Proposed Exemptions; Lake Dallas Telephone Company, Inc. Defined Benefit Pension Plan

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-9679 and D-9680]

Proposed Exemptions; Lake Dallas Telephone Company, Inc. Defined

Benefit Pension Plan

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 restriction 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

Register. Such notice shall include a copy of the notice of proposed

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.

Lake Dallas Telephone Company, Inc. Defined Benefit Pension Plan

(Pension Plan) and Lake Dallas Telephone Company, Inc. 401(k) Profit

Sharing Plan (P/S Plan; Collectively, the Plans) Located in Lake

Dallas, Texas

[Application Nos. D-9679 and D-9680]

Proposed Exemption

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 proposed sale from the Plans of two

interests (the Interests) in a certain partnership to Lake Cities Land

and Development, Inc. (Lake Cities), an affiliate of the Plans' sponsor

and a party in interest with respect to the Plans, provided that the

following conditions are satisfied:

(1) the sale will be a one-time cash transaction;

(2) no commissions or fees will be paid by the Plans as a result of

the sale; and

(3) the sale price will be the higher of: a) the aggregate fair

market value of the Interests on the date of the sale; or b) the

aggregate investment cost of the Interests to the Plans of $129,146.64.

Summary of Facts and Representations

1. The Plans were established January 1, 1985. The Pension Plan is

a defined benefit plan, and the P/S Plan is a profit sharing plan. The

Plans have approximately 30 participants which participate in both

Plans. As of December 31, 1993, the Pension Plan had $433,943.19 in

total assets, and the P/S Plan had $1,708,137.83 in total assets. Lake

Dallas Telephone Company, Inc. is the sponsor of the Plans (the

Employer). The Employer is a regulated telephone company with $19.5

million in assets incorporated in the State of Texas, and it provides

telephone service to approximately 4,900 subscribers in Denton County,

Texas. The Employer is a wholly-owned subsidiary of Tele-Max, Inc. Lake

Cities is an affiliate of the Employer. The Plans' trustees are Kitna

R. Griggs, President of the Employer, Greg A. Gross, Executive Vice

President of the Employer, and Helen Hutto, Director of Administration

of the Employer (the Trustees).

2. In April and May of 1986, respectively, the Pension Plan

purchased a 4.76% interest (P/P Interest) for $24,500 in cash; and the

P/S Plan purchased a 20.48% interest for $105,350 in cash (P/S

Interest, collectively; the Interests) in CFNVEST Southlake Joint

Venture (the Partnership). The Interests are minority interests and are

not publicly traded. The Plans' Trustees made the decision for the

Plans to invest in the Partnership. At the time of acquisition, the P/P

Interest represented approximately 56% of the Pension Plan's assets and

the P/S Interest represented approximately 39% of the P/S Plan's

assets.1

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

the Interests are governed by the fiduciary responsibility

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

regard, the Department herein is not proposing relief for any

violations of Part 4 which may have arisen as a result of the

acquisition and holding of the Interests by the Plans.

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3. The Partnership is a general partnership joint venture created

in 1986 for the exclusive purpose of purchasing a 3.75 acre tract of

undeveloped land in Southlake, Texas (the Land) and holding it as

investment. It is represented that the Land is the only asset owned by

the Partnership, which holds no investments and conducts no business

other than holding and managing the Land. The Partnership was designed

primarily for investment by tax exempt entities such as employee

retirement plans, although ownership of Partnership interests is not

limited to such entities. The Partnership currently consists of

eighteen partners, fourteen of which are employee retirement plans. The

assets of the Partnership are managed by Robert Cecil, the general

partner and consultant to the Partnership. The Partnership is an

unrelated party to the Plan, the Employer, the holding company and

affiliates of the Employer. At the time the Partnership was formed, the

city of Southlake, Texas was expected to expand rapidly. However, it is

represented that the real estate market has not proven to be as

profitable as originally projected.

4. It is represented that because there is not an established

market for the Interests and because the Land is the only asset owned

by the Partnership, the Interests are valued according to the

proportionate value of the underlying Land. In this regard, the

applicant submitted an affidavit dated April 6, 1994, prepared by Mr.

Cecil (the Affidavit). In the Affidavit, Mr. Cecil stated that he is

independent of the Plans, the Employer and Lake Cities, the proposed

purchaser of the Interests. Mr. Cecil represented that when considering

the book value of the Partnership, its financial condition, lack of

earning capacity, the potential return on the investment, as well as

the history and nature of the Partnership and the lack of a market or

comparable sales for the Interests, it was his opinion that the

Interests have no value in and of themselves. Rather, the only value to

be attributed to the Interests is the proportionate underlying value of

the Land. Each Plan's pro rata ownership Interest in the Land

represents the maximum fair market value of that Interest, before any

discounts for minority interests and lack of marketability.

5. The Land was appraised (the Appraisal) on June 29, 1993, by

Jeffrey A. Walburn (Mr. Walburn), an independent certified real estate

appraiser in the State of Texas. The Land, which is located in the City

of Southlake, Tarrant County, Texas, is vacant and contains 3.75 acres.

Mr. Walburn determined that the fair market value of the Land was

$450,000 as of June 29, 1993. Accordingly, the maximum fair market

value of the P/P Interest was $21,420 and the fair market value of the

P/S Interest was $92,160, for an aggregate fair market value of

$113,580. As such, as of December 31, 1993 the P/P Interest represents

4.94% of the Pension Plan's total assets, and P/S Interest represents

5.4% of the P/S Plan's total assets.

6. Currently, the Plans are receiving no income from their

investment. To date, the P/S Plan and the Pension Plan have received

distributions of $3,845.37 and $894.28, respectively, from their

investment.2 Since the original acquisition of the Interests,

certain additional capital contributions and holding costs have been

paid to the Partnership by the Plans in the aggregate amount of

$4,036.29 (the Holding Costs), with the P/S Plan and the Pension Plan

paying $3,394.76 and $641.53, respectively.

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\2\Proceeds were paid by the State of Texas to the Partnership

as payment for a right of way on the Land. The Partnership in turn

distributed the payments to each partner on a proportionate basis.

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7. The Trustees have made several unsuccessful attempts to sell the

Interests to the other members of the Partnership. In this regard, the

Partnership also has attempted to sell the Land, and a ``for sale''

sign has been posted on the Land for approximately two years. In this

regard, the applicant represents that in rural areas it is the custom

to sell undeveloped lots by posting signs on the property rather than

hiring a real estate broker. The Trustees believe that their inability

to sell the Interests is primarily due to the fact that the Interests

are minority interests and also due to a decline in the real estate

market. It is represented that there is no established market for the

Interests. Moreover, because the Plans hold minority Interests, they

cannot force a sale of the Land.

8. On April 1, 1993, the Employer amended the P/S Plan in order to

provide participant directed investments pursuant to section 404(c) of

the Act and the regulations thereunder. The P/S Plan participants will

be able to invest in mutual funds provided by PaineWebber Trust Company

(Paine Webber). Paine Webber will provide third party administration

and record keeping required to administer the P/S Plan. The applicant

represents that because Paine Webber mutual funds are unable to accept

in-kind transfers of the P/S Plan's assets, all P/S Plan assets must be

liquidated before they can be invested in the mutual fund options and

subject to participant direction. Until that time, the P/S Plan must

incur the added administrative expense of separately trusteeing and

accounting for the P/S Interest.

9. For these reasons, the applicant proposes to sell the Interests

to Lake Cities, a wholly owned subsidiary of Tele-Max, Inc., and

therefore an affiliate of the Employer. Lake Cities desires to purchase

the Interests in a one-time cash transaction. The purchase price will

be the greater of: a) the aggregate fair market value of the Interests

on the date of the sale;3 or b) the aggregate investment cost (the

Aggregate Investment Cost) of the Interests to the Plans of

$129,146.64.4 It is also represented that neither Lake Cities, nor

any of its affiliates own property adjacent to or near the Partnership

Land. Furthermore, no individual owner of the Employer (or any parent

or subsidiary) own any interests in the Partnership, interest in the

underlying Land, or interest in any real property adjacent to or near

the Partnership Land.

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\3\The applicant represents that the fair market value will not

be discounted for the Interests' lack of marketability or the fact

that the Interests are minority interests.

\4\The Aggregate Investment Cost is determined as follows. The

aggregate purchase price to the Plans was $129,850 ($24,500 for the

P/P Interest + $105,350 for the P/S Interest) plus the aggregate

Holding Costs of $4,036.29 ($641.53 for the Pension Plan + $3,394.76

for the P/S Plan) minus the aggregate distributions to the Plans of

$4,739.65 ($894.28 for the P/P Interest + $3,845.37 for the P/S

Interest). Numerically, this is as follows (($129,850 + $4,036.29) -

$4,739.65)) = $129,146.64 for the Aggregate Investment Cost to the

Plans.

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10. It is represented that the proposed transaction is

administratively feasible, in the interest and protection of the Plans'

participants and beneficiaries. The sale would be a one-time cash

transaction and the Plans would incur no expenses or commissions with

respect to the sale. The proposed transaction would enable the Plans to

liquidate its assets and would facilitate restructuring of the P/S

Plan. The proposed sale is protective of the Plans because Lake Cities

will purchase the Interests from the Plans for the greater of: a) the

aggregate fair market value of the Interests on the date of the sale;

or b) the Aggregate Investment Cost of the Interests to the Plans of

$129,146.64. Also, the Plans will be relieved of any liability with

respect to the Partnership. Furthermore, the applicant represents that

any amounts received by the Plans as a result of the proposed

transaction, which are in excess of the fair market value of the

Interests, will be treated as contributions to the Plans, but that

these contributions will not exceed limitations of section 415 of the

Internal Revenue Code.

11. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because:

(1) the sale will be a one-time cash transaction;

(2) no commissions or fees will be paid by the Plans as a result of

the sale;

(3) the sale will enable the Plans to liquidate its assets and will

facilitate restructuring of the P/S Plan;

(4) the sale will allow the Plans to divest of non-income producing

Interests that have depreciated in value; and

(5) the sale price will be the higher of: a) the aggregate fair

market value of the Interests on the date of the sale; or b) the

aggregate investment cost of the Interests to the Plans of $129,146.64.

Tax Consequences of Transaction

The Department of Treasury has determined that if a transaction

between a qualified employee benefit plan and its sponsoring employer

(or an affiliate thereof) results in the plan either paying less or

receiving more than fair market value, such excess may be considered to

be a contribution by the sponsoring employer to the plan, and therefore

must be examined under the applicable provisions of the Internal

Revenue Code, including sections 401(a)(4), 404 and 415.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,

telephone (202) 219-8883. (This is not a toll-free number.)

The Prudential Insurance Company of America Located in New Jersey

[Application No. D-9692]

Proposed Exemption

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, effective December 31, 1991, the restrictions of section

406 (a) and 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 transfer

by the Prudential Insurance Company of America (Prudential) of certain

assets from its general account (the General Account) into a separate

account (the Separate Account), established and managed by Prudential,

in connection with the conversion of one of Prudential's non-

participating group annuity contracts (the Non-Participating Annuity

Contract) to a participating group annuity contract (the Participating

Annuity Contract), issued by Prudential to the Retirement Program Plan

for Employees of Union Carbide Corporation and its subsidiary companies

(the Plan) and funded through the assets transferred to the Separate

Account; provided that the following conditions are met: (a) Prudential

transferred to the Separate Account sufficient assets to create a

reserve the value of which equaled or exceeded 103% of the value of the

Participating Annuity Contract liabilities, as of December 31, 1991;

(b) an independent qualified appraiser determined the fair market value

of the assets transferred into the Separate Account, as of the date of

such transfer; (c) Prudential irrevocably guarantees the payment of

benefits under the Participating Annuity Contract to the former

participants of the Plan who retired prior to December 31, 1985, (the

Retirees); (d) no additional contribution from the Union Carbide

Corporation (Union Carbide) or its subsidiary companies or the Plan was

or will be required to fund benefits to the Retirees or to any other

participants and beneficiaries of the Plan; (e) prior to the transfer

of assets between the General Account and the Separate Account, Union

Carbide, acting as fiduciary on behalf of the Plan, determined that the

transaction was feasible, in the interest of, and protective of the

Plan and its participants and beneficiaries and would not affect the

payment of benefits to the Retirees; (f) Union Carbide determined that

the terms and conditions of the transaction were at least as favorable

as those negotiated at arm's length in similar transactions with

unrelated third parties; (g) prior to the conversion, Union Carbide

negotiated, reviewed, and approved the transaction, and will monitor

the transaction; (h) Union Carbide reviewed the appraisal and approved

the transfer of each of the assets into the Separate Account prior to

the date the transaction was entered; and (i) the Plan incurred no

fees, commissions, costs, expenses, or other charges associated with

the transaction and will pay no addition compensation as a result of

the conversion of the Non-Participating Annuity Contract to the

Participating Annuity Contract.5

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\5\For purposes of this proposed exemption references to

specific provisions of title I of the Act, unless otherwise

specified, refer also to the corresponding provisions of the Code.

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Effective Date: If granted, this exemption will be effective

December 31, 1991.

Summary of Facts and Representations

1. The Plan is a defined benefit plan that is tax qualified under

section 401(a) of the Code. The Plan is funded by a trust that is

exempt from tax under section 501(a) of the Code. Manufacturers Hanover

Trust Company serves as the trustee for the Plan. The Plan had total

assets of approximately $3.1 billion and $2.58 billion, as of December

31, 1990, and 1991, respectively. It is also represented that there

were approximately 64,000 active individual participants in the Plan,

as of December 31, 1991, and approximately 23,900 Retirees.

2. The sponsor of the Plan is Union Carbide and its subsidiaries.

Union Carbide is a large chemical manufacturer with operations in the

United States and in countries abroad. Union Carbide is a New York

corporation with its principal place of business located in Danbury,

Connecticut. Union Carbide employs approximately 37,756 persons and, as

of December 31, 1990, had total assets of approximately $8.133 billion.

3. Prudential provides a variety of insurance products and

services, including participating and non-participating annuity

contracts, funding, and asset management to pension and profit-sharing

plans subject to the provisions of Title I of the Act. In this regard,

it is represented that Prudential and its affiliates provided insurance

products and services to the Plan prior to the conversion. Accordingly,

Prudential and its affiliates were parties in interest with respect to

the Plan when the transaction was entered.

4. On September 30, 1985, Union Carbide established a plan (the

Spinoff Plan) that was separate from the Plan which is the subject of

this proposed exemption. At that time, the liabilities for the accrued

benefits of former participants who had retired on or before September

30, 1985, and assets in an amount exceeding all such liabilities were

transferred from the Plan to the Spinoff Plan. Union Carbide then,

pursuant to section 4043 of the Act, filed a notice of intent to

terminate the Spinoff Plan under section 4041 of the Act and received a

favorable determination letter from the Internal Revenue Service and

the Pension Benefit Guaranty Corporation. Accordingly, the Spinoff Plan

was then terminated and the excess assets reverted to Union Carbide.

It is represented that Union Carbide purchased irrevocable annuity

contracts from Prudential to cover all vested accrued benefits of the

former participants in the Spinoff Plan at the time it was terminated.

One of the annuity contracts purchased was the Non-Participating

Annuity Contract which is involved in this proposed exemption. However,

because the actual date of Union Carbide's purchase of the Non-

Participating Annuity Contract was subsequent to the effective date of

the termination of the Spinoff Plan, Union Carbide determined that it

would cover certain additional former participants of the Plan who had

retired between September 30, 1985, and December 31, 1985. Accordingly,

under the terms of the Non-Participating Annuity Contract, Prudential

agreed to provide an irrevocable commitment to cover and guarantee the

payment of all benefits for those former participants who retired on or

before December 31, 1985, and their beneficiaries. It is represented

that these Retirees ceased to be participants of the Plan, pursuant to

29 CFR Sec. 2510.3-3(d)(2)(ii) of the Department's regulations, as such

individuals received a certificate describing the benefits to which

they were entitled, the entire benefit rights of such individuals were

fully guaranteed by Prudential, and such rights are enforceable by the

sole choice of such individuals against Prudential. However, because

the Non-Participating Contract covered this additional group of

retirees it is represented that the Non-Participating Contract was

issued by Prudential to the Plan. Further, because the Plan is the

named holder under the provisions of such contract, it is represented

that the Non-Participating Annuity Contract is deemed to be an asset of

the Plan and is subject to the discretion of Union Carbide, acting as

fiduciary for the Plan.

5. Subsequent to the purchase of the Non-Participating Annuity

Contract, the Separate Account was established for the purpose of

converting the Non-Participating Annuity Contract held by the Plan into

a Participating Annuity Contract funded through the Separate Account.

The Separate Account was funded with fixed income investments (the

Fixed Income Assets) transferred from the segment of Prudential's

General Account to which liability for the benefits provided under the

Non-Participating Annuity Contract had been assigned. It is represented

that the in-kind transfer of the Fixed Income Assets avoided

transaction costs in connection with the acquisition by the Separate

Account of a suitable portfolio.

It is represented that the Non-Participating Annuity Contract was

converted to a Participating Annuity Contract funded through the

Separate Account in order for the Plan and the Retirees to take

advantage, in the event of Prudential's insolvency, of the additional

protection from the creditors of the insurer which is typically

available from a separate account structure, and also to obtain for the

Plan the opportunity to participate risk free in any Separate Account

earnings. It is represented that when the transaction was entered, the

terms of the Participating Annuity Contract were at least as favorable

as those provided under the Non-Participating Annuity Contract. Union

Carbide further represents that the Participating Annuity Contract

provides the same level and guarantee of benefit payments to Retirees

as were provided under the terms of the Non-Participating Annuity

Contract. In this regard, it is represented that the contractual

relationship of the Retirees with Prudential was not impacted by the

conversion of the Non-Participating Annuity Contract to the

Participating Annuity Contract, as the individual certificates which

were issued to the Retirees described the benefits which the Retirees

are entitled to receive and provided those Retirees with the right to

enforce the obligation to pay those benefits directly against

Prudential. It is further represented that neither of these factors was

affected by the conversion, because the guarantees provided in the

individual certificates are not dependent on the continuation of the

particular group annuity contract under which the certificates were

issued. No additional contribution of assets was or will be required

from Union Carbide or the Plan to Prudential or the Separate Account in

order to fund benefits guaranted under the terms of the Participating

Annuity Contract. In the event that the Fixed Income Assets transferred

to the Separate Account are insufficient to pay all benefits, it is

represented that Prudential's General Account continues to provide an

irrevocable guarantee for the payment of benefits.

Prudential established the Separate Account, and selected and

transferred the assets into the Separate Account, subject to the

approval of Union Carbide acting as fiduciary on behalf of the Plan.

Once transferred, all of the underlying assets of the Separate Account

were managed by Prudential or its affiliates exclusively. However, it

is represented that Prudential did not provide investment advice to

Union Carbide nor exercise discretionary control with respect to the

decision to convert the Non-Participating Annuity Contract into the

Participating Annuity Contract.

6. The Separate Account was established by Prudential as a separate

account under the definition as set forth in section 3(17) of the Act.

The investment guidelines for the Separate Account (the Investment

Guidelines) imposed certain percentage limitations on the amount that

the Separate Account could invest in each sector of the fixed income

security market and restricted investment to no more than five percent

(5%) of its assets in securities issued by a single issuer. Other

restrictions included that the Separate Account could invest no more

than twenty-five percent (25%) of its assets in securities rated Baa,

and a maximum of seventy-five percent (75%) of its assets in a

combination of securities that have been rated A or Baa by one or more

rating agency selected by the issuer of such securities. These

Investment Guidelines corresponded to the guidelines relating to the

quality of investments held in the segment of Prudential's General

Account to which the Non-Participating Annuity Contract was assigned.

Further, the Separate Account is required to be passively managed by

Prudential in a manner intended to maintain this asset/liability match.

7. Once the Separate Account was established, Prudential

transferred the Fixed Income Assets in-kind from its General Account to

the Separate Account. The Fixed Income Assets consisted entirely of a

dedicated bond portfolio, containing either publicly traded or

privately placed bonds.6 Further, the value of the Fixed Income

Assets transferred from the General Account represented the remaining

liabilities under the Non-Participating Annuity Contract plus an amount

in excess of such liabilities sufficient to establish a reserve as

required by applicable state insurance law. Prudential's intention was

to use the Fixed Income Assets to provide for the payment of benefits

and reasonable expenses related thereto under the terms of the

Participating Annuity Contract maintained by the Separate Account.

However, Prudential has also provided an irrevocable commitment of the

assets of its General Account to pay benefits to the Retirees under the

terms of the Participating Annuity Contract and the Separate Account.

For this reason, it is represented that there was no incentive for

Prudential to have transferred assets other than those of the highest

quality to the Separate Account. Accordingly, on December 31, 1991,

Prudential transferred Fixed Income Assets, valued at approximately $1

billion, from its General Account to the Separate Account.7

Prudential represents that this method of funding the Separate Account

avoided the transaction costs that would have been incurred, had assets

held in Prudential's General Account been liquidated and appropriate

securities been purchased on behalf of the Separate Account with the

proceeds from such a sale.

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\6\It is represented that a portfolio is considered dedicated if

there is a cash-flow match to the liabilities under the contract for

the first twelve months and thereafter a duration match (within one-

half year) on subsequent liabilities.

\7\Prudential represents that the in-kind transfer of the Fixed

Income Assets to the Separate Account also permitted Prudential to

recognize certain statutory gains on its financial statements. It is

represented that at the time of the transfer, the market value of

the transferred assets exceeded the book value at which the assets

had been carried on Prudential's financial statements. Because

assets in a separate account must be reported at market value, the

statutory income statement surplus reflected a gain in the amount of

the difference between book value and market value. As the surplus

of a mutual insurance company is the equivalent of equity capital,

it is represented that the surplus gain reflected on Prudential's

financial schedules reflected a strengthening of its financial

condition.

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8. Prudential is uncertain as to whether the transaction, as

consummated, involved violations of section 406(a) and 406(b) of the

Act. In this regard, the prohibited transaction analysis depends on

whether the Separate Account is deemed to hold ``plan assets'' that are

subject to the fiduciary responsibility provisions of the Act, such

that Prudential's transfer of such assets from the General Account to

the Separate Account may have constituted a direct or indirect transfer

of assets between a plan and a party in interest, described in section

406(a)(1) (A) and (D) of the Act.8

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\8\Section 29 CFR 2510.3-101(h) of the Department's regulations

provides, in part, that a separate account does not hold ``plan

assets'' for purposes of the Act, if it is maintained solely in

connection with fixed contractual obligations of the insurance

company under which the amounts payable to the plan are not affected

in any manner by the investment performance of the separate account.

In the opinion of Prudential, because there is a possibility that

the Plan may participate in the investment performance of the

Separate Account under the terms of the Participating Annuity

Contract, it would appear that the underlying assets of the Separate

Account are not eligible for this exception to the plan assets

regulation and that such assets are ``plan assets.''

Further, Prudential believes that the Separate Account could be

deemed to hold ``plan assets'' for purposes of the Act, because the

assets of the Separate Account do not appear to be held in

connection with a ``guaranteed benefit policy,'' as defined in

section 401(b)(2)(B) of the Act. Section 401(b)(2)(B), defines the

term ``guaranteed benefit policy'' to mean an insurance policy or

contract to the extent that such policy or contract provides for

benefits the amount of which is guaranteed by the insurer. Such term

includes any surplus in a separate account, but excludes any other

portion of a separate account. Under section 401(b)(2), the assets

of a plan are deemed to include such ``guaranteed benefit policy''

but are not, solely by reason of the issuance of such policy deemed

to include the assets of the insurer.

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If the Separate Account contained Plan assets, the question becomes

whether Prudential acted as a fiduciary with respect to the Separate

Account at the time the Fixed Income Assets were transferred. In

Prudential's view, exemptive relief from section 406(b) may be

necessary, because Prudential approved the assets transferred to the

Separate Account from the segment of Prudential's General Account that

formerly backed the Non-Participating Annuity Contract, or because

Prudential is the manager of the Separate Account, even though the

Separate Account did not hold any cash or other assets until after the

transfer took place. In this regard, however, Prudential represents

that Union Carbide acted as fiduciary with respect to the Plan, as

discussed more fully in paragraph number eleven below. Accordingly,

Prudential has requested exemptive relief from section 406(a) and

406(b) for the transaction described herein.

9. It is represented that all of the assets in the Separate Account

are and will be managed exclusively by Prudential or its affiliates and

that Prudential receives from the Separate Account certain customary

fees and charges to compensate for services performed and risks assumed

by Prudential. In this regard, Prudential receives an annual

administrative charge equal to .05% of the outstanding liabilities

under the terms of the Participating Annuity Contract and an annual

investment management and custodial fee equal to .45% of the value of

the Separate Account. Prudential also receives risk charges fixed at

.90% of the Participating Annuity Contract liability amount which

accrues daily beginning January 1, 1992. In this regard, it is

represented that such risk charges are deducted from the Separate

Account on a quarterly basis and that withdrawal of risk charges from

the Separate Account is permitted only to the extent that the assets in

the Separate Account exceed 107% of the contract liability amount of

the Participating Annuity Contract which is equivalent to 110% of the

actual benefit liabilities then remaining under the Participating

Annuity Contract. It is further represented that other than the fees

and charges described in this paragraph, Prudential does not receive

any part of the earnings in the Separate Account, and that the Plan

receives the entire benefit of favorable investment experience, if any,

in the Separate Account.

With respect to the fees Prudential receives from the Separate

Account, Prudential represents that for two reasons it cannot under any

circumstances receive more compensation in connection with the

provision of services to the Separate Account under the terms of the

Participating Annuity Contract than it was entitled to receive through

the single premium for the Non-Participating Annuity Contract when

initially purchased by Union Carbide. First, Prudential represents that

generally it charges higher premiums for a participating annuity

contract than for a non-participating annuity contract. However, with

respect to conversion of the Non-Participating Annuity Contract to the

Participating Annuity Contract that is the subject of this proposed

exemption, no additional premiums or other consideration, beyond the

single premium already paid by Union Carbide for the Non-Participating

Annuity Contract, were or will be charged by Prudential to Union

Carbide or the Plan in connection with the Participating Annuity

Contract.

Second, with regard to the fees and charges received by Prudential

under the terms of the Participating Annuity Contract, it is

represented that generally the same types of costs are taken into

account for purposes of calculating the premium required for a non-

participating annuity contract. It is further represented that because

such fees and charges are not the continuing obligation of the holder

of a non-participating annuity contract, they are not set forth in a

fee schedule but are primarily a matter of internal record keeping.

According to Prudential, similar fees and charges were built into the

single sum premium under the terms of the Non-Participating Annuity

Contract and were pro-rated for the purpose of the conversion to the

Participating Annuity Contract. It is represented that in accordance

with the terms of the Participating Annuity Contract, Prudential

transferred to the Separate Account assets attributable to the pro-

rated value of those internal fees and risk charges which had not yet

accrued under the Non-Participating Annuity Contract at the time of the

transfer. According to Prudential, it is entitled to reimbursement for

the amount of such internal fees and risk charges over the life of the

Participating Annuity Contract, and that such reimbursement does not

constitute additional compensation.9

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\9\Prudential has not requested relief for the institution of

the fee schedule nor the receipt of fees from the Separate Account

in accordance with the terms of the Participating Annuity Contract.

The Department is expressing no opinion as to whether the change in

the manner in which fees were and are charged to the Plans by

Prudential as a result of the conversion from the Non-Participating

Annuity Contract to a Participating Annuity Contract constituted a

violation of section 406 of the Act. Accordingly, no relief is

proposed, herein, beyond that covered by section 408(b)(2) of the

Act for the provision of services by Prudential to the Separate

Account or the receipt of fees for services rendered in connection

with the transaction described in this proposed exemption.

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10. Prior to the transfer of the Fixed Income Assets between the

General Account and Separate Account, Prudential hired an independent

accounting firm, Deloitte & Touche, to perform an independent appraisal

of each of the Fixed Income Assets. In preparing this appraisal,

Deloitte & Touche was provided with and reviewed information on: (a)

the historical and prospective financial credit risk of the issuers;

(b) the terms of the Fixed Income Assets; and (c) credit market data.

Deloitte & Touche represents that it has extensive experience in the

valuation of securities and that it receives less than one percent of

its income from Prudential. Further, Deloitte & Touche represents that

it had no present or contemplated future interest in the assets which

were the subject of the appraisal and had no personal interest or bias

with respect to the Fixed Income Assets or the parties involved.

Deloitte & Touche also represents that the compensation it received in

connection with preparation of the appraisal report was in no way

contingent on the conclusions drawn therein.

As described in paragraph number seven above, the Fixed Income

Assets initially transferred to the Separate Account were publicly and

privately placed debt instruments. In determining the fair market value

of privately placed Fixed Income Assets, Deloitte & Touche read and

analyzed summaries of pertinent provisions of the loan agreements,

including interest rates, collateral provisions, call provisions,

sinking fund provisions, and other terms having a material influence on

value. With respect to the publicly traded Fixed Income Assets,

Deloitte & Touche determined their value by applying the trading price

on the date of transfer to the number of securities transferred into

the Separate Account. Deloitte & Touche concluded that the publicly

traded Fixed Income Assets and the privately placed Fixed Income Assets

were valued, respectively, at $609,715,883 and $474,251,095, as of

December 31, 1991. Accordingly, the total fair market value of the

Fixed Income Assets was approximately $1.083 billion dollars, as of the

same date.

Initially due to delays in the availability of trade pricing

information, it is represented that the fair market value of the Fixed

Income Assets transferred into the Separate Account on December 31,

1991, was based on fair market value of such assets, as of December 27,

1991. This date was chosen for valuation purposes to insure that a

consistent valuation date could be applied to each of the Fixed Income

Assets. Once valuation information became available, Prudential,

complying with state insurance law, provided for the transfer to the

Separate Account of sufficient assets to create a reserve10 which

equaled or exceeded 103% of the value of the Participating Annuity

Contract liabilities on December 31, 1991.

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\1\0Prudential maintains that funds of the General Account

contributed in order to establish a reserve amount in the Separate

Account, as required under state insurance law, are equivalent to

``seed money,'' and should not be treated as ``plan assets'' for

purposes of the Act. In this regard, Prudential cites to the

analysis contained in Advisory Opinion 83-38A (July 22, 1983), for

the proposition that ``seed money'' allocated by an insurer to its

pooled separate accounts would not be treated as ``plan assets'' for

purposes of the Act and that the redemption of the units of

participation in these separate accounts by the insurer, according

to the rules governing the redemption rights of those participating

units, would not, solely by reason of the redemption, constitute a

violation of section 406(a)(1) (A) and (D) and 406 (b)(1) and (b)(2)

of the Act. Accordingly, Prudential has not requested exemptive

relief from section 406(a)(1) (A) and (D) and 406 (b)(1) and (b)(2)

of the Act with respect to the contribution to or with respect to

the withdrawal from the Separate Account of such reserve amounts. In

this regard, the Department, herein, is expressing no opinion

whether any such transactions would violate section 406 of the Act

and is offering no relief for such contribution or withdrawal of

``seed money.''

However, as the bulk of the assets in the Separate Account would

not constitute ``seed money'' under Prudential's analysis,

Prudential requests and the Department, herein, is proposing relief

for the transfer of assets from the General Account to the Separate

Account to the extent that such transaction may have constituted a

prohibited sale or exchange, or use of plan assets for the benefit

of a party in interest in violation of section 406(a)(1) (A) and (D)

of the Act.

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Following the transfer, the valuation of the assets in the Separate

Account and the calculation of the liabilities under the Participating

Annuity Contract were reconciled. This reconciliation of assets and

liabilities resulted in Prudential's transfer of two additional assets

(the Additional Assets) to the Separate Account on January 10, 1992, in

connection with three minor adjustments to the valuations. The transfer

of these Additional Assets was approved by Union Carbide. The three

adjustments are described in the three paragraphs immediately below.

First, the valuation, as of December 27, 1991, assumed all coupons

attached to the securities would be transferred to the Separate Account

on December 31, 1991. However, a $920,000 coupon payment was due and

paid to Prudential's General Account on December 30, 1991. Thus, the

value of the Additional Assets which were transferred to the Separate

Account equaled or exceeded the value of the coupon.

Second, the option pricing model utilized in the December 27th

appraisal overestimated the duration of some publicly traded bonds

which resulted in a $530,000 overstatement in the initial valuations of

these securities. It is represented that because these bonds were

actually subject to a high call probability, the model should have

assigned a duration of zero, instead of the three or four year duration

actually assumed.

Finally, the decline in interest rates between December 27, 1991,

and December 31, 1991, resulted in an increased market value for the

Separate Account, which caused the value of certain securities

tentatively transferred to the Separate Account to exceed the dollar

limitations established for the Separate Account by the Investment

Guidelines. The securities that exceeded these limitations were valued

at $900,000. Accordingly, they were replaced by portions of the

Additional Assets described in the paragraph below.

The Additional Assets transferred to the Separate Account in

connection with the reconciliation were valued at $3,576,650, as of

December 31, 1991. Although the value of these Additional Assets

exceeded the amount required to be transferred by approximately $1.2

million, these Additional Assets were selected, because they were the

smallest available denominations that met the Investment Guidelines.

11. It is represented that Union Carbide exercised fiduciary

discretion with respect to this proposed transaction. In this regard,

it is represented that Union Carbide is independent of Prudential in

that it is not affiliated with Prudential and receives less than one

percent of its annual income from Prudential.

Before reaching its conclusions on the proposed transaction, Union

Carbide, was provided with and reviewed the following information: (a)

the appraisals of the value of the Fixed Income Assets prepared by

Deloitte & Touche; (b) the terms of the Participating Annuity Contract,

including the compensation to be retained by Prudential pursuant to

such contract; (c) the calculation of the current value of the

liabilities under the Participating Annuity Contract performed by

Prudential using the methodology and assumptions, as set forth in the

Participating Annuity Contract; (d) the list of the Fixed Income Assets

selected by Prudential for transfer into the Separate Account; (e) a

copy of the Investment Guidelines for the portfolio of the Separate

Account; and (f) all additional information provided by Prudential or

requested by Union Carbide.

As fiduciary with respect to this transaction, Union Carbide

represents that it: (a) reviewed the general investment strategy

regarding the assets that were assigned to meet the liabilities under

the Non-Participating Annuity Contract; (b) reviewed the Investment

Guidelines of the Separate Account, and determined that such were

appropriate, and that the transfer of the Fixed Income Assets was

consistent with the Investment Guidelines; (c) reviewed the quality and

diversification of the Fixed Income Assets transferred to the Separate

Account and found such assets to be of high investment quality and

sufficiently diverse to protect the interests of the Plan; (d) approved

each of the Fixed Income Assets selected by Prudential from its General

Account before such assets were transferred into the Separate Account;

(e) reviewed the appraisal report prepared by Deloitte & Touche and

determined that such report was reliable and complete, notwithstanding

the fact that Deloitte & Touche relied on certain information provided

by Prudential; (f) reviewed and approved the methodology for valuing

the liabilities and the assumptions with respect to interest rates,

mortality, and expenses that are set forth in the Participating Annuity

Contract; (g) based on its review of the Deloitte & Touche appraisal

report and on Prudential's calculations of the current value of

contract liabilities, determined that the Fixed Income Assets were

transferred to the Separate Account at fair market value and were

sufficient to meet the liabilities due under the terms of the

Participating Annuity Contract, as of the date of the transfer; (h)

reviewed and approved the reconciliation as described more fully in

paragraph number ten above; (i) reviewed and analyzed the terms of the

Participating Annuity Contract, including the compensation Prudential

receives thereunder, and determined that such terms were at least as

favorable as those which could have been obtain in arm's length

negotiations with unrelated third parties; (j) determined that the

conversion was in the best interest of the Retirees, because it did not

affect Prudential's irrevocable commitment to use the assets in its

General Account to provide payment for benefits under the certificates

issued to the Retirees and because in the event Prudential becomes

insolvent, the assets in the Separate Account will be protected from

the claims of Prudential's general creditors; and (k) gave due

consideration to the cash flow of the liabilities under the terms of

the Participating Annuity Contract.

Accordingly, prior to the transfer of the Fixed Income Assets

between the General Account and the Separate Account, Union Carbide,

determined that the transaction was in the best interest of the Plan

and that adequate safeguards were adopted to protect the interest of

the Retirees and of the Plan and its participants and beneficiaries. In

addition, Union Carbide, acting as fiduciary, reviewed and approved the

risk charges described in paragraph nine above.\11\

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\1\1In this regard, the Department expects that Union Carbide,

acting as fiduciary to the Plan, prudently considered the

relationship of fees for services and risk charges paid by the Plan

to the level of services provided by Prudential to the Separate

Account and the risks assumed by Prudential in connection with the

Participating Annuity Contract.

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Five officers either of Union Carbide or Benefit Capital Management

Corporation (BCMC), a wholly-owned subsidiary of Union Carbide that

manages the investment portfolio of the Plan, were responsible for

carrying out Union Carbide's functions as a fiduciary with respect to

the transaction. As a group, it is represented that these individuals

were qualified in that they had extensive experience with sophisticated

investment analysis techniques, in-depth expertise relating to

investments suitable to the Plan, and skill in negotiating terms and

conditions of investments. These individuals had at their disposal

various outside experts and in-house professionals to advise them in

areas where more specialized expertise is required. It is represented

that these individuals were responsible, either directly or through

oversight of outside managers, for approximately $3.8 billion in assets

of plans sponsored by Union Carbide.

These individuals were employed by Union Carbide to perform the

analysis and evaluation of the transaction and to issue a fiduciary

report. Such a fiduciary report (the Original Report), as summarized

above in this paragraph eleven, was issued in March of 1992.

Subsequently, on February 3, 1993, one of the preparers of the Original

Report, a Senior Vice President of BCMC and the investment manager of

the Plan's fixed income portfolio, was arrested and incarcerated for

tax fraud. As a result of this event, on April 27, 1993, Union Carbide

terminated the employment of this individual (the Former Employee),

effective August 17, 1992. Thereafter, this Former Employee on August

31, 1993, was indicted for mail fraud, securities fraud, kickbacks with

respect to an employee benefit plan, and on February 2, 1994, pled

guilty in connection with these activities.

BCMC and Union Carbide are cooperating with the U.S. Attorney's

office in the investigation and prosecution of the matters described in

the paragraph above. In this regard, an investigation was conducted

under the direction of the law department of Union Carbide which found

no indication that anyone else was implicated or was aware of the

illegal activities of the Former Employee. It is represented that BCMC

had preventative practices and procedures in place at the time and has

enhanced such procedures, since the discovery of the wrongdoing on the

part of the Former Employee.

Union Carbide estimates that the loss to the Plan from the illegal

activities of the Former Employee totaled approximately $3.5 million.

In this regard, Union Carbide has made a claim against the insurer

which provides fraud and dishonesty coverage to BCMC and the Plans. In

addition, Union Carbide anticipates filing suit against various parties

seeking satisfactory recovery of the loss to the Plan.

Subsequently, three of the individuals who signed the Original

Report, plus a fourth individual, issued a supplemental fiduciary

report (the Supplemental Report), dated September 2, 1993. It is

represented that the Former Employee did not participate in the

preparation of the Supplemental Report. It is represented that the

Supplemental Report confirmed that the conversion of the Non-

Participating Annuity Contract to the Participating Annuity Contract

was in the best interest of the Retirees, because (1) such action does

not affect Prudential's irrevocable commitment to use its General

Account assets to provide payment for all benefits provided under the

certificates issued to Retirees, and (2) the assets in the Separate

Account should be protected from the claims of Prudential's general

creditors in the event of insolvency.

Subsequently, on March 28, 1994, the four individuals who signed

the Supplemental Report, plus the fixed income investment manager who

replaced the Former Employee, issued another report (the Restated

Report) which reached the identical conclusions in support of the

transaction which were issued in the Original Report. In this regard,

the Restated Report contained the following conclusions: (1) Any

earnings from the Separate Account that are not required to reimburse

certain risk charges, management fees and administrative fees will be

used to meet Plan liabilities; (2) in the event that the assets in the

Separate Account are insufficient to cover all Participating Annuity

Contract liabilities, Prudential will continue to provide the same

irrevocable commitment to use its general assets to provide payment of

all benefits provided under the Participating Annuity Contract; (3)

under no circumstances will Union Carbide or the Plan be required to

contribute additional assets to fund benefits under the Participating

Annuity Contract; (4) in the event of Prudential's insolvency, the

assets of the Separate Account should not be reached by Prudential's

creditors; (5) the transfer of assets permits the Separate Account to

avoid transaction costs in connection with the acquisition of a

suitable portfolio; (6) the type and quality of the assets transferred

to the Separate Account are consistent with the Separate Account's

investment guidelines; (7) based on a review of the Deloitte & Touche

appraisal report, the assets transferred to the Separate Account were

transferred at fair market value and were sufficient to meet the

liabilities due under the Non-Participating Annuity Contract as of the

date of the transfer; and (8) the transaction is at least as favorable

to current and former Plan participants and beneficiaries as an arm's

length transaction with an unrelated third party. Further the Restated

Report confirmed that Union Carbide would have performed the same

analysis and reached the same conclusions set forth in Original Report,

if the Former Employee had not participated in the original review of

the transaction.

The applicant maintains that exemption should be granted on the

basis of Union Carbide's Restated Report for the following reasons: (1)

Union Carbide, not the Former Employee individually, acted as the

fiduciary on behalf of the Plan; (2) the Former Employee was only one

of several persons assigned to carry out Union Carbide's duties as

fiduciary; (3) Union Carbide has reconfirmed each of its determinations

in the Original Report; (4) the securities transferred from the General

Account of Prudential into the Separate Account were in no way involved

with the Former Employee's improper activities; and (5) the indictment

of the Former Employee did not affect whether the transaction was in

the best interest of the Plan.

12. In addition to the responsibilities described above, as named

fiduciary on behalf of the Plan, Union Carbide is also responsible for

monitoring the performance of any investment manager that it appoints

on behalf of the Plan. Because the Separate Account is structured with

a ``buy and hold'' strategy, it is represented that relatively little

oversight should be required. As the transaction did not involve any

ongoing prohibited transaction, no specialized continuing oversight is

anticipated by Union Carbide. However, it is represented that Union

Carbide will yearly arrange for an independent audit of the Separate

Account for the purpose of reconciling the benefit payments made out of

the Separate Account, determining the remaining contract liability, and

calculating whether additional reserves are necessary, as the reserve

amount that is required to be maintained in the Separate Account may

vary with time and quality of the assets held in such Separate Account.

13. It is represented that Union Carbide received no payments or

other compensation in connection with the transaction, except to the

extent that Union Carbide received reimbursement for the ``direct

expenses'' of providing services to the Plan, pursuant to sections

408(b)(2) and 408(c)(2) of the Act.\12\ In addition, Prudential will

indemnify Union Carbide with respect to any action or threatened action

to which Union Carbide is made a party by reason of Union Carbide's

services as fiduciary.\13\

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\1\2 The Department expresses no opinion, herein, as to whether

the provision of services by Union Carbide and the compensation

received therefor satisfy the terms and conditions as set forth in

section 408(b)(2) of the Act.

\1\3The Department does not hereby construe any exculpatory

clauses agreed to between Union Carbide and Prudential, nor do such

agreements in any way modify the fiduciary duties and

responsibilities of either Union Carbide or Prudential with respect

to the Plan, as imposed by reason of part 4, title I, of the Act.

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14. In summary, Prudential, as applicant, represents that the

transaction met the statutory criteria for an exemption under section

408(a) of the Act because:

(a) Prudential transferred to the Separate Account sufficient

assets to create a reserve the value of which equaled or exceeded 103%

of value of the Participating Annuity Contract liabilities, as of

December 31, 1991;

(b) the fair market value of the Fixed Income Assets transferred

into the Separate Account was determined by an independent qualified

appraiser, as of the date the transaction was entered;

(c) Prudential irrevocably guarantees the payment of benefits to

the Retirees;

(d) no additional contribution from Union Carbide or the Plan was

or will be required to fund benefits to the Retirees;

(e) the Plan avoided transaction costs inherent in liquidating

assets of the General Account in order to initially fund the Separate

Account;

(f) funding the Participating Annuity Contract through the Separate

Account protects the Plan and the Retirees from the general creditors

of Prudential;

(g) prior to entering the transaction, Union Carbide, acting as

fiduciary on behalf of the Plan, determined that the transaction was

feasible, was in the interest of, and was protective of the Plan and

its participants and beneficiaries and would not affect the payment of

benefits to the Retirees;

(h) after full disclosure, including the provisions regarding the

compensation to be paid to Prudential, Union Carbide determined that

the terms of the transaction were at least as favorable as those

negotiated at arm's length with unrelated third parties in similar

transactions;

(i) prior to the conversion, Union Carbide negotiated, reviewed,

and approved the transaction, and will monitor the transaction;

(j) Union Carbide reviewed the appraisal and the transfer of each

of the assets into the Separate Account prior to entering into the

transaction; and

(k) according to Prudential, the Plan incurred no fees,

commissions, costs, expenses, or other charges associated with the

transaction and will pay no additional compensation as a result of the

conversion of the Non-Participating Annuity Contract to the

Participating Annuity Contract.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

Department, telephone (202) 219-8883. (This is not a toll-free number.)

Berean Capital, Inc. (Berean) Located in Chicago, Illinois

[Application No. D-9745]

Proposed Exemption

I. Transactions

A. Effective June 27, 1994, the restrictions of sections 406(a) and

407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of

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

shall not apply to the following transactions involving trusts and

certificates evidencing interests therein:

(1) The direct or indirect sale, exchange or transfer of

certificates in the initial issuance of certificates between the

sponsor or underwriter and an employee benefit plan when the sponsor,

servicer, trustee or insurer of a trust, the underwriter of the

certificates representing an interest in the trust, or an obligor is a

party in interest with respect to such plan;

(2) The direct or indirect acquisition or disposition of

certificates by a plan in the secondary market for such certificates;

and

(3) The continued holding of certificates acquired by a plan

pursuant to subsection I.A. (1) or (2).

Notwithstanding the foregoing, section I.A. does not provide an

exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and

407 for the acquisition or holding of a certificate on behalf of an

Excluded Plan by any person who has discretionary authority or renders

investment advice with respect to the assets of that Excluded

Plan.14

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\1\4Section I.A. provides no relief from sections 406(a)(1)(E),

406(a)(2) and 407 for any person rendering investment advice to an

Excluded Plan within the meaning of section 3(21)(A)(ii) and

regulation 29 CFR 2510.3-21(c).

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B. Effective June 27, 1994, the restrictions of sections 406(b)(1)

and 406(b)(2) of the Act and the taxes imposed by section 4975 (a) and

(b) of the Code by reason of section 4975(c)(1)(E) of the Code shall

not apply to:

(1) The direct or indirect sale, exchange or transfer of

certificates in the initial issuance of certificates between the

sponsor or underwriter and a plan when the person who has discretionary

authority or renders investment advice with respect to the investment

of plan assets in the certificates is (a) an obligor with respect to 5

percent or less of the fair market value of obligations or receivables

contained in the trust, or (b) an affiliate of a person described in

(a); if:

(i) the plan is not an Excluded Plan;

(ii) solely in the case of an acquisition of certificates in

connection with the initial issuance of the certificates, at least 50

percent of each class of certificates in which plans have invested is

acquired by persons independent of the members of the Restricted Group

and at least 50 percent of the aggregate interest in the trust is

acquired by persons independent of the Restricted Group;

(iii) a plan's investment in each class of certificates does not

exceed 25 percent of all of the certificates of that class outstanding

at the time of the acquisition; and

(iv) immediately after the acquisition of the certificates, no more

than 25 percent of the assets of a plan with respect to which the

person has discretionary authority or renders investment advice are

invested in certificates representing an interest in a trust containing

assets sold or serviced by the same entity.15 For purposes of this

paragraph B.(1)(iv) only, an entity will not be considered to service

assets contained in a trust if it is merely a subservicer of that

trust;

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\1\5 For purposes of this exemption, each plan participating in

a commingled fund (such as a bank collective trust fund or insurance

company pooled separate account) shall be considered to own the same

proportionate undivided interest in each asset of the commingled

fund as its proportionate interest in the total assets of the

commingled fund as calculated on the most recent preceding valuation

date of the fund.

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(2) The direct or indirect acquisition or disposition of

certificates by a plan in the secondary market for such certificates,

provided that the conditions set forth in paragraphs B.(1) (i), (iii)

and (iv) are met; and

(3) The continued holding of certificates acquired by a plan

pursuant to subsection I.B. (1) or (2).

C. Effective June 27, 1994, the restrictions of sections 406(a),

406(b) and 407(a) of the Act, and the taxes imposed by section 4975(a)

and (b) of the Code by reason of section 4975(c) of the Code, shall not

apply to transactions in connection with the servicing, management and

operation of a trust, provided:

(1) such transactions are carried out in accordance with the terms

of a binding pooling and servicing arrangement; and

(2) the pooling and servicing agreement is provided to, or

described in all material respects in the prospectus or private

placement memorandum provided to, investing plans before they purchase

certificates issued by the trust.16

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\1\6In the case of a private placement memorandum, such

memorandum must contain substantially the same information that

would be disclosed in a prospectus if the offering of the

certificates were made in a registered public offering under the

Securities Act of 1933. In the Department's view, the private

placement memorandum must contain sufficient information to permit

plan fiduciaries to make informed investment decisions.

Notwithstanding the foregoing, section I.C. does not provide an

exemption from the restrictions of section 406(b) of the Act or from

the taxes imposed by reason of section 4975(c) of the Code for the

receipt of a fee by a servicer of the trust from a person other than

the trustee or sponsor, unless such fee constitutes a ``qualified

administrative fee'' as defined in section III.S.

D. Effective June 27, 1994, the restrictions of sections 406(a) and

407(a) of the Act, and the taxes imposed by sections 4975(a) and (b) of

the Code by reason of sections 4975(c)(1)(A) through (D) of the Code,

shall not apply to any transactions to which those restrictions or

taxes would otherwise apply merely because a person is deemed to be a

party in interest or disqualified person (including a fiduciary) with

respect to a plan by virtue of providing services to the plan (or by

virtue of having a relationship to such service provider described in

section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F),

(G), (H) or (I) of the Code), solely because of the plan's ownership of

certificates.

II. General Conditions

A. The relief provided under Part I is available only if the

following conditions are met:

(1) The acquisition of certificates by a plan is on terms

(including the certificate price) that are at least as favorable to the

plan as they would be in an arm's-length transaction with an unrelated

party;

(2) The rights and interests evidenced by the certificates are not

subordinated to the rights and interests evidenced by other

certificates of the same trust;

(3) The certificates acquired by the plan have received a rating at

the time of such acquisition that is in one of the three highest

generic rating categories from either Standard & Poor's Corporation

(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.

(D & P) or Fitch Investors Service, Inc. (Fitch);

(4) The trustee is not an affiliate of any member of the Restricted

Group. However, the trustee shall not be considered to be an affiliate

of a servicer solely because the trustee has succeeded to the rights

and responsibilities of the servicer pursuant to the terms of a pooling

and servicing agreement providing for such succession upon the

occurrence of one or more events of default by the servicer;

(5) The sum of all payments made to and retained by the

underwriters in connection with the distribution or placement of

certificates represents not more than reasonable compensation for

underwriting or placing the certificates; the sum of all payments made

to and retained by the sponsor pursuant to the assignment of

obligations (or interests therein) to the trust represents not more

than the fair market value of such obligations (or interests); and the

sum of all payments made to and retained by the servicer represents not

more than reasonable compensation for the servicer's services under the

pooling and servicing agreement and reimbursement of the servicer's

reasonable expenses in connection therewith; and

(6) The plan investing in such certificates is an ``accredited

investor'' as defined in Rule 501(a)(1) of Regulation D of the

Securities and Exchange Commission under the Securities Act of 1933.

B. Neither any underwriter, sponsor, trustee, servicer, insurer, or

any obligor, unless it or any of its affiliates has discretionary

authority or renders investment advice with respect to the plan assets

used by a plan to acquire certificates, shall be denied the relief

provided under Part I, if the provision of subsection II.A.(6) above is

not satisfied with respect to acquisition or holding by a plan of such

certificates, provided that (1) such condition is disclosed in the

prospectus or private placement memorandum; and (2) in the case of a

private placement of certificates, the trustee obtains a representation

from each initial purchaser which is a plan that it is in compliance

with such condition, and obtains a covenant from each initial purchaser

to the effect that, so long as such initial purchaser (or any

transferee of such initial purchaser's certificates) is required to

obtain from its transferee a representation regarding compliance with

the Securities Act of 1933, any such transferees will be required to

make a written representation regarding compliance with the condition

set forth in subsection II.A.(6) above.

III. Definitions

For purposes of this exemption:

A. Certificate means:

(1) a certificate--

(a) that represents a beneficial ownership interest in the assets

of a trust; and

(b) that entitles the holder to pass-through payments of principal,

interest, and/or other payments made with respect to the assets of such

trust; or

(2) a certificate denominated as a debt instrument--

(a) that represents an interest in a Real Estate Mortgage

Investment Conduit (REMIC) within the meaning of section 860D(a) of the

Internal Revenue Code of 1986; and

(b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which

Berean or any of its affiliates is either (i) the sole underwriter or

the manager or co-manager of the underwriting syndicate, or (ii) a

selling or placement agent.

For purposes of this exemption, references to ``certificates

representing an interest in a trust'' include certificates denominated

as debt which are issued by a trust.

B. Trust means an investment pool, the corpus of which is held in

trust and consists solely of:

(1) either

(a) secured consumer receivables that bear interest or are

purchased at a discount (including, but not limited to, home equity

loans and obligations secured by shares issued by a cooperative housing

association);

(b) secured credit instruments that bear interest or are purchased

at a discount in transactions by or between business entities

(including, but not limited to, qualified equipment notes secured by

leases, as defined in section III.T);

(c) obligations that bear interest or are purchased at a discount

and which are secured by single-family residential, multi-family

residential and commercial real property (including obligations secured

by leasehold interests on commercial real property);

(d) obligations that bear interest or are purchased at a discount

and which are secured by motor vehicles or equipment, or qualified

motor vehicle leases (as defined in section III.U);

(e) ``guaranteed governmental mortgage pool certificates,'' as

defined in 29 CFR 2510.3-101(i)(2);

(f) fractional undivided interests in any of the obligations

described in clauses (a)-(e) of this section B.(1);

(2) property which had secured any of the obligations described in

subsection B.(1);

(3) undistributed cash or temporary investments made therewith

maturing no later than the next date on which distributions are to made

to certificateholders; and

(4) rights of the trustee under the pooling and servicing

agreement, and rights under any insurance policies, third-party

guarantees, contracts of suretyship and other credit support

arrangements with respect to any obligations described in subsection

B.(1).

Notwithstanding the foregoing, the term ``trust'' does not include any

investment pool unless: (i) the investment pool consists only of assets

of the type which have been included in other investment pools, (ii)

certificates evidencing interests in such other investment pools have

been rated in one of the three highest generic rating categories by

S&P's, Moody's, D & P, or Fitch for at least one year prior to the

plan's acquisition of certificates pursuant to this exemption, and

(iii) certificates evidencing interests in such other investment pools

have been purchased by investors other than plans for at least one year

prior to the plan's acquisition of certificates pursuant to this

exemption.

C. Underwriter means:

(1) Berean;

(2) any person directly or indirectly, through one or more

intermediaries, controlling, controlled by or under common control with

Berean; or

(3) any member of an underwriting syndicate or selling group of

which Berean or a person described in (2) is a manager or co-manager

with respect to the certificates.

D. Sponsor means the entity that organizes a trust by depositing

obligations therein in exchange for certificates.

E. Master Servicer means the entity that is a party to the pooling

and servicing agreement relating to trust assets and is fully

responsible for servicing, directly or through subservicers, the assets

of the trust.

F. Subservicer means an entity which, under the supervision of and

on behalf of the master servicer, services loans contained in the

trust, but is not a party to the pooling and servicing agreement.

G. Servicer means any entity which services loans contained in the

trust, including the master servicer and any subservicer.

H. Trustee means the trustee of the trust, and in the case of

certificates which are denominated as debt instruments, also means the

trustee of the indenture trust.

I. Insurer means the insurer or guarantor of, or provider of other

credit support for, a trust. Notwithstanding the foregoing, a person is

not an insurer solely because it holds securities representing an

interest in a trust which are of a class subordinated to certificates

representing an interest in the same trust.

J. Obligor means any person, other than the insurer, that is

obligated to make payments with respect to any obligation or receivable

included in the trust. Where a trust contains qualified motor vehicle

leases or qualified equipment notes secured by leases, ``obligor''

shall also include any owner of property subject to any lease included

in the trust, or subject to any lease securing an obligation included

in the trust.

K. Excluded Plan means any plan with respect to which any member of

the Restricted Group is a ``plan sponsor'' within the meaning of

section 3(16)(B) of the Act.

L. Restricted Group with respect to a class of certificates means:

(1) each underwriter;

(2) each insurer;

(3) the sponsor;

(4) the trustee;

(5) each servicer;

(6) any obligor with respect to obligations or receivables included

in the trust constituting more than 5 percent of the aggregate

unamortized principal balance of the assets in the trust, determined on

the date of the initial issuance of certificates by the trust; or

(7) any affiliate of a person described in (1)-(6) above.

M. Affiliate of another person includes:

(1) Any person directly or indirectly, through one or more

intermediaries, controlling, controlled by, or under common control

with such other person;

(2) Any officer, director, partner, employee, relative (as defined

in section 3(15) of the Act), a brother, a sister, or a spouse of a

brother or sister of such other person; and

(3) Any corporation or partnership of which such other person is an

officer, director or partner.

N. Control means the power to exercise a controlling influence over

the management or policies of a person other than an individual.

O. A person will be independent of another person only if:

(1) such person is not an affiliate of that other person; and

(2) the other person, or an affiliate thereof, is not a fiduciary

who has investment management authority or renders investment advice

with respect to any assets of such person.

P. Sale includes the entrance into a forward delivery commitment

(as defined in section Q below), provided:

(1) The terms of the forward delivery commitment (including any fee

paid to the investing plan) are no less favorable to the plan than they

would be in an arm's length transaction with an unrelated party;

(2) The prospectus or private placement memorandum is provided to

an investing plan prior to the time the plan enters into the forward

delivery commitment; and

(3) At the time of the delivery, all conditions of this exemption

applicable to sales are met.

Q. Forward delivery commitment means a contract for the purchase or

sale of one or more certificates to be delivered at an agreed future

settlement date. The term includes both mandatory contracts (which

contemplate obligatory delivery and acceptance of the certificates) and

optional contracts (which give one party the right but not the

obligation to deliver certificates to, or demand delivery of

certificates from, the other party).

R. Reasonable compensation has the same meaning as that term is

defined in 29 CFR 2550.408c-2.

S. Qualified Administrative Fee means a fee which meets the

following criteria:

(1) the fee is triggered by an act or failure to act by the obligor

other than the normal timely payment of amounts owing in respect of the

obligations;

(2) the servicer may not charge the fee absent the act or failure

to act referred to in (1);

(3) the ability to charge the fee, the circumstances in which the

fee may be charged, and an explanation of how the fee is calculated are

set forth in the pooling and servicing agreement; and

(4) the amount paid to investors in the trust will not be reduced

by the amount of any such fee waived by the servicer.

T. Qualified Equipment Note Secured By A Lease means an equipment

note:

(a) which is secured by equipment which is leased;

(b) which is secured by the obligation of the lessee to pay rent

under the equipment lease; and

(c) with respect to which the trust's security interest in the

equipment is at least as protective of the rights of the trust as the

trust would have if the equipment note were secured only by the

equipment and not the lease.

U. Qualified Motor Vehicle Lease means a lease of a motor vehicle

where:

(a) the trust holds a security interest in the lease;

(b) the trust holds a security interest in the leased motor

vehicle; and

(c) the trust's security interest in the leased motor vehicle is at

least as protective of the trust's rights as the trust would receive

under a motor vehicle installment loan contract.

V. Pooling and Servicing Agreement means the agreement or

agreements among a sponsor, a servicer and the trustee establishing a

trust. In the case of certificates which are denominated as debt

instruments, ``Pooling and Servicing Agreement'' also includes the

indenture entered into by the trustee of the trust issuing such

certificates and the indenture trustee.

Effective Date: This exemption, if granted, will be effective

for transactions occurring on or after June 27, 1994.

Summary of Facts and Representations

1. Berean is a financial services company involved in securities

brokerage. It is registered as a broker-dealer with the Securities and

Exchange Commission under the Securities Exchange Act of 1934, and with

the National Association of Securities Dealers. Berean is incorporated

in the State of Delaware and is owned by two individual shareholders.

The applicant represents that Berean has extensive experience in

underwriting and trading of mortgage-backed and other asset-backed,

pass-through securities.

Trust Assets

2. Berean seeks exemptive relief to permit plans to invest in pass-

through certificates representing undivided interests in the following

categories of trusts: (1) single and multi-family residential or

commercial mortgage investment trusts;17 (2) motor vehicle

receivable investment trusts; (3) consumer or commercial receivables

investment trusts; and (4) guaranteed governmental mortgage pool

certificate investment trusts.18

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\1\7The Department notes that PTE 83-1 [48 FR 895, January 7,

1983], a class exemption for mortgage pool investment trusts, would

generally apply to trusts containing single-family residential

mortgages, provided that the applicable conditions of PTE 83-1 are

met. Berean requests relief for single-family residential mortgages

in this exemption because it would prefer one exemption for all

trusts of similar structure. However, Berean has stated that it may

still avail itself of the exemptive relief provided by PTE 83-1.

\1\8Guaranteed governmental mortgage pool certificates are

mortgage-backed securities with respect to which interest and

principal payable is guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation

(FHLMC), or the Federal National Mortgage Association (FNMA). The

Department's regulation relating to the definition of plan assets

(29 CFR 2510.3-101(i)) provides that where a plan acquires a

guaranteed governmental mortgage pool certificate, the plan's assets

include the certificate and all of its rights with respect to such

certificate under applicable law, but do not, solely by reason of

the plan's holding of such certificate, include any of the mortgages

underlying such certificate. The applicant is requesting exemptive

relief for trusts containing guaranteed governmental mortgage pool

certificates because the certificates in the trusts may be plan

assets.

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3. Commercial mortgage investment trusts may include mortgages on

ground leases of real property. Commercial mortgages are frequently

secured by ground leases on the underlying property, rather than by fee

simple interests. The separation of the fee simple interest and the

ground lease interest is generally done for tax reasons. Properly

structured, the pledge of the ground lease to secure a mortgage

provides a lender with the same level of security as would be provided

by a pledge of the related fee simple interest. The terms of the ground

leases pledged to secure leasehold mortgages will in all cases be at

least ten years longer than the term of such mortgages.19

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\1\9Trust assets may also include obligations that are secured

by leasehold interests on residential real property. See PTE 90-32

involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,

1990 at 23150).

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Trust Structure

4. Each trust is established under a pooling and servicing

agreement between a sponsor, a servicer and a trustee. The sponsor or

servicer of a trust selects assets to be included in the trust. These

assets are receivables which may have been originated by a sponsor or

servicer of the trust, an affiliate of the sponsor or servicer, or by

an unrelated lender and subsequently acquired by the trust sponsor or

servicer.

On or prior to the closing date, the sponsor acquires legal title

to all assets selected for the trust, establishes the trust and

designates an independent entity as trustee. On the closing date, the

sponsor conveys to the trust legal title to the assets, and the trustee

issues certificates representing fractional undivided interests in the

trust assets. Berean, alone or together with other broker-dealers, acts

as underwriter or placement agent with respect to the sale of the

certificates. All of the public offerings of certificates made to date

and all of the public offerings of certificates presently contemplated

have been or are to be underwritten on a firm commitment basis. In

addition, Berean has privately placed certificates on both a firm

commitment and an agency basis. Berean may also act as the lead

underwriter for a syndicate of securities underwriters.

Certificateholders are entitled to receive monthly, quarterly or

semi-annually installments of principal and/or interest, or lease

payments due on the receivables, adjusted, in the case of payments of

interest, to a specified rate--the pass-through rate--which may be

fixed or variable.

When installments or payments are made on a semi-annual basis,

funds are not permitted to be commingled with the servicer's assets for

longer than would be permitted for a monthly-pay security. A segregated

account is established in the name of the trustee (on behalf of

certificateholders) to hold funds received between distribution dates.

The account is under the sole control of the trustee, who invests the

account's assets in short-term securities which have received a rating

comparable to the rating assigned to the certificates. In some cases,

the servicer may be permitted to make a single deposit into the account

once a month. When the servicer makes such monthly deposits, payments

received from obligors by the servicer may be commingled with the

servicer's assets during the month prior to deposit. In no event will

the period of time between receipt of funds by the servicer and deposit

of these funds in a segregated account exceed 45 days. Furthermore, in

those cases where distributions are made semi-annually, the servicer

will furnish a report on the operation of the trust to the trustee on a

monthly basis. At or about the time this report is delivered to the

trustee, it will be made available to certificateholders and delivered

to or made available to each rating agency that has rated the

certificates.

5. Some of the certificates will be multi-class certificates.

Berean requests exemptive relief for two types of multi-class

certificates: ``strip'' certificates and ``fast-pay/slow-pay''

certificates. Strip certificates are a type of security in which the

stream of interest payments on receivables is split from the flow of

principal payments and separate classes of certificates are

established, each representing rights to disproportionate payments of

principal and interest.\20\

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\20\It is the Department's understanding that where a plan

invests in REMIC ``residual'' interest certificates to which this

exemption applies, some of the income received by the plan as a

result of such investment may be considered unrelated business

taxable income to the plan, which is subject to income tax under the

Code. The Department emphasizes that the prudence requirement of

section 404(a)(1)(B) of the Act would require plan fiduciaries to

carefully consider this and other tax consequences prior to causing

plan assets to be invested in certificates pursuant to this

exemption.

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Fast-pay/slow-pay certificates involve the issuance of classes of

certificates having different stated maturities or the same maturities

with different payment schedules. In certain transactions of this type,

interest and/or principal payments received on the underlying

receivables are distributed first to the class of certificates having

the earliest stated maturity of principal, and/or earlier payment

schedule, and only when that class of certificates have been paid in

full (or has received a specified amount) will distributions be made

with respect to the second class of certificates. Distributions on

certificates having later stated maturities will proceed in like manner

until all the certificateholders have been paid in full. The only

difference between this multi-class pass-through arrangement and a

single-class pass-through arrangement is the order in which

distributions are made to certificateholders. In each case,

certificateholders will have a beneficial ownership interest in the

underlying assets. In neither case will the rights of a plan purchasing

a certificate be subordinated to the rights of another

certificateholder in the event of default on any of the underlying

obligations. In particular, if the amount available for distribution to

certificateholders is less than the amount required to be so

distributed, all senior certificateholders then entitled to receive

distributions will share in the amount distributed on a pro rata

basis.\21\

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\21\If a trust issues subordinated certificates, holders of such

subordinated certificates may not share in the amount distributed on

a pro rata basis with the senior certificateholders. The Department

notes that the exemption does not provide relief for plan investment

in such subordinated certificates.

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6. For tax reasons, the trust must be maintained as an essentially

passive entity. Therefore, both the sponsor's discretion and the

servicer's discretion with respect to assets included in a trust are

severely limited. Pooling and servicing agreements provide for the

substitution of receivables by the sponsor only in the event of defects

in documentation discovered within a short time after the issuance of

trust certificates. Any receivable so substituted is required to have

characteristics substantially similar to the replaced receivable and

will be at least as creditworthy as the replaced receivable.

In some cases, the affected receivable would be repurchased, with

the purchase price applied as a payment on the affected receivable and

passed through to certificateholders.

Parties to Transactions

7. The originator of a receivable is the entity that initially

lends money to a borrower (obligor), such as a homeowner or automobile

purchaser, or leases property to the lessee. The originator may either

retain a receivable in its portfolio or sell it to a purchaser, such as

a trust sponsor.

Originators of receivables included in the trusts will be entities

that originate receivables in the ordinary course of their business,

including finance companies for whom such origination constitutes the

bulk of their operations, financial institutions for whom such

origination constitutes a substantial part of their operations, and any

kind of manufacturer, merchant, or service enterprise for whom such

origination is an incidental part of its operations. Each trust may

contain assets of one or more originators. The originator of the

receivables may also function as the trust sponsor or servicer.

8. The sponsor will be one of three entities: (i) a special-purpose

corporation unaffiliated with the servicer, (ii) a special-purpose or

other corporation affiliated with the servicer, or (iii) the servicer

itself. Where the sponsor is not also the servicer, the sponsor's role

will generally be limited to acquiring the receivables to be included

in the trust, establishing the trust, designating the trustee, and

assigning the receivables to the trust.

9. The trustee of a trust is the legal owner of the obligations in

the trust. The trustee is also a party to or beneficiary of all the

documents and instruments deposited in the trust, and as such is

responsible for enforcing all the rights created thereby in favor of

certificateholders.

The trustee will be an independent entity, and therefore will be

unrelated to Berean, the trust sponsor or the servicer. Berean

represents that the trustee will be a substantial financial institution

or trust company experienced in trust activities. The trustee receives

a fee for its services, which will be paid by the servicer, sponsor or

the trust as specified in the pooling and servicing agreement. The

method of compensating the trustee which is specified in the pooling

and servicing agreement will be disclosed in the prospectus or private

placement memorandum relating to the offering of the certificates.

10. The servicer of a trust administers the receivables on behalf

of the certificateholders. The servicer's functions typically involve,

among other things, notifying borrowers of amounts due on receivables,

maintaining records of payments received on receivables and instituting

foreclosure or similar proceedings in the event of default. In cases

where a pool of receivables has been purchased from a number of

different originators and deposited in a trust, it is common for the

receivables to be ``subserviced'' by their respective originators and

for a single entity to ``master service'' the pool of receivables on

behalf of the owners of the related series of certificates. Where this

arrangement is adopted, a receivable continues to be serviced from the

perspective of the borrower by the local subservicer, while the

investor's perspective is that the entire pool of receivables is

serviced by a single, central master servicer who collects payments

from the local subservicers and passes them through to

certificateholders.

In some cases, the originator and servicer of receivables to be

included in a trust and the sponsor of the trust (though they

themselves may be related) will be unrelated to Berean. In other cases,

however, affiliates of Berean may originate or service receivables

included in a trust, or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

11. Where the sponsor of a trust is not the originator of

receivables included in a trust, the sponsor generally purchases the

receivables in the secondary market, either directly from the

originator or from another secondary market participant. The price the

sponsor pays for a receivable is determined by competitive market

forces, taking into account payment terms, interest rate, quality, and

forecasts as to future interest rates.

As compensation for the receivables transferred to the trust, the

sponsor receives certificates representing the entire beneficial

interest in the trust, or the cash proceeds of the sale of such

certificates. If the sponsor receives certificates from the trust, the

sponsor sells all or a portion of these certificates for cash to

investors or securities underwriters. In some transactions, the sponsor

or an affiliate may retain a portion of the certificates for its own

account. In addition, in some transactions the originator may sell

receivables to a trust for cash. At the time of the sale, the trustee

would sell certificates to the public or to underwriters and use the

cash proceeds of the sale to pay the originator for receivables sold to

the trust. The transfer of the receivables to the trust by the sponsor,

the sale of certificates to investors, and the receipt of the cash

proceeds by the sponsor generally take place simultaneously.

12. The price of the certificates, both in the initial offering and

in the secondary market, is affected by market forces, including

investor demand, the pass-through interest rate on the certificates in

relation to the rate payable on investments of similar types and

quality, expectations as to the effect on yield resulting from

prepayment of underlying receivables, and expectations as to the

likelihood of timely payment.

The pass-through rate for certificates is equal to the interest

rate on receivables included in the trust minus a specified servicing

fee.22 This rate is generally determined by the same market forces

that determine the price of a certificate. The price of a certificate

and its pass-through, or coupon, rate together determine the yield to

investors. If an investor purchases a certificate at less than par,

that discount augments the stated pass-through rate; conversely, a

certificate purchased at a premium yields less than the stated coupon.

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\2\2The pass-through rate on certificates representing interests

in trusts holding leases is determined by breaking down lease

payments into ``principal'' and ``interest'' components based on an

implicit interest rate.

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13. As compensation for performing its servicing duties, the

servicer (who may also be the sponsor, and receive fees for acting in

that capacity) will retain the difference between payments received on

the receivables in the trust and payments payable (at the pass-through

rate) to certificateholders, except that in some cases a portion of the

payments on receivables may be paid to a third party, such as a fee

paid to a provider of credit support or deposited into a reserve fund.

Any funds on deposit in a reserve fund after the certificateholders

(and the credit enhancement provider, if any) have been paid in full

are generally paid to the sponsor or the servicer. The servicer may

receive additional compensation by having the use of the amounts paid

on the receivables between the time they are received by the servicer

and the time they are due to the trust (which time is set forth in the

pooling and servicing agreement). The servicer will be required to pay

the administrative expenses of servicing the trust, including, in some

cases, the trustee's fee, out of its servicing compensation.

The servicer is also compensated to the extent it may provide

credit enhancement to the trust or otherwise arrange to obtain credit

support from another party. This ``credit support fee'' may be

aggregated with other servicing fees, and is either paid out of the

interest income received on the receivables in excess of the pass-

through rate or paid in a lump sum at the time the trust is

established.

14. The servicer may be entitled to retain certain administrative

fees paid by a third party, usually the obligor. These administrative

fees fall into three categories: (a) prepayment fees; (b) late payment

and payment extension fees and fees related to the modification of the

terms of an obligation as permitted by the provisions of the pooling

and servicing agreement (including the partial release of collateral to

the extent provided therein); and (c) fees and charges associated with

foreclosure or repossession, or other conversion of a secured position

into cash proceeds, upon default of an obligation.

Compensation payable to the servicer will be set forth or referred

to in the pooling and servicing agreement and described in reasonable

detail in the prospectus or private placement memorandum relating to

the certificates.

15. Payments on receivables may be made by obligors to the servicer

at various times during the period preceding any date on which pass-

through payments to the trust are due. In some cases, the pooling and

servicing agreement may permit the servicer to place these payments in

non-interest bearing accounts in itself or to commingle such payments

with its own funds prior to the distribution dates. In these cases, the

servicer would be entitled to the benefit derived from the use of the

funds between the date of payment on a receivable and the pass-through

date. Commingled payments may not be protected from the creditors of

the servicer in the event of the servicer's bankruptcy or receivership.

In those instances when payments on receivables are held in non-

interest bearing accounts or are commingled with the servicer's own

funds, the servicer is required to deposit these payments by a date

specified in the pooling and servicing agreement into an account from

which the trustee makes payments to certificateholders.

16. Berean will receive a fee in connection with the securities

underwriting or private placement of certificates. In a securities

underwriting, this fee would normally consist of the difference between

what Berean receives for the certificates that it distributes and what

it pays the sponsor for those certificates. In some public offerings,

however, Berean may sell certificates on an agency basis in a best

efforts underwriting. In those cases, Berean would receive an agency

commission paid by the sponsor plus reimbursement for out-of-pocket

expenses. In a private placement, the fee normally takes the form of an

agency commission paid by the sponsor.

Purchase of Receivables by the Servicer

17. The applicant represents that as the principal amount of the

receivables in a trust is reduced by payment, the cost of administering

the trust generally increases, making the servicing of the trust

prohibitively expensive at some point. Consequently, the pooling and

servicing agreement generally provides that the servicer may purchase

the receivables remaining in the trust when the aggregate unpaid

balance payable on the receivables is reduced to a specified percentage

(usually 5 to 10 percent) of the initial aggregate unpaid balance.

The purchase price of a receivable is specified in the pooling and

servicing agreement and will be at least equal to: (1) the unpaid

principal balance on the receivable plus accrued interest, less any

unreimbursed advances of principal made by the servicer; or (2) the

greater of (a) the amount in (1) or (b) the fair market value of such

obligations in the case of a REMIC, or the fair market value of the

certificates in the case of a trust that is not a REMIC.

Certificate Ratings

18. The certificates will have received one of the three highest

ratings available from either S&P's, Moody's, D&P or Fitch. Insurance

or other credit support (such as surety bonds, letters of credit,

guarantees, or the creation of a class of certificates with

subordinated cash flow) will be obtained by the trust sponsor to the

extent necessary for the certificates to attain the desired rating. The

amount of this credit support is set by the rating agencies at a level

that is a multiple of the worst historical net credit loss experience

for the type of obligations included in the issuing trust.

Provision of Credit Support

19. In some cases, the master servicer, or an affiliate of the

master servicer, may provide credit support to the trust (i.e. act as

an insurer). In these cases, the master servicer, in its capacity as

servicer, will first advance funds to the full extent that it

determines that such advances will be recoverable (a) out of late

payments by the obligors, (b) from the credit support provider (which

may be itself) or, (c) in the case of a trust that issues subordinated

certificates, from amounts otherwise distributable to holders of

subordinated certificates, and the master servicer will advance such

funds in a timely manner. When the servicer is the provider of the

credit support and provides its own funds to cover defaulted payments,

it will do so either on the initiative of the trustee, or on its own

initiative on behalf of the trustee, but in either event it will

provide such funds to cover payments to the full extent of its

obligations under the credit support mechanism. In some cases, however,

the master servicer may not be obligated to advance funds but instead

would be called upon to provide funds to cover defaulted payments to

the full extent of its obligations as insurer. However, a master

servicer typically can recover advances either from the provider of

credit support or from future payments on the affected assets.

If the master servicer fails to advance funds, fails to call upon

the credit support mechanism to provide funds to cover delinquent

payments, or otherwise fails in its duties, the trustee would be

required and would be able to enforce the certificateholders' rights,

as both a party to the pooling and servicing agreement and the owner of

the trust estate, including rights under the credit support mechanism.

Therefore, the trustee, who is independent of the servicer, will have

the ultimate right to enforce the credit support arrangement.

When a master servicer advances funds, the amount so advanced is

recoverable by the servicer out of future payments on receivables held

by the trust to the extent not covered by credit support. However,

where the master servicer provides credit support to the trust, there

are protections in place to guard against a delay in calling upon the

credit support to take advantage of the fact that the credit support

declines proportionally with the decrease in the principal amount of

the obligations in the trust as payments on receivables are passed

through to investors. These safeguards include:

(a) There is often a disincentive to postponing credit losses

because the sooner repossession or foreclosure activities are

commenced, the more value that can be realized on the security for the

obligation;

(b) The master servicer has servicing guidelines which include a

general policy as to the allowable delinquency period after which an

obligation ordinarily will be deemed uncollectible. The pooling and

servicing agreement will require the master servicer to follow its

normal servicing guidelines and will set forth the master servicer's

general policy as to the period of time after which delinquent

obligations ordinarily will be considered uncollectible;

(c) As frequently as payments are due on the receivables included

in the trust (monthly, quarterly or semi-annually as set forth in the

pooling and servicing agreement), the master servicer is required to

report to the independent trustee the amount of all past-due payments

and the amount of all servicer advances, along with other current

information as to collections on the receivables and draws upon the

credit support. Further, the master servicer is required to deliver to

the trustee annually a certificate of an executive officer of the

master servicer stating that a review of the servicing activities has

been made under such officer's supervision, and either stating that the

master servicer has fulfilled all of its obligations under the pooling

and servicing agreement or, if the master servicer has defaulted under

any of its obligations, specifying any such default. The master

servicer's reports are reviewed at least annually by independent

accountants to ensure that the master servicer is following its normal

servicing standards and that the master servicer's reports conform to

the master servicer's internal accounting records. The results of the

independent accountants' review are delivered to the trustee; and

(d) The credit support has a ``floor'' dollar amount that protects

investors against the possibility that a large number of credit losses

might occur towards the end of the life of the trust, whether due to

servicer advances or any other cause. Once the floor amount has been

reached, the servicer lacks an incentive to postpone the recognition of

credit losses because the credit support amount becomes a fixed dollar

amount, subject to reduction only for actual draws. From the time that

the floor amount is effective until the end of the life of the trust,

there are no proportionate reductions in the credit support amount

caused by reductions in the pool principal balance. Indeed, since the

floor is a fixed dollar amount, the amount of credit support ordinarily

increases as a percentage of the pool principal balance during the

period that the floor is in effect.

Disclosure

20. In connection with the original issuance of certificates, the

prospectus or private placement memorandum will be furnished to

investing plans. The prospectus or private placement memorandum will

contain information material to a fiduciary's decision to invest in the

certificates, including:

(a) Information concerning the payment terms of the certificates,

the rating of the certificates, and any material risk factors with

respect to the certificates;

(b) A description of the trust as a legal entity and a description

of how the trust was formed by the seller/servicer or other sponsor of

the transaction;

(c) Identification of the independent trustee for the trust;

(d) A description of the receivables contained in the trust,

including the types of receivables, the diversification of the

receivables, their principal terms, and their material legal aspects;

(e) A description of the sponsor and servicer;

(f) A description of the pooling and servicing agreement, including

a description of the seller's principal representations and warranties

as to the trust assets and the trustee's remedy for any breach thereof;

a description of the procedures for collection of payments on

receivables and for making distributions to investors, and a

description of the accounts into which such payments are deposited and

from which such distributions are made; identification of the servicing

compensation and any fees for credit enhancement that are deducted from

payments on receivables before distributions are made to investors; a

description of periodic statements provided to the trustee, and

provided to or made available to investors by the trustee; and a

description of the events that constitute events of default under the

pooling and servicing contract and a description of the trustee's and

the investors' remedies incident thereto;

(g) A description of the credit support;

(h) A general discussion of the principal federal income tax

consequences of the purchase, ownership and disposition of the pass-

through securities by a typical investor;

(i) A description of the underwriters' plan for distributing the

pass-through securities to investors; and

(j) Information about the scope and nature of the secondary market,

if any, for the certificates.

21. Reports indicating the amount of payments of principal and

interest are provided to certificateholders at least as frequently as

distributions are made to certificateholders. Certificateholders will

also be provided with periodic information statements setting forth

material information concerning the underlying assets, including, where

applicable, information as to the amount and number of delinquent and

defaulted loans or receivables.

22. In the case of a trust that offers and sells certificates in a

registered public offering, the trustee, the servicer or the sponsor

will file such periodic reports as may be required to be filed under

the Securities Exchange Act of 1934. Although some trusts that offer

certificates in a public offering will file quarterly reports on Form

10-Q and Annual Reports on Form 10-K, many trusts obtain, by

application to the Securities and Exchange Commission, a complete

exemption from the requirement to file quarterly reports on Form 10-Q

and a modification of the disclosure requirements for annual reports on

Form 10-K. If such an exemption is obtained, these trusts normally

would continue to have the obligation to file current reports on Form

8-K to report material developments concerning the trust and the

certificates. While the Securities and Exchange Commission's

interpretation of the periodic reporting requirements is subject to

change, periodic reports concerning a trust will be filed to the extent

required under the Securities Exchange Act of 1934.

23. At or about the time distributions are made to

certificateholders, a report will be delivered to the trustee as to the

status of the trust and its assets, including underlying obligations.

Such report will typically contain information regarding the trust's

assets, payments received or collected by the servicer, the amount of

prepayments, delinquencies, servicer advances, defaults and

foreclosures, the amount of any payments made pursuant to any credit

support, and the amount of compensation payable to the servicer. Such

report also will be delivered to or made available to the rating agency

or agencies that have rated the trust's certificates.

In addition, promptly after each distribution date,

certificateholders will receive a statement prepared by the trustee

summarizing information regarding the trust and its assets. Such

statement will include information regarding the trust and its assets,

including underlying receivables. Such statement will typically contain

information regarding payments and prepayments, delinquencies, the

remaining amount of the guaranty or other credit support and a

breakdown of payments between principal and interest.

Secondary Market Transactions

24. It is Berean's normal policy to attempt to make a market for

securities for which it is lead or co-managing underwriter, and it is

Berean's intention to attempt to make a market for any certificates for

which Berean is lead or co-managing underwriter.

Retroactive Relief

25. Berean represents that it has engaged in transactions related

to mortgage-backed and asset-backed securities based on the assumption

that retroactive relief would not be granted. However, it is possible

that some transactions may have occurred that would be prohibited. For

example, because many certificates are held in street or nominee name,

it is not always possible to identify whether the percentage interest

of plans in a trust is or is not ``significant'' for purposes of the

Department's regulation relating to the definition of plan assets (29

CFR 2510.3-101(f)). These problems are compounded as transactions occur

in the secondary market. In addition, with respect to the ``publicly-

offered security'' exception contained in that regulation (29 CFR

2510.3-101(b)), it is difficult to determine whether each purchaser of

a certificate is independent of all other purchasers.

Therefore, Berean requests relief retroactive for transactions

which have occurred on or after June 27, 1994, the date Berean

originally filed its exemption application with the Department.

Summary

26. In summary, the applicant represents that the transactions for

which exemptive relief is requested satisfy the statutory criteria of

section 408(a) of the Act due to the following:

(a) The trusts contain ``fixed pools'' of assets. There is little

discretion on the part of the trust sponsor to substitute receivables

contained in the trust once the trust has been formed;

(b) Certificates in which plans invest will have been rated in one

of the three highest rating categories by S&P's, Moody's, D&P or Fitch.

Credit support will be obtained to the extent necessary to attain the

desired rating;

(c) All transactions for which Berean seeks exemptive relief will

be governed by the pooling and servicing agreement, which is made

available to plan fiduciaries for their review prior to the plan's

investment in certificates;

(d) Exemptive relief from sections 406(b) and 407 for sales to

plans is substantially limited; and

(e) Berean has made, and anticipates that it will continue to make,

a secondary market in certificates.

Discussion of Proposed Exemption

I. Differences between Proposed Exemption and Class Exemption PTE 83-1

The exemptive relief proposed herein is similar to that provided in

PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain

Transactions Involving Mortgage Pool Investment Trusts, amended and

restated as PTE 83-1 [48 FR 895, January 7, 1983].

PTE 83-1 applies to mortgage pool investment trusts consisting of

interest-bearing obligations secured by first or second mortgages or

deeds of trust on single-family residential property. The exemption

provides relief from sections 406(a) and 407 for the sale, exchange or

transfer in the initial issuance of mortgage pool certificates between

the trust sponsor and a plan, when the sponsor, trustee or insurer of

the trust is a party-in-interest with respect to the plan, and the

continued holding of such certificates, provided that the conditions

set forth in the exemption are met. PTE 83-1 also provides exemptive

relief from section 406(b)(1) and (b)(2) of the Act for the above-

described transactions when the sponsor, trustee or insurer of the

trust is a fiduciary with respect to the plan assets invested in such

certificates, provided that additional conditions set forth in the

exemption are met. In particular, section 406(b) relief is conditioned

upon the approval of the transaction by an independent fiduciary.

Moreover, the total value of certificates purchased by a plan must not

exceed 25 percent of the amount of the issue, and at least 50 percent

of the aggregate amount of the issue must be acquired by persons

independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1

provides conditional exemptive relief from section 406(a) and (b) of

the Act for transactions in connection with the servicing and operation

of the mortgage trust.

Under PTE 83-1, exemptive relief for the above transactions is

conditioned upon the sponsor and the trustee of the mortgage trust

maintaining a system for insuring or otherwise protecting the pooled

mortgage loans and the property securing such loans, and for

indemnifying certificateholders against reductions in pass-through

payments due to defaults in loan payments or property damage. This

system must provide such protection and indemnification up to an amount

not less than the greater of one percent of the aggregate principal

balance of all trust mortgages or the principal balance of the largest

mortgage.

The exemptive relief proposed herein differs from that provided by

PTE 83-1 in the following major respects: (1) The proposed exemption

provides individual exemptive relief rather than class relief; (2) The

proposed exemption covers transactions involving trusts containing a

broader range of assets than single-family residential mortgages; (3)

Instead of requiring a system for insuring the pooled receivables, the

proposed exemption conditions relief upon the certificates having

received one of the three highest ratings available from S&P's,

Moody's, D&P or Fitch (insurance or other credit support would be

obtained only to the extent necessary for the certificates to attain

the desired rating); and (4) The proposed exemption provides more

limited section 406(b) and section 407 relief for sales transactions.

II. Ratings of Certificates

After consideration of the representations of the applicant and

information provided by S&P's, Moody's, D&P and Fitch, the Department

has decided to condition exemptive relief upon the certificates having

attained a rating in one of the three highest generic rating categories

from S&P's, Moody's, D&P or Fitch. The Department believes that the

rating condition will permit the applicant flexibility in structuring

trusts containing a variety of mortgages and other receivables while

ensuring that the interests of plans investing in certificates are

protected. The Department also believes that the ratings are indicative

of the relative safety of investments in trusts containing secured

receivables. The Department is conditioning the proposed exemptive

relief upon each particular type of asset-backed security having been

rated in one of the three highest rating categories for at least one

year and having been sold to investors other than plans for at least

one year.\23\

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\23\In referring to different ``types'' of asset-backed

securities, the Department means certificates representing interests

in trusts containing different ``types'' of receivables, such as

single family residential mortgages, multi-family residential

mortgages, commercial mortgages, home equity loans, auto loan

receivables, installment obligations for consumer durables secured

by purchase money security interests, etc. The Department intends

this condition to require that certificates in which a plan invests

are of the type that have been rated (in one of the three highest

generic rating categories by S&P's, D&P, Fitch or Moody's) and

purchased by investors other than plans for at least one year prior

to the plan's investment pursuant to the proposed exemption. In this

regard, the Department does not intend to require that the

particular assets contained in a trust must have been ``seasoned''

(e.g., originated at least one year prior to the plan's investment

in the trust).

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III. Limited Section 406(b) and Section 407(a) Relief for Sales

Berean represents that in some cases a trust sponsor, trustee,

servicer, insurer, and obligor with respect to receivables contained in

a trust, or an underwriter of certificates may be a pre-existing party

in interest with respect to an investing plan.\24\ In these cases, a

direct or indirect sale of certificates by that party in interest to

the plan would be a prohibited sale or exchange of property under

section 406(a)(1)(A) of the Act.\25\ Likewise, issues are raised under

section 406(a)(1)(D) of the Act where a plan fiduciary causes a plan to

purchase certificates where trust funds will be used to benefit a party

in interest.

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\24\In this regard, we note that the exemptive relief proposed

herein is limited to certificates with respect to which Berean or

any of its affiliates is either (a) the sole underwriter or manager

or co-manager of the underwriting syndicate, or (b) a selling or

placement agent.

\25\The applicant represents that where a trust sponsor is an

affiliate of Berean, sales to plans by the sponsor may be exempt

under PTE 75-1, Part II (relating to purchases and sales of

securities by broker-dealers and their affiliates), if Berean is not

a fiduciary with respect to plan assets to be invested in

certificates.

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Additionally, Berean represents that a trust sponsor, servicer,

trustee, insurer, and obligor with respect to receivables contained in

a trust, or an underwriter of certificates representing an interest in

a trust may be a fiduciary with respect to an investing plan. Berean

represents that the exercise of fiduciary authority by any of these

parties to cause the plan to invest in certificates representing an

interest in the trust would violate section 406(b)(1), and in some

cases section 406(b)(2), of the Act.

Moreover, Berean represents that to the extent there is a plan

asset ``look through'' to the underlying assets of a trust, the

investment in certificates by a plan covering employees of an obligor

under receivables contained in a trust may be prohibited by sections

406(a) and 407(a) of the Act.

After consideration of the issues involved, the Department has

determined to provide the limited sections 406(b) and 407(a) relief as

specified in the proposed exemption.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,

telephone (202) 219-8881. (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 4th day of August, 1994.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration,U.S. Department of Labor.

[FR Doc. 94-19414 Filed 8-8-94; 8:45 am]

BILLING CODE 4510-29-P