Low-Priced Growth--stocks of companies with below average price-to-

earnings ratios and above average growth; and (e) Insiders--stocks

of companies where corporate insiders have purchased the company's

stock on the open market.

---------------------------------------------------------------------------

With respect to the Portfolio Construction Process, BFM represents

that the results of the Stock Evaluation Process are brought together

with the particular facts applicable to each Account to generate the

optimal portfolio for that Account and suggested trades to arrive at

that optimal portfolio. The Portfolio Construction Process is driven by

the Optimization Program. The Optimization Program receives the

relevant information and automatically generates the optimal portfolio

and the suggested buy and sell decisions that are designed to move a

particular Account toward ``optimality'' (i.e. maximum expected return

for a prescribed level of risk). The information utilized in the

Portfolio Construction Process consists of (i) the existing make-up of

the portfolio of the particular Account, (ii) the investment objectives

and restrictions which have been established by the Independent Account

Representative for the Account, and (iii) objective economic data (such

as existing market prices for equity securities, price-earnings ratios

for such securities, etc.) which is obtained by BFM from independent

sources.

BFM represents that the results of its investment process will

create cross-trade opportunities for the Accounts under the following

circumstances: (1) When the Independent Account Representative for an

Account directs a liquidation of all or a portion of the equity

securities in the Account, as described in condition 2(a) (i) and (ii)

above; or (2) when the application of the Optimization Program in the

Portfolio Construction Process requires the sale of a security which is

ranked as a ``buy'' or ``hold'' under the Stock Evaluation Process. In

the latter instance, the sale of the security results from the

investment objectives and restrictions applicable to the Account which

are established by the Independent Account Representative, as described

in condition 2(a)(iii) above.

For example, the applicable investment restrictions might provide

that not more than 5 percent of the assets of the Account can be

invested in any one security. If a particular holding appreciates in

value to a point where it exceeds 5 percent of the Account's assets,

the excess shares must be sold by the Account to comply with this

restriction even though the stock is otherwise classified as a ``buy''

or ``hold'' under the Stock Evaluation Process. Alternatively, the

applicable investment restrictions might provide that not more than 10

percent of the assets of the Account can be invested in equity

securities of any one industry. If the aggregate value of all such

equity securities in the Account exceeds 10 percent of the Account's

assets, the excess shares must be sold to comply with this restriction

even though the particular stock is otherwise classified as a ``buy''

or ``hold'' under the Stock Evaluation Process. In the latter case, the

Optimization Program would select the particular equity securities to

be sold from the Account's holdings in that industry so as to bring the

Account into compliance with the applicable investment restriction and

move the Account toward ``optimality''.

BFM represents that none of the Accounts in the proposed cross-

trading program would be index funds that attempt to track or replicate

a particular independently maintained index, such as the Standard &

Poors 500 Index (the S&P 500). Thus, under the proposed exemption, no

Plan Account will purchase or sell equity securities with another

Account in order to merely track such an index. In all cases, BFM will

exercise some degree of investment discretion to determine which

particular equity securities are desirable investments for the

Accounts. As noted above, the rankings of each security are developed

as part of the Stock Evaluation Process and are identical for all

Accounts invested in a particular universe of equity securities. These

rankings and the results of the Stock Evaluation Process will not be

tied to any particular index or to the specific investment objectives

and restrictions established for the Account by its Independent Account

Representative. However, an index may be used as part of the investment

objectives or restrictions established by the Independent Account

Representative, most typically as either a benchmark against which the

Account's performance is to be measured or a further restriction on the

universe of securities available for an Account.

For example, an Account might be subject to an investment objective

that seeks to outperform the S&P 500 Index to the maximum extent,

subject to certain volatility parameters or risk tolerance levels

specified by the Independent Account Representative. In this situation,

the foregoing investment objective would be taken into account by the

Optimization Program in determining the buys and sells for this Account

which could lead to cross-trade opportunities.12 Such an Account

would be an actively managed account, not an index fund, even though

the benchmark against which its performance is measured would be an

index.

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\1\2The applicant has provided the following example: Assume

there are two Accounts. Account A operates pursuant to a relatively

low risk investment objective, in terms of permitted deviation from

the applicable benchmark, and Account B uses the same benchmark but

allows substantially greater risk in the hope of achieving better

performance relative to the benchmark over the long term. In this

case, a particular stock which is viewed as attractive generally by

BFM and therefore is classified as a ``buy'' in the Stock Evaluation

Process, might demonstrate an increased level of volatility to the

point that, as part of the Portfolio Construction Process, the

Optimization Program may determine that this stock should be sold by

conservative Account A because its increased level of volatility is

inconsistent with the risk tolerance of Account A. Nevertheless,

this particular stock might well continue to be attractive to

Account B given that Account's greater level of risk tolerance. The

application of the investment objectives and restrictions

established for Account A would require that this stock, otherwise

ranked as a ``buy'', be sold by Account A which, in turn, would

trigger a direct cross-trade opportunity pursuant to which Account B

would be able to acquire the stock directly from Account A.

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As a further example, an Account might be established which is

subject to an investment restriction providing that the Account may be

invested only in equity securities which constitute the 100 largest

equity securities (by market capitalization) in the S&P 500 Index. This

investment restriction will be incorporated by the Optimization Program

as part of the Portfolio Construction Process for the Account, taking

into account the uniform rankings developed by BFM for all of the

equity securities in the particular universe. If a security ceases to

be one of the 100 largest equity securities in the S&P 500 Index, it

would no longer be eligible to be held by the Account and would have to

be sold. This would be a trigger event that would give rise to a direct

cross-trade opportunity whereby other Accounts which are not so limited

would be able to purchase this security from the Selling Account,

assuming that the Optimization Program indicates that such a purchase

would be desirable for those Accounts in order to move toward

``optimality''.

5. The Optimization Program is a computer program developed by an

independent third party and utilized by BFM pursuant to a license

agreement. Various such programs are commercially available. BFM

represents that the ability to exercise discretion for the operation of

the Optimization Program is limited. BFM selects the Optimization

Program, selects and weighs the strategic themes used at any point in

time in the Stock Evaluation Process, and develops certain mathematical

models used as data for the Optimization Program. Once installed, the

Optimization Program typically remains in place without material change

for a lengthy period of time (2 to 10 years). While the strategic

themes and mathematical models are changed more frequently, they

usually remain unchanged for approximately 12 months. BFM states that

the Optimization Program operates in an automatic fashion and that

actions within BFM's discretionary control (e.g. changing its strategic

themes or changing the mathematical models used in its stock rankings

for the Stock Evaluation Process) will not generate direct cross-trade

transactions.

6. BFM uses the Optimization Program on a daily basis to examine

all equity securities in the applicable universe and to determine the

specific equity securities, if any, to be purchased for each Account in

order to achieve the optimal portfolio for that Account. Each universe

is developed by BFM as part of the Stock Evaluation Process and is

uniform for all Accounts for which that particular universe is

relevant.

For example, in the context of domestic equity securities, BFM

determines the universe of securities to be considered for potential

investment as part of the Stock Evaluation Process. The universe for

domestic equity clients currently consists of all U.S. publicly-traded

common stocks, excluding any such stock which has a market

capitalization of less than $50 million. BFM states that this domestic

equity securities universe, which includes several thousand stocks, is

identical for all of BFM's domestic equity Accounts unless certain

restrictions are imposed by the Independent Account Representative.

In addition to domestic equity Accounts, BFM uses the Optimization

Program to examine data on foreign equity securities for Accounts that

have designated investment objectives which permit such securities for

their portfolios. At the present time, the potential universe of

securities for such Accounts would include equity securities listed on

exchanges in the following countries: Australia; Austria; Belgium;

Canada; Denmark; Finland; France; Germany; Hong Kong; Ireland; Italy;

Japan; Malaysia; Mexico; Netherlands; New Zealand; Norway; Singapore;

Spain; Sweden; Switzerland; and the United Kingdom. BFM states that

these are the countries which today have sufficiently developed

securities markets (including adequate data on the exchange-traded

securities) to permit use of the Optimization Program for the Accounts.

BFM represents that the two-part investment process (i.e. the Stock

Evaluation Process and the Portfolio Construction Process) operates in

substantially the same manner for foreign equity securities as it does

for domestic equity securities. In all cases involving either domestic

or foreign equity securities, the Independent Account Representative

for each Account will determine which universe is relevant for the

Account.

To the extent there are any equity securities available for sale

from a Selling Account by reason of one of the triggering events, the

Optimization Program will include the equity securities in its analysis

of all available equity securities in a particular universe, taking

into account the lower transaction costs available for cross-trade

transactions involving such securities. However, BFM states that the

opportunity for a cross-trade will not influence the Optimization

Program's analysis and determination as to whether such securities

should be bought or sold for an Account except to the extent

transaction costs are lower.

In the event any of the equity securities available for sale in

cross-trade transactions are attractive to more than one Account, the

Optimization Program will automatically allocate such securities among

the Accounts on a consistent, objective basis according to the

allocation methodology described herein (see Item 14 below). The

allocation methodology will be disclosed to, and approved by, the

Independent Account Representatives. Since the determination and

allocation of cross-trade opportunities among potential Buying Accounts

will be performed automatically by the Optimization Program, BFM states

that it will be unable to use any discretion to benefit one Account

over another Account.

7. BFM represents that since particular equity securities which are

sold by a Selling Account in one of the ``trigger events'' described

above are often desirable investments (i.e. classified as a ``buy'' or

a ``hold'' under the Stock Evaluation Process) for BFM's other

Accounts, the opportunity to cross-trade such securities would

significantly reduce the transaction costs incurred by both the Selling

Accounts and the Buying Accounts. BFM states that these savings result

from the fact that the independent broker effecting a cross-trade

transaction will effect the transaction for a lower commission. The

independent broker will effect these transactions for approximately

.5 cents per share. By contrast, if BFM were to effect the same trade

other than by a cross-trade transaction, the commission would be

approximately 2 cents per share. In the context of foreign equity

securities, where brokerage commissions are significantly higher, the

potential savings on commissions would be even greater.

BFM states that cross-trading also avoids the bid/ask differential

that would ordinarily occur in such transactions because the price

received by the Selling Account for a particular equity security will

be the same price paid by the Buying Account. The elimination of any

price differential in equity securities that are cross-traded will

result in savings of approximately 1 cents per share for each Account.

In addition, the ability to use cross-trade transactions to shift

equity securities directly from a Selling Account to a Buying Account

will enable BFM to implement optimal investment strategies for the

Accounts more effectively. First, the allocation of equity securities

necessary to bring Accounts closer to optimality would be easier

because all ``buys'' will be net position buys for the Accounts without

any bid/offer spread. Second, there is a timing efficiency to be

achieved if direct cross-trades are permitted. Under BFM's current

procedures, if an Account has sold a particular security on a

particular day, no other Account is permitted to buy that security on

that day. Rather, all purchases of such security are deferred until the

next day. Similarly, if an Account has bought a particular security on

a given day, other Accounts are not permitted to sell that security on

the same day. Under the requested exemption, BFM would be able to net

these contemporaneous buy and sell orders on the same day.

Finally, the ability to effect direct cross-trades will avoid the

adverse consequences of any market impact which trading in particular

equity securities may generate.

8. BFM represents that each employee benefit plan comprising a Plan

Account that participates in the cross-trading program must have total

assets equal to at least $25 million. In the case of multiple employee

benefit plans maintained by a single employer or controlled group of

employers, the $25 million requirement may be met by aggregating the

assets of such plans if the assets are commingled for investment

purposes in a single master trust.

9. The Independent Fiduciary will provide written authorization

before a Plan Account is permitted to participate in BFM's cross-trade

program. This authorization will be terminable at will upon written

notice by the Independent Fiduciary. BFM will receive no additional fee

or other compensation for providing such cross-trading services. No

penalty or other charge will be made as a result of the termination of

an Account's participation in the cross-trade program. Before any

authorization is made by a Plan Account, BFM will provide the

Independent Fiduciary for the Plan Account with all reasonably

available materials necessary to permit an evaluation of the cross-

trade program by such fiduciary. These materials will include a copy of

the proposed and final exemption, an explanation of how the Plan

Account's authorization may be terminated, a description of BFM's

cross-trade practices, and any other reasonably available information

requested by the Independent Fiduciary.

10. The Independent Account Representative of each Account engaging

in a cross-trade transaction will be provided with a written

confirmation of the cross-trade transaction within 10 days after the

transaction is completed. The confirmation will set forth information

regarding the particular equity securities involved, the number of

shares involved, the price at which the transaction was executed, and

the specific ``trigger event'' (identified in condition 2(a) above)

which caused the cross-trade transaction to occur.

11. BFM will provide the Independent Fiduciary of each Plan Account

participating in the cross-trade program with a report, at least once

every three months and not later than 45 days following the period for

the report, setting forth: (a) A list of all cross-trade transactions

engaged in on behalf of the Plan Account during the previous period;

and (b) with respect to each cross-trade transaction, the actual price

used to effect the transaction and the identity of the pricing source,

as well as the highest and lowest reported prices at which the subject

equity securities were traded on the date of such transaction. In

addition, the Independent Fiduciary of each Plan Account participating

in the cross-trade program will be provided with a summary report at

least once a year, and not later than 45 days after the end of the

period for the report, which will include: (a) A description of the

total amount of Plan Account assets, by type of equity security,

involved in cross-trade transactions completed during the year; (b) a

statement that the Independent Fiduciary's authorization for the Plan

Account to participate in the cross-trade program can be terminated

without penalty upon BFM's receipt of a written notice to that effect;

regarding the cross-trade program will continue unless it is

terminated; and (d) a description of any material change in BFM's

cross-trade practices during the period covered by the summary report.

BFM states that these reports will provide the Independent

Fiduciary with a mechanism for monitoring the operation of the cross-

trade program. BFM represents that the authorization procedures and the

limited circumstances in which cross-trade transactions will be

considered, in conjunction with BFM's use of the Optimization Program,

will prevent BFM from favoring one Account at the expense of another

Account in a cross-trade transaction.

12. The equity securities involved in any cross-trade transaction

will be only those for which there is a generally recognized market

with adequate pricing information to permit use of the Optimization

Program for the Accounts. All cross-trades will be effected at prices

determined according to an established, fixed methodology which will be

applied uniformly to all Accounts. Under this pricing methodology, each

cross-trade transaction will be effected at the closing price for the

equity securities involved on the date of the transaction, as quoted by

the exchange on which such securities are principally traded or by the

NASDAQ National Market System (NASDAQ). In the case of domestic equity

securities traded over-the-counter, other than those traded on NASDAQ,

the price will be the mean between the closing daily ``bid'' and

``asked'' prices on the date of the transactions, obtained from

recognized independent sources, unless such securities have actually

traded within 24 hours of the cross-trade transaction in which case the

price will be the last sale price for the securities. However, if more

than one source is used by BFM to price a particular domestic equity

security traded over-the-counter, then the price will be equal to the

average of the highest current independent bid and lowest current

independent offer obtained from such sources. BFM states that no

foreign equity securities, other than those traded on a recognized

foreign securities exchange for which market quotations are readily

available, will be cross-traded by the Accounts. The pricing

methodology will be communicated to the Independent Account

Representative at the beginning of the Account's participation in the

cross-trade program. The pricing methodology will apply to all cross-

trade transactions implemented by BFM under the proposed exemption.

BFM states that utilization of an established, fixed pricing

methodology will prevent it from being able to use any discretion to

manipulate cross-trades to benefit one Account over another Account.

Moreover, BFM will in all cases utilize price data obtained from an

independent pricing source.

13. A cross-trade transaction will be effected only where the trade

involves less than 5 percent of the aggregate average daily trading

volume for the equity securities which are the subject of the

transaction for the week immediately preceding the completion of the

transaction. BFM states that this percentage limitation attempts to

address the potential impact which a large trade might have in the sale

of equity securities on the open market. Thus, BFM will only engage in

cross-trade transactions where the size of the trade will ensure that

the price utilized in the cross-trade will not differ materially from

what would have been the market price for the equity securities in an

open market transaction.

14. BFM represents that where equity securities available for sale

from a Selling Account present an attractive investment opportunity for

more than one Buying Account, BFM will make the allocation to that

Buying Account which is ranked by the Optimization Program as being

furthest from optimality.\13\ BFM states that each Account's distance

from optimality can be measured and quantified on a numerical basis at

any point in time. Cross-trade opportunities would continue to be

allocated to such a Buying Account until it is brought up to par with

the Account which is next furthest from optimality. Thereafter, the

cross-trade opportunities would be allocated to both of these Accounts

pro rata until they are brought up to the level of the Account which is

next furthest from optimality, and so on until all cross-trading

opportunities involving the equity securities in question are

exhausted. BFM states that this allocation process will operate in a

mechanical, objective fashion and will not be manipulated in any way by

BFM to benefit particular Accounts during the operation of the cross-

trading program.

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\13\The Department is not proposing, nor is the applicant

requesting, exemptive relief for any violations of Part 4 of Title I

of the Act which may arise from BFM's allocation of investment

opportunities to particular Buying Accounts under the proposed

cross-trading program.

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15. In summary, the applicant represents that the proposed

transactions will satisfy the criteria of section 408(a) of the Act

because, among other things:

(a) An Independent Fiduciary must provide written authorization,

which is terminable at will, to BFM to permit the Account to

participate in the cross-trading program;

(b) All cross-trade transactions will be effected within three

business days of the triggering event creating the cross-trade

opportunity;

determined pursuant to a established, fixed methodology using

independent pricing sources and will be applied uniformly to all

Accounts;

(d) All cross-trade opportunities will be subject to an allocation

methodology which is designed to benefit Accounts which are ranked by

the Optimization Program as being furthest from optimality and will not

be manipulated by BFM to benefit particular Accounts;

(e) A cross-trade transaction will be effected only if certain

volume requirements are satisfied;

(f) All equity securities (i.e. either foreign or domestic)

involved in cross-trade transactions will be securities for which there

is a generally recognized market;

(g) BFM will receive no additional fees as a result of the proposed

cross-trade transactions;

(h) BFM will provide periodic reporting of the cross-trade

transactions to the Independent Fiduciaries of the participating Plan

Accounts;

(i) The opportunity to participate in the cross-trade program will

save significant sums of money for the Accounts because cross-trading

reduces brokerage commissions, avoids the bid/ask differential in such

transactions, and provides more efficient implementation of optimal

investment strategies;

(j) Each employee benefit plan comprising a Plan Account which

participates in the cross-trading program must have total assets of at

least $25 million, or must be part of a master trust of plans

maintained by a single employer or controlled group of employers which

has at least $25 million in total assets; and

(k) The cross-trade transactions will not involve the assets of any

Batterymarch Plan.

FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 20th day of May, 1994.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 94-12716 Filed 5-24-94; 8:45 am]

BILLING CODE 4510-29-P

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.