Proposed Exemptions; Sammons Enterprises, Inc. Employees Stock Ownership Trust et al.

DEPARTMENT OF LABOR

[Application No. D-9743, et al.]

Proposed Exemptions; Sammons Enterprises, Inc. Employees Stock

Ownership Trust et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction 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

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, 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.

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, N.W., Washington, D.C.

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, N.W., Washington, D.C. 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.

Sammons Enterprises, Inc. Employee Stock Ownership Trust (the Trust)

Located in Dallas, Texas

[Exemption Application No. D-9743]

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, 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 cash sale (the Sale) by certain

accounts (the Prior Plan Accounts) in the Trust of certain limited

partnership interests (the Limited Partnership Interests) and an

undivided interest in certain real property (the Property Interest;

collectively, the Interests) to Otter, Inc. (Otter), a party in

interest with respect to the Trust.

This proposed exemption is conditioned upon the following

requirements: (1) All terms and conditions of the Sale are at least as

favorable to the Prior Plan Accounts as those obtainable in an arm's

length transaction; (2) the Sale is a one-time cash transaction; (3)

the Prior Plan Accounts are not required to pay any commissions, costs

or other expenses in connection with the Sale; (4) the Prior Plan

Accounts receive a sales price equal to the greater of: (a) the fair

market value of the Interests as determined by qualified, independent

appraisers; or (b) the Prior Plan Accounts' aggregate costs of

acquiring and holding the Interests; (5) the trustee of the Trust

determines that the Sale is appropriate for the Prior Plan Accounts and

is in the best interests of the Prior Plan Accounts and their

participants and beneficiaries; (6) the Prior Plan Accounts, prior to

the Sale, obtain the written consent of the general partner of each of

the limited partnerships involved with respect to the sale of the

Limited Partnership Interests; and (7) the other partners of such

limited partnerships, as per the limited partnership agreements, are

given the right of first refusal with respect to the Limited

Partnership Interests.

Summary of Facts and Representations

1. Sammons Corporate Services, Inc. (SCSI), an affiliate of Sammons

Enterprises, Inc. (SEI), sponsors a defined contribution plan

designated as the Sammons Employee Stock Ownership Plan (the Plan), the

assets of which are the corpus of the Trust. SEI is the common parent

of Consolidated Investment Services, Inc. (CIS), of which Otter, SCSI

and many other corporations are subsidiaries. SEI, through various

wholly owned subsidiaries, is involved in a variety of industries,

including the insurance, cable television, industrial supply and

bottled water industries. Otter is engaged primarily in the business of

collecting and monetizing debts incurred in oil and gas related

transactions.

2. As of December 31, 1993, the Trust had total assets of

$101,618,265 and 2,242 participants. The trustee of the Trust (the

Trustee) is Texas Commerce Bank, N.A., formerly Ameritrust, N.A. The

Trustee has the sole investment discretion with regard to the Trust's

assets. The purpose of the Plan is to invest primarily in the

outstanding stock of SEI (the Stock), which is not publicly

traded.1 As of December 31, 1993, the Trust held approximately

ninety-eight percent of its assets in the Stock. The Trust owns 7.65

percent of the Stock; the balance of the outstanding stock is privately

held.

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\1\The applicants represent that the Stock is qualifying

employer securities (QES) within the meaning of section 407(d)(5) of

the Act and that the exemption provided by section 408(e) of the Act

applies to the acquisition of the Stock by the Trust. In this

proposed exemption, the Department expresses no opinion on whether

the Stock constitutes QES within the meaning of section 407(d)(5) of

the Act or whether the requirements of the statutory exemption, as

set forth by section 408(e) of the Act, have been met by the Trust

under the circumstances described.

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3. In 1960, Texas Marine & Industrial Supply Company (TMIS), a

Texas corporation engaged in the business of selling marine supplies,

adopted the Texas Marine & Industrial Supply Company Profit Sharing

Plan (the TMIS Plan). In 1971, TMIS was acquired by TMI Supply Company

and, as a result of that transaction, became a member of the

consolidated group of which SEI is the common parent. Effective 1991,

the TMIS Plan merged into the Plan. As a result of this merger, the

existing TMIS Plan accounts were frozen and all future contributions

under the TMIS Plan were discontinued. The Prior Plan Accounts consist

of these frozen accounts which have been maintained as separate

accounts for TMIS employees under the Trust and have continued to be

invested in assets other than the Stock, such as the Interests

described herein below and certain liquid investments in securities.

The Prior Plan Accounts involve forty-three participants. The fair

market value of the assets in the Prior Plan Accounts totalled

$1,994,394 as of December 31, 1993. The Interests account for

approximately twenty-five percent of the Prior Plan Accounts' assets.

Several TMIS employees who have substantial amounts in the Prior Plan

Accounts are expected to retire in the near future. Therefore, the

Trust must convert the assets in the Prior Plan Accounts into more

liquid investments to insure that sufficient cash will be available to

make such distributions. Because Otter has offered to purchase the

Interests at a price higher than any actual or anticipated offers

resulting from the Trustee's efforts to sell the Interests to an

unrelated party, the Trustee proposes to sell the Interests to Otter

for the greater of: (a) The fair market values of the Interests as

determined by qualified, independent appraisers; or (b) the Prior Plan

Accounts' aggregate costs of acquiring and holding the Interests. The

Sale will be a one-time cash transaction, and the Prior Plan Accounts

will not be required to pay any fees, commissions or expenses in

connection with the Sale. The Trustee has determined that the Sale is

appropriate for the Prior Plan Accounts and is in the best interests of

the Prior Plan Accounts and their participants and beneficiaries.

However, the Sale will be subject to the Prior Plan Accounts obtaining,

prior to the Sale, the written consent of the general partner of each

of the limited partnerships involved with respect to the sale of the

Limited Partnership Interests. In addition, the other partners of such

limited partnerships, as per the limited partnership agreements, must

be given the right of first refusal with respect to the Limited

Partnership Interests. The inability of the Prior Plan Accounts to sell

one of the Limited Partnership Interests to Otter either due to the

failure of the Prior Plan Accounts to obtain the written consent of the

general partner or the exercise of the right of first refusal by any

partner does not preclude the sale of the other Limited Partnership

Interest to Otter if the requisite conditions are met. Accordingly,

Otter and the Trustee request an administrative exemption from the

Department to permit the Sale of the Interests under the terms and

conditions described herein.

The Limited Partnership Interests

4. The Limited Partnership Interests consist of a 22.50 percent

interest in Sunbelt Commercial Associates (Sunbelt Commercial) and two

interests--a 14.15 percent Class A interest and a 14.5 percent Class B

interest--in Sunbelt City, Ltd. (Sunbelt Oklahoma). (Sunbelt Commercial

and Sunbelt Oklahoma are collectively referred to as the Limited

Partnerships). The Prior Plan Accounts acquired the Limited Partnership

Interests as a result of a series of purchases occurring between 1981

and 1993, in the case of Sunbelt Commercial, and 1982 and 1984, in the

case of Sunbelt Oklahoma. The Prior Plan Accounts made such purchases

either directly from the Limited Partnerships or from withdrawing

limited partners. The general partners of both Limited Partnerships, as

well as the other investors, are unrelated to the Prior Plan Accounts,

SEI and its affiliates. The Limited Partnerships were formed for the

purpose of investing in real estate through a sale-leaseback

arrangement with Cyclops Inc. (Cyclops). In 1982, the Limited

Partnerships purchased certain properties in Tulsa and Oklahoma City

from Cyclops and leased such properties back to Cyclops for use by its

Silo Division for the retail sale of major electrical appliances. The

leases are triple net leases for a term of fifteen years with two five-

year lessee renewal options. In 1993, Cyclops closed its Silo stores in

the Tulsa and Oklahoma City locations but has advised the Limited

Partnerships that it intends to honor its lease agreements.

The Prior Plan Accounts invested $250,600 in Sunbelt Commercial and

$230,089 in Sunbelt Oklahoma with the total Prior Plan Account

investment in the two Limited Partnerships amounting to $480,689. As of

December 31, 1993, the Prior Plan Accounts had received distributions

representing returns of capital totaling $480,689 and income

distributions totaling $146,064 for the two Limited Partnerships

combined. Sunbelt Commercial and Sunbelt Oklahoma have experienced

average compounded rates of return of 10.1 percent and 10.8 percent,

respectively.

Annual valuations of interests in both partnerships are furnished,

on behalf of the general partners, to investors by Churchill Management

Corporation (Churchill), the investment adviser to the Limited

Partnerships. The applicants represent that Churchill is independent

of, and unrelated to, the Prior Plan Accounts, SEI and its affiliates.

Based upon the valuation reports from Churchill dated February 14,

1994, the aggregate fair market value of the Limited Partnership

Interests for the three Limited Partnership investments was $400,508 as

of December 31, 1993.

Substantially all of the assets of each Limited Partnership consist

of its real estate and its lease contract with Silo. The Limited

Partnerships' only other material asset is cash. Therefore, Churchill

bases its valuation of the Limited Partnerships on the fair market

values of the underlying assets of the Limited Partnership, which are

the Tulsa and Oklahoma City properties, plus the Limited Partnerships'

available cash. Independent, qualified appraisers annually value these

underlying properties.

The most recent appraisals, dated January 14, 1994, by Duane J.

Blevins, MAI of Tulsa, Oklahoma, taking into account the existing long-

term leases on the properties, place primary emphasis on the income

approach. Mr. Blevins placed the fair market values on the Tulsa and

Oklahoma City properties at $950,000 and $1,250,000, respectively. Mr.

Blevins notes that the values of these properties have declined since

the closing of the Silo stores because the Limited Partnerships will

not be able to renew the lease with Cyclops. As a result, Mr. Blevins

further notes, the Limited Partnerships, as owners, will be faced with

added expenses such as marketing, leasing commissions, vacancy and

possibly up-front renovation costs for a prospective tenant. The

applicants represent that the Limited Partnership Interests are highly

illiquid investments for which there is a very limited secondary

market.2 On March 14, 1994, an attorney for the Trust contacted

Churchill and inquired whether either the general partner or any of the

other limited partners would be interested in purchasing the Limited

Partnership Interests. On April 6, 1994, Churchill advised the attorney

that none of the Limited Partners were interested in purchasing those

interests and that the general partner would consider purchasing them

at a purchase price equal to one third to one half of their original

purchase price.

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\2\ The Department expresses no opinion, in this proposed

exemption, on whether plan fiduciaries violated any of the fiduciary

responsibility provisions of Part 4 of Title I of the Act in

acquiring and holding the Limited Partnership Interests.

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The Real Property Interest

5. The Property Interest consists of a 3.125 percent undivided

interest in a 117,956 square foot retail center with a 1,500 square

foot addition and the underlying land (collectively, the Property). The

Property is located at 5029-5139 Austell Road in Cobb County, Georgia.

On November 30, 1988, the TMIS Plan participated with unrelated

investors in a loan in the original amount of $1,600,000 to Atlanta

Austell Plaza, Ltd. (Atlanta Ltd.), a California limited partnership

which was unrelated to the Prior Plan Accounts.3 The TMIS Plan's

contribution was $50,000 or 3.125 percent of the total principal

amount. A second deed of trust on the Property secured the loan. The

first deed of trust, originally held by the Fulton National Bank of

Atlanta, secured a loan in the original principal amount of $1,800,000.

The first deed of trust note was subsequently assigned to Western

Savings Bank and is now held by Meritor Savings Bank (formerly known as

Philadelphia Savings Fund Society, successor by merger to Western

Savings Bank). At the time that the parties entered into the second

deed of trust loan, the unpaid principal balance on the first deed of

trust loan was $1,113,000.

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\3\The Department expresses no opinion, in this proposed

exemption, on whether plan fiduciaries violated any of the fiduciary

responsibility provisions of Part 4 of Title I of the Act in

acquiring and holding the Property Interest.

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Eventually, Atlanta Ltd. experienced difficulties and became unable

to service the debt on the first and second deed of trust loans. In

February of 1991, the Prior Plan Accounts and the other lenders

foreclosed on the second deed of trust, thereby acquiring direct

ownership of the Property.4 In accordance with their original

investment, the Prior Plan Accounts received a 3.125 percent interest

in the Property. The other investors in the Property are unrelated to

SEI and its affiliates. The Prior Plan Accounts and the other lenders

contributed the necessary funds to make current the principal and

interest payments on the first deed of trust loan. The Trust

contributed a total of $11,406 to cover the costs of foreclosure, the

payments of the first deed of trust loan and other costs which included

operating, maintenance and advertising expenses.5 As a result of

such foreclosure, the Prior Plan Accounts and the other lenders assumed

Atlanta Ltd.'s position as debtor on the first deed of trust loan.

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\4\The applicants represent that Atlanta Ltd. ceased making

payments approximately three months prior to the foreclosure in

February 1991. Accordingly, the Prior Plan Accounts' share of the

interest which was due but never received under the second deed of

trust loan will total $23,554 as of December 31, 1994.

\5\The applicants represent that interest in the amount of

$4,160 would have reasonably accrued on the $11,406 of holding

costs, assuming an interest rate of nine percent per annum, for the

period beginning on February of 1991 and ending December 31, 1994.

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In 1993, the Property owners, pursuant to the terms of a lease,

were required to make tenant improvements in the amount of $225,000.

Several of the Property owners objected to further mortgaging the

Property in an effort to raise this additional $225,000. Finally, the

tenant and the Property owners agreed that the tenant would pay for its

own improvements but would be reimbursed in the amount of $225,000 by

the Property owners out of any proceeds which resulted from the sale of

the Property. As of December 31, 1993, the outstanding balance on the

original first deed of trust loan was $617,000. Accordingly, the

outstanding liabilities on the Property (the Liabilities), as of

December 31, 1993, increased by $350,000 to $842,000.

The applicants represent that the Property has been and continues

to be leased to unrelated parties. As of December 31, 1993, the

Property had a fifty percent occupancy rate with the average lease

being a five-year, triple net lease with the tenant responsible for all

of the actual tenant finish work on the space. The Prior Plan Accounts'

portion of the lease income collected since 1991 will amount to $36,349

as of December 31, 1994.

Roger R. Upton, MAI and Martha H. Mathis, MAI (the Appraisers) of

Upton Associates located in Atlanta, Georgia appraised the Property as

of January 14, 1994 on an ``as is'' basis, i.e., a fifty percent lease

rate. Otter represents that both the Appraisers and Upton Associates

are independent of and unrelated to SEI and its affiliates. In placing

the fair market value of the Property at $2,650,000, the Appraisers

utilized the income approach and the market approach, but gave primary

emphasis to the income approach for the value estimate of the Property.

Accordingly, the Trust's 3.125 percent interest in the Property minus

its pro rata share of the Liabilities would be worth $56,500.

6. Because the fair market value of the Property Interest is less

than the Prior Plan Accounts' aggregate costs of acquiring and holding

the Property Interest, the Property Interest will be sold by the Trust

to Otter for the aggregate costs of acquiring and holding the Property

which totaled $61,406. The rental income received by the Prior Plan

Accounts covered any interest which might have reasonably accrued on

the holding costs as well as any interest which was due but not

received under the second deed of trust loan. However, the rental

income is insufficient to fully cover the actual holding costs.6

Because the Prior Plan Accounts have received a complete return of

capital with regard to their investment in the Limited Partnerships,

the Trust will sell the Limited Partnership Interests to Otter at their

combined fair market values of $400,508. Accordingly, the Trust will

sell the Interests for an aggregate sales price of $461,914.

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\6\The rental income minus the Prior Plan Accounts' pro rata

share of the interest which was due but never received under the

second deed of trust loan minus the interest which reasonably would

have accrued on the holding costs equals $8,689 ($36,349 -$23,554

-$4,106). Because the holding costs amount to $11,406, the remaining

rental income of $8,689 is insufficient to cover these costs. See

Representation #5 for an explanation of the rental income received

by the Prior Plan Accounts. See Footnotes #4 and #5 for an

explanation as to how the applicants calculated the interest

attributable to the second deed of trust loan and the holding costs,

respectively.

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7. In summary, it is represented that the transaction will satisfy

the statutory criteria of section 408(a) of the Act because: (a) All

terms and conditions of the Sale will be at least as favorable to the

Prior Plan Accounts as those obtainable in an arm's length transaction;

(b) the Sale will be a one-time cash transaction; (c) the Prior Plan

Accounts will not be required to pay any commissions, costs or other

expenses in connection with the Sale; (d) the Prior Plan Accounts will

receive a sales price equal to the greater of the: (1) the fair market

values of the Interests as determined by qualified, independent

appraisers; or (2) the Prior Plan Accounts' aggregate costs of

acquiring and holding the Interests; (e) the trustee of the Plan will

determine that the Sale is appropriate for the Prior Plan Accounts and

is in the best interests of the Prior Plan Accounts and their

participants and beneficiaries; (f) the Prior Plan Accounts, prior to

the Sale, will obtain the written consent of the general partner of

each of the limited partnerships involved; and (g) the other partners

of such limited partnerships, as per the limited partnership

agreements, will be given the right of first refusal with respect to

the Limited Partnership Interests.

FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,

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

Lucky Electric Supply Inc. Employees Pension Plan (the Plan) Located in

Memphis, Tennessee

[Application No. D-9792]

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 cash sale by the Plan to

Lucky Electric Supply, Inc. (the Employer), the sponsor of the Plan, of

a group annuity contract (the GAC) issued by Mutual Benefit Life

Insurance Company of New Jersey (Mutual Benefit); provided that the

following conditions are satisfied:

(A) The sale is a one-time transaction for cash;

(B) The Plan does not suffer any loss or incur any expenses in

the transaction;

(3) The Plan receives a purchase price of no less than the fair

market value of the GAC at the time of the transaction; and

(4) The proceeds of the sale are used solely to discharge the

Plan's obligations to participants and beneficiaries in connection

with the termination of the Plan.

Summary of Facts and Representations

1. The Plan is a defined benefit pension plan, with 30 participants

as of December 31, 1993. The Plan was established in 1974 by Lucky

Electric Supply, Inc. (the Employer), which is a closely-held Tennessee

corporation engaged in wholesale and retail electrical supply

operations, with its place of business in Memphis, Tennessee. The

trustee of the Plan is Marylew Lewis who is a director of the Employer.

2. In 1991, the Employer took the actions necessary to terminate

the Plan, and established May 31, 1991 as the termination date. The

Employer represents that notice of intent to terminate the Plan was

made to Plan participants, and was filed with the Pension Benefit

Guaranty Corporation (PBGC), in accordance with the requirements of the

PBGC.

3. The sole asset in the Plan upon its termination was group

annuity contract No. 03057 (the GAC) issued by Mutual Benefit Life

Insurance Company of New Jersey (Mutual Benefit). The Employer

represents that Mutual Benefit was notified of the termination of the

Plan, and that Mutual Benefit acknowledged receipt of such notification

in a letter to the Employer dated July 22, 1991. Mutual Benefit also

advised the Employer that effective July 16, 1991, Mutual Benefit had

been placed in a rehabilitory conservatorship (the Conservatorship) by

the insurance commissioner of the State of New Jersey (the

Commissioner).7 The Employer represents that the Conservatorship

effected a freeze on regular payments and withdrawals from Mutual

Benefits group annuity contracts, including the GAC held by the Plan.

Since the Conservatorship commenced, the only withdrawals with respect

to the GAC have been to enable hardship distributions under the Plan

(the Hardship Withdrawals). The Employer represents that upon

commencement of the Conservatorship on July 16, 1991, the GAC had a

face value, referred to in the terms of the GAC as ``contract value'',

of $147,477.68 (the Conservatorship Face Value), consisting of total

principal deposits, plus interest at the rates guaranteed by the GAC

(the Contract Rates), less previous withdrawals. The Employer

represents that a total of $37,743.55 in Hardship Withdrawals from the

GAC have been made by the Plan since the commencement of the

Conservatorship.

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\7\The Department notes that the decisions to acquire and hold

the GAC are governed by the fiduciary responsibility requirements of

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

the Department is not proposing relief for any violations of Part 4

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

the GAC.

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4. In January of 1993, the Employer received a letter from the PBGC

requesting a certification that final distribution of Plan benefits, in

connection with termination of the Plan, had been accomplished. Due to

the Conservatorship's freeze on withdrawals and payments with respect

to the GAC, other than the Hardship Withdrawals, the Employer has not

been able to accomplish final distribution of benefits to the Plan's

participants, in accordance with requirements of the PBGC. In order to

enable the Plan to accomplish complete discharge of Plan benefit

obligations and distribution of assets in accordance with requirements

of the PBGC, the Employer proposes to purchase the GAC from the Plan,

and is requesting an exemption to permit such transaction under the

terms and conditions described herein.

5. The Employer proposes a purchase price for the GAC which

represents its new value as determined with reference to the

Conservatorship, as described herein. As a result of the

Conservatorship, a plan of rehabilitation of Mutual Benefit (the Rehab

Plan) has been approved by the Commissioner, under which the terms of

the GAC have been redefined and restated. Under the Rehab Plan, as the

holder of a Mutual Benefit group annuity contract, the Plan had the

options of ``opting out'' of the Rehab Plan, in which case the GAC

would have been terminated, or ``opting in'', in which case the GAC

would be restated, redefined, and would be supported and reinsured by a

consortium of life insurance companies. By not submitting the forms

necessary to ``opt out'' of the Rehab Plan, the Trustee allowed the

Plan to be ``opted in'' automatically. Consequently, the GAC has been

assigned a new value (the New Value) equal to 100 percent of the

Conservatorship Face Value, less subsequent Hardship Withdrawals, plus

interest on this amount as follows: (a) For the period of July 16, 1991

through December 31, 1991, interest at the Contract Rates; (b) for

calendar year 1992, interest an annual rate of four percent; and (c)

for calendar years 1993 and 1994, an annual rate of 3.5 percent. The

Rehab Plan provides that subsequent to 1994, the New Value will earn an

annual rate of interest determined each year by the performance of a

separate account maintained by Mutual Benefit. On the basis of the

foregoing, the GAC's New Value plus interest, as of December 31, 1993,

was $123,422.43. The Employer represents that the Plan is unable to

withdraw its investment in the GAC without the payment of a substantial

fee, which would be assessed by Mutual Benefit under the terms of the

Rehab Plan.

6. In accordance with the Rehab Plan's new valuation of the GAC,

the Employer proposes to pay the Plan cash for the GAC in the amount of

the New Value plus all interest accrued in accordance with the Rehab

Plan as of the date of the purchase. The Employer states that such a

purchase transaction will allow the Plan to substitute the GAC, which

is illiquid due to the inability to withdraw its value, for the cash

assets necessary for the Plan's participants to receive the full amount

of the benefits due them under the terms of the Plan. The Employer

represents that no participant will receive less than the full value of

his or her accrued benefits under the terms of the Plan. The Employer

estimates that the termination value of all Plan participants' accrued

benefits as of March 31, 1995 will be $239,953.57. Commensurate with

the Employer's proposed purchase of the GAC, the Employer will make

cash contributions to the Plan to supply funding for the excess of the

Plan's accrued benefit obligations over the purchase price of the GAC.

7. In summary, the applicant represents that the transaction

satisfies the criteria of section 408(a) of the Act for the following

reasons: (1) The transaction enables the Plan to liquidate it sole

asset, the GAC, to enable distribution of benefits in connection with

termination of the Plan; (2) The transaction is a one-time cash

transaction in which the Plan will incur no losses or expenses; (3) The

Plan will receive a purchase price for the GAC equal to its New Value

plus interest through the date of sale in accordance with the Rehab

Plan; and (4) All Plan participants will receive all benefits due them

under the terms of the Plan.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

CNA Employees' Retirement Trust (the Trust) Located in Chicago,

Illinois

[Application Nos. D-9539 through D-9544]

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, effective January 17, 1992, to fifteen past

sales and purchases by the Trust of twelve issues of short-term

commercial paper (the CNA Transactions), as identified below, involving

the Continental Casualty Company, the Continental Assurance Company,

the Continental Assurance Company Guaranteed Investment Fund, the

Valley Forge Life Insurance Company, Valley Forge Insurance Company,

and the American Casualty Company of Reading, Pennsylvania

(collectively, the CNA Companies), each of which is a party in interest

with respect to the CNA Employees' Retirement Plan (the Plan), whose

assets are held by the Trust; provided that the following conditions

are satisfied:

(A) In each of the CNA Transactions, the Trust paid no more, or

received no less, than the fair market value of the commercial paper

involved in the transaction;

(B) The CNA Transactions constituted, in the aggregate, less than

four percent of all commercial paper transactions of the Trust during

1992; and

(C) The CNA Companies have undertaken efforts to prevent any

recurrence of direct or indirect transactions involving the Trust and

the CNA Companies, including the appointment of an independent

investment manager of all the Trust's commercial paper investments.

Summary of Facts and Representations

1. The Plan is a defined contribution pension plan sponsored by CNA

Financial Corporation (CNAF), an Illinois public corporation, 83

percent of the stock of which is owned by Loews Corporation. CNAF's

largest wholly-owned subsidiary is the Continental Casualty Company

(Casualty), one of the largest property-casualty insurance underwriters

in the United States. Among Casualty's eleven insurance subsidiaries

(collectively, the CNA Companies) are the Continental Assurance Company

(Assurance) and the American Casualty Company of Reading, Pennsylvania

(ACCP). Valley Forge Life Insurance Company (VF Life) is a wholly-owned

subsidiary of Assurance, and Valley Forge Insurance Company (VF

Insurance) is a wholly-owned subsidiary of ACCP. Assurance is a

registered investment advisor under the Investment Advisors Act of

1940, as amended. The Plan had 19,858 participants as of December 31,

1992, and total assets of approximately $443 million as of June 30,

1993.

2. Prior to January 2, 1992, the Plan's assets had been invested by

Assurance, as Plan fiduciary, through a variety of separate accounts,

and in a participating investment contract issued by Assurance.

Effective January 1, 1992, all of the Plan's investment contracts and

separate accounts were canceled and terminated, and the liquidated

assets were transferred to the CNA Employees' Retirement Trust (the

Trust). Simultaneously, CNAF entered into a contract with Assurance

(the Advisory Agreement), effective January 1, 1992, under which

Assurance agreed to provide investment advice to the Trust.8 Among

other things, Assurance agreed to supervise the composition of the

Trust's portfolio continuously, and to determine the nature and timing

of changes in the portfolio and the manner of effectuating such

changes, subject to the oversight of the Trust's trustees. Assurance's

responsibilities under the Advisory Agreement include the provision of

advice, information and recommendations with respect to acquisition,

holding and disposition of securities by the Trust. During 1992, two

individuals who were employed by Assurance and Casualty (the Traders)

had investment discretion over commercial paper transactions of the

Trust, Casualty, and the other CNA Companies.

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\8\The Applicants represent that the Trust does not pay any fees

to Assurance with respect to services rendered pursuant to the

Advisory Agreement.

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3. The Applicants represent that as part of an internal compliance

program, Casualty's employee benefits planning staff developed a

systems program designed to detect related-party transactions involving

the Trust. A trial run of that program on May 6, 1993 detected that

certain Trust transactions involved commercial paper which was

purchased by CNA Companies. Upon this discovery, further investigations

were conducted by Casualty's legal staff in June 1993 to determine

whether any more of the Trust's commercial paper transactions involved

CNA Companies. As a result of these voluntary investigative efforts,

Casualty has determined that fifteen of the commercial paper

transactions engaged in by the Trust between January 17 and December

10, 1992 involved five of the CNA Companies (the CNA Transactions). In

response to the discovery of these transactions, the five CNA Companies

involved (the Applicants) are requesting an exemption for the CNA

Transactions under the terms and conditions described herein.

4. The CNA Transactions fall into four categories: (a) Direct Trust

sales, which are direct sales by the Trust of commercial paper to a CNA

Company; (b) Indirect Trust sales through the issuer, which are sales

by the Trust of commercial paper to the issuer of the commercial paper,

and the purchase by CNA Companies, on the same date and from the same

issuer, of commercial paper issued by that same issuer with the same

maturity date; (c) Indirect Trust sales through dealers, which are

sales by the Trust of commercial paper to independent broker-dealers,

and the purchase by CNA Companies on the same date from the same

broker-dealers of commercial paper of the same issuer and with the same

maturity date; and (d) Indirect Trust purchases through dealers, which

are sales by CNA Companies of commercial paper to independent broker-

dealers, and the purchase by the Trust on the same date from the same

broker-dealers of commercial paper of the same issuer and with the same

maturity date. The Applicants describe the details of the CNA

Transactions as follows:

(a) Direct Trust sales:

(1) On November 2, 1992, the Trust sold Ameritech Capital Funding

commercial paper with a maturity date of November 13, 1992, principal

amount $17,575,000, to Casualty for $17,558,245.17.

(2) On November 2, 1992, the Trust sold Woolworth Corporation

commercial paper with a maturity date of November 13, 1992, principal

amount $17,950,000, to Casualty for $17,928,011.25.9

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\9\The Applicants represent that the sale prices in both of the

direct Trust sales were determined by contemporaneous independent

price quotes for the commercial paper from dealers in such paper.

The Applicants further represent that due to an irregularity in the

U.S. commercial paper market on the day of the transactions, the

Trust's representative, Mr. Wayne Gulgren, succeeded in obtaining

prices for the Ameritech Capital Funding and Woolworth Corporation

commercial paper on November 2, 1992, which were actually more

favorable to the Trust than the Trust could have obtained through

dealers in the open market.

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(b) Indirect Trust sales through the issuer: On November 2, 1992,

the Trust sold Chevron commercial paper which it had acquired on

October 28, 1992, with a maturity date of December 3, 1992 and the

principal amount $65,900,000, to Chevron for $65,928,614.85,10 and

on the same date Assurance and Casualty bought Chevron commercial paper

with the same maturity date and in the same principal amount from

Chevron.

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\1\0The Applicants represent that the Chevron paper, unlike all

the other commercial paper involved in the CNA Transactions, is

referred to as ``coupon paper'' which sells at its principal face

amount, rather than at a discount, and has a stated interest rate.

Interest accrues at the stated interest rate, and the principal

amount plus the accrued interest is returned at maturity or on

prepayment. Thus, when the Trust acquired $65,900,000 principal

amount Chevron paper with a maturity of December 3, 1992 and a 3.125

percent stated interest rate, the Trust had paid $65,900,000. When

the Trust sold this position back to Chevron on November 2, 1992,

the Trust received $65,928,614.85, including five days' interest at

the paper's stated rate of 3.125 percent. The Applicant represents

that the remainder of the commercial paper involved in the CNA

Transactions is referred to as ``discount paper'', for which the

purchaser pays a price below the principal face amount and is paid

the face amount upon the paper's maturity. The Applicants state that

approximately one-half of Chevron's commercial paper is issued as

discount paper, and the remainder is issued as coupon paper. The

Applicants represent that investors typically preferring to invest

in U.S. Treasury bills, which are issued only in discount form, are

likely to invest in discount paper, while coupon paper is a more

likely investment for investors which typically invest in interest-

bearing securities.

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

(c) Indirect Trust sales through dealers:

(1) On January 17, 1992, the Trust sold Federal Farm Credit

commercial paper, in the principal amount of $15 million with a

maturity date of January 24, 1992, to an independent broker-dealer for

$14,988,625, and on the same date Assurance bought Federal Farm Credit

commercial paper with the same maturity date and in the same principal

amount from the same independent broker-dealer for $14,988,654.17.

(2) On January 31, 1992, the Trust sold Student Loan Mortgage

commercial paper, in the principal amount of $24,800,000 with a

maturity date of February 14, 1992, to an independent broker-dealer for

$24,762,097.33, and on the same date Student Loan Mortgage commercial

paper with the same maturity date in a lesser principal amount was

purchased from the same independent broker-dealer for $20,693,567.08 by

the Continental Assurance Company Guaranteed Investment Fund (the G.I.

Fund), which is a sub-account of a separate account maintained by

Assurance.

(3) On February 18, 1992, the Trust sold Bell Atlantic commercial

paper, in the principal amount of $24,700,000 with a maturity date of

February 21, 1992, to an independent broker-dealer for $24,691,252.08,

and on the same date the G.I. Fund bought Bell Atlantic commercial

paper with the same maturity date and in the same principal amount from

the same independent broker-dealer for $24,691,355.

(4) On November 2, 1992, the Trust sold Detroit Edison commercial

paper, in the principal amount of $10 million with a maturity date of

November 23, 1992, to an independent broker-dealer for $9,979,466.67,

and on the same date Casualty bought Detroit Edison commercial paper

with the same maturity date and in the same principal amount from the

same independent broker-dealer for $9,980,722.22.

(5) On November 18, 1992, the Trust sold Abbot Labs commercial

paper, in the principal amount of $13,970,000 with a maturity date of

December 14, 1992, to an independent broker-dealer for $13,938,218.25,

and on the same date Casualty bought Abbott Labs commercial paper with

the same maturity date and in the same principal amount from the same

independent broker-dealer for $13,938,420.04.

(6) On December 1, 1992, the Trust sold Wal-Mart commercial paper,

in the principal amount of $20,645,000 with a maturity date of December

10, 1992, to an independent broker-dealer for $20,628,225.94, and on

the same date Casualty, VF Life, and ACCP bought Wal-Mart commercial

paper with the same maturity date and in the same principal amount from

the same independent broker-dealer for $20,628,484.

(d) Indirect Trust purchases through dealers:

(1) On March 4, 1992, Casualty sold Unilever Capital Corporation

commercial paper, in the principal amount of $17,530,000 with a

maturity date of April 2, 1992, to an independent broker-dealer for

$17,471,396.24, and on the same date the Trust bought Unilever Capital

Corporation commercial paper with the same maturity date in the

principal amount of $13,390,000 from the same independent broker-dealer

for $13,883,992.31.

(2) On September 29, 1992, ACCP sold Nestles Capital Corporation

commercial paper, in the principal amount of $2,200,000 with a maturity

date of October 13, 1992, to an independent broker-dealer for

$2,197,347.78, and on the same date the Trust bought Nestles Capital

Corporation commercial paper with the same maturity date and in the

same principal amount from the same independent broker-dealer for

$2,197,364.89.

(3) On December 10, 1992, VF Insurance sold GTE Corporation

commercial paper, in the principal amount of $11 million with a

maturity date of January 13, 1993, to an independent broker-dealer for

$10,959,275.56, and on the same date the Trust bought GTE Corporation

commercial paper with the same maturity date and in the same principal

amount from the same independent broker-dealer for $10,959,483.33.

5. The Applicants represent that any violations of the Act

attributable to the participation of CNA Companies in the CNA

Transactions resulted inadvertently and unintentionally from actions

customarily taken by the Traders in effecting commercial paper

transactions. The Applicants represent that, except for three indirect

Trust purchases of commercial paper through dealers, the CNA

Transactions were effected to accomplish the necessary liquidation of

Trust assets in order to satisfy the Trust's obligations arising from

commitments to purchase U.S. Treasury securities or short-term

commercial paper issued by U.S. corporations. The Applicants state that

in all of the CNA Transactions, the commitments on behalf of the Trust

to purchase the commercial paper or U.S. Treasury securities were made

because the yields on the obligations to be purchased were higher than

those on the commercial paper which was sold. The Applicants maintain

that if the commercial paper in issue had not been sold by the Trust on

the dates of the CNA Transactions, the Trust would have foregone the

incremental return on the government obligations and commercial paper

to which it was committed, and the Trust would have been required to

reimburse its broker for any costs of carrying the obligations until

settlement.

The Applicants represent that the three indirect Trust purchase

transactions were mistakenly initiated by the Traders, who proceeded on

erroneous assumptions about the Trust's ability to engage in the

transactions with the CNA Companies. The Applicants state that the

sellers in these transactions were under no obligation to sell the

commercial paper to the Trust, nor was the Trust obligated to purchase

the commercial paper from the sellers. The Applicants represent that

the commercial paper involved in the Trust purchase transactions was

readily tradable on the open market, and that sellers other than the

CNA Companies could readily have been located.

The Applicants represent that as a percentage of commercial paper

transactions entered into during 1992 by the Trust, the CNA

Transactions were minor. Specifically, the Applicants state that the

total amount involved in the CNA Transactions constituted only 3.15

percent of all commercial paper transactions entered into by the Trust

during 1992 and only 2.52 percent of all transactions entered into by

the Trust during 1992.

6. The Applicants represent that in each of the CNA Transactions,

the Trust bought or sold commercial paper on terms which were as

favorable or more favorable to the Trust as those which the Trust could

have obtained in arm's-length transactions with unrelated parties on

the open market. Specifically, the Applicants represent that in the

purchase transactions, the Trust did not pay, and the CNA Companies did

not receive, prices which were in excess of the fair market value of

the commercial paper purchased. Similarly, with respect to the sale

transactions, the Applicants represent that the Trust received purchase

prices which were equal to or in excess of the fair market values of

the commercial paper at the time of the transactions.11 With

respect to the Trust purchases, the Applicants also represent that the

commercial paper issues involved in the CNA Transactions were highly

liquid and involved highly liquid issuers, and that none of the parties

to the transactions were under any compulsion or duress because the

commercial paper involved could have been sold by and purchased by

sellers and purchasers other than the Trust and the CNA Companies. The

Applicants have obtained written determinations by independent

commercial paper broker-dealers (the Independent Dealers), confirming

the fair market value prices and liquidity of the commercial paper

involved in the CNA Transactions. The representations of the

Independent Dealers are summarized as follows:

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

\1\1The Applicants represent that a retrospective determination

of whether a single trade of commercial paper was made for fair

market value (defined as the price at which the commercial paper

would trade between a willing buyer and willing seller, neither

party being under a compulsion to buy or sell), is difficult, and

includes comparisons of identical or similar transactions, taking

into account differences between the transactions being compared.

The Department expresses no opinion as to the Applicants'

representations regarding the determination of fair market value of

commercial paper, or whether the paper involved in the CNA

Transactions was exchanged at its fair market value.

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(a) In a letter dated December 20, 1993, William H. Honnaker III

(Honnaker), vice-president of Goldman Sachs Money Markets, L.P. (GSMM)

states that after a review of the CNA Transactions, it is the opinion

of GSMM that the Trust sold and purchased the commercial paper at rates

which are representative of those at which such paper would have traded

on the open market for the time periods in question between unrelated

buyers and sellers, and that the Trust purchased the commercial paper

at rates which are representative of those at which such paper would

have traded on the open market for the time periods in question between

unrelated buyers. With respect to the Trust purchases, in a letter

dated January 14, 1994, Honnaker states that GSMM could have found a

willing buyer other than the Trust to purchase the Nestles and Unilever

commercial paper if it had held or acquired such paper at the time of

those transactions, and that the commercial paper traded by Nestles and

Unilever was readily tradable in the market at the time of those

transactions.

(b) In a letter dated December 2, 1993, Andrea L. Dullberg

(Dullberg), a senior vice-president of Merrill Lynch Money Markets,

L.P. (MLMM) states that the prices at which the CNA Transactions were

consummated were within the bid-offer ranges for such securities on the

dates involved. With respect to the Trust purchases of GTE and Unilever

commercial paper, involving MLMM as broker-dealer, Dullberg states the

purchase prices were the fair market prices of the commercial paper at

the time of the transactions.12 In a letter dated January 5, 1994,

another vice president of MLMM, John B. Sprung, states that it could

have found a willing buyer other than the Trust to purchase the GTE and

Unilever commercial paper involved in the Trust purchases in which MLMM

participated as broker-dealer, and that the commercial paper issued by

GTE and Unilever was readily tradable on the open market at the times

of the Trust purchases of that commercial paper.

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

\1\2Dullberg's letter does not refer to the fair market value of

any other commercial paper involved in the CNA Transactions, and

Dullberg states that as a matter of policy, MLMM does not opine on

fair market value with respect to trades in which MLMM did not

participate.

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

(c) Michael B. Connolly, vice president of Citicorp Securities,

Inc., states in a letter dated January 7, 1994, that the purchase

prices in the CNA Transactions were within the bid-offer range for

similar commercial paper on the dates involved.

(d) William D. Folland, vice president of CS First Boston

Corporation, in a letter dated January 6, 1994, represents that the

prices at which the Trust purchased and sold commercial paper in the

CNA Transactions were equal to or better than the rates which such

paper would have been quoted on the open market by a dealer willing to

make a market in such paper.

7. In addition to the foregoing representations of the Independent

Dealers, the applicants have also obtained the opinions of an

independent professional analyst of commercial paper markets, Dr.

Marcia L. Stigum (Dr. Stigum). Dr. Stigum (Ph. D. in economics, 1961,

Massachusetts Institute of Technology), who is president of her money

market consulting firm in Quechee, Vermont, represents that she is

independent of and unrelated to the CNA Companies, and that she has

substantial experience as an expert on commercial paper market issues.

Dr. Stigum has submitted a report containing analyses of each of the

CNA Transactions and the market environments in which each one

occurred. Dr. Stigum represents that her report was prepared with the

objective of addressing two questions: (1) Was the paper sold to and

bought by the Trust in each CNA Transaction readily marketable at the

time of the transaction? (2) Were the CNA Transactions consummated at

fair market value? Dr. Stigum's findings detailed in her report in

response to these two questions are summarized as follows:

(A) All twelve issues of commercial paper sold to and bought by the

Trust in the CNA Transactions were unequivocally readily marketable.

Dr. Stigum states that in this context, the term ``readily marketable''

means ``highly liquid.'' She states that at any time, the original

owner or subsequent owner of each issue of the commercial paper could

have sold that paper at a fair market value to the issuing dealer or,

in the case of direct paper, could have obtained a prepayment from the

issuer.

(1) Dr. Stigum notes that all issues of paper sold by the Trust to

CNA Companies, except for the Chevron paper, was ``dealer paper'' which

the Trust had purchased from dealers rather than directly from the

issuers. Dr. Stigum states that every dealer in commercial paper stands

ready to bid for paper issued by one of the names which that dealer

sells (i.e., ``dealer paper''), in order to make the paper sold by that

dealer as liquid as possible. Dr. Stigum has determined that the Trust

could have sold to an unrelated third party, including any dealer

through whom the paper of a particular name is issued, each piece of

dealer paper it sold to the CNA Companies, on the same date it sold

that paper to the CNA Companies. Accordingly, Dr. Stigum concludes that

all dealer paper in the CNA Transactions was 100 percent liquid. With

respect to the Chevron paper, Dr. Stigum states that it was ``direct

paper'' which the Trust purchased directly from the issuer, featuring

the ability to have the issuer prepay at any time before maturity, and

that this issue of Chevron paper was and is 100 percent liquid.

(2) Dr. Stigum states that two of the three issues of commercial

paper bought by the Trust from the CNA Companies were dealer paper

which carried the top credit ratings given by Moody's and Standard &

Poors, and that the third issue of such paper carried a split rating

which even conservative investors consider to be quite acceptable. Dr.

Stigum states that at no time during the period over which the

commercial paper involved in the CNA Transactions matured, or

subsequently, have any one of the issuers of such paper experienced

financial difficulties that either caused the issuer's paper to be

downgraded or caused the issuer to exit the commercial paper market.

Dr. Stigum concludes that the commercial paper sold by the Trust was

100 percent liquid.

(B) All of the CNA Transactions, both buys and sells, were

consummated at fair market values, i.e., terms at least as favorable to

the Trust as could have been obtained in open-market transactions with

unrelated parties. Dr. Stigum's report includes an analysis of, and

conclusions regarding, each of the CNA Transactions, and she represents

that her findings on each transaction demonstrate that each of the CNA

Transactions was consummated at fair market value, which she defines as

``a price (rate) at which a willing seller would have sold to a willing

buyer, neither being under any compulsion to sell or buy.''

In her report, Dr. Stigum explains that her determinations of the

fair market values of the commercial paper involved in the CNA

Transactions were based on comparisons with LIBOR rates13, because

time-series data on short-term commercial paper rates are not

available, and short-term commercial paper was traded during the

relevant period at a relatively constant spread to LIBOR rates, on

which accurate time-series data are readily available. She states that

over the time period of the CNA Transactions, commercial paper for

different maturities consistently traded at a spread below LIBOR rates

for Eurodollar deposits having those same maturities. Accordingly, for

each CNA Transaction, Dr. Stigum presented and compared actual CNA

Transactions data with two LIBOR yield curves: (1) For the week of the

initial purchase of the commercial paper; and (2) for the week of the

subsequent sale or purchase of such paper. She states that her

determinations were also influenced by her awareness that the rates at

which secondary trades of commercial paper may be effected through a

dealer depend on the name and rating of the issuer, the rates that the

issuer is posting, and the precise time of day at which the secondary

trade is made. On the basis of these factors, Dr. Stigum represents

that she has judged the prices (rates) involved in the CNA Transactions

to be fair market prices if they fell within a range of five basis

points above or below the rate that the data indicated to be a fair

market rate.

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\1\3LIBOR is the London Interbank Offered Rate for Eurodollar

deposits. Dr. Stigum represents that banks post, each day, a number

of different LIBOR rates, one for each maturity in which they are

bidding for funds.

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8. The Applicants represent that since discovery of the CNA

Transactions in May and June 1993, they have undertaken efforts to

prevent any recurrence of direct or indirect transactions between the

Trust and the CNA Companies. The Applicants state that three full-time

attorneys were appointed to review all proposed CNA intercompany trades

of commercial paper, to detect any proposed transactions involving the

Trust. Additionally, a memorandum describing the prohibitions of the

Act was distributed to all personnel involved in commercial paper

transactions on behalf of the Trust, the receipt of which was

acknowledged in writing. The Applicants state that this memorandum will

be recirculated annually to all such investment personnel. The

Applicants represent that personnel involved in the Trust's commercial

paper transactions have been directed to develop a ``real-time''

trading audit computer program which would interdict proposed party-in-

interest transactions before the trade can be accomplished.

Furthermore, Assurance has entered into an investment management

agreement with Harris Investment Management, Inc. (Harris), under which

Harris manages all the Trust's commercial paper investments and

approves all the Trust's commercial paper transactions, in order to

prevent any transactions involving parties related to the Trust.

9. In summary, the Applicants represent that the CNA Transactions

satisfy the criteria of section 408(a) of the Act for the following

reasons: (a) The prices at which the Trust sold commercial paper were

not less than the paper's fair market value, and the prices at which

the Trust purchased commercial paper were not in excess of the paper's

fair market value; (b) The transactions resulted from actions

customarily taken by the Traders in effecting commercial paper

transactions; (c) The transactions involved a very small percentage of

the Trust's total commercial paper transactions for 1992; and (d) The

Applicants have undertaken efforts to prevent any recurrence of direct

or indirect transactions involving the Trust and the CNA Companies,

including the appointment of Harris as an independent investment

manager of all the Trust's commercial paper investments.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department (202)

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

John R. Lyman Company 401(k) Profit Sharing Plan (the Plan) Located in

Chicopee, Massachusetts

[Application No. D-9759]

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) 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 proposed cash sale (the Sale) by the Plan

of Guaranteed Investment Contract CGO1303A3A (GIC1303) and Guaranteed

Investment Contract CGO1344A3A (GIC1344, collectively, the GICs) issued

by Executive Life Insurance Company (Executive Life), a California

corporation, located in Los Angeles, California, to John R. Lyman

Company, a Massachusetts corporation (the Employer), the sponsoring

employer and a party in interest with respect to the Plan; provided

that (1) the Sale is a one-time transaction for cash; (2) the Plan

experiences no loss nor incurs any expense from the Sale; (3) the Plan

receives as consideration from the Sale the greater of either the fair

market value of the GICs as determined on the date of the Sale or an

amount that is equal to the total amount expended by the Plan for the

GICs at the time of acquisition, less withdrawals, plus the amount the

GICs would have earned by the date of the Sale if Executive Life had

not been placed under conservatorship; and (4) any funds from the GICs

in excess of the Sale price that are received by the Employer, or its

successors, from Executive Life, or its successors, after the date of

the Sale are paid to the Plan.

Summary of Facts and Representations

1. The Employer, a Massachusetts corporation, is a closely held

corporation that was established in 1906 and currently employs

approximately 186 individuals. It is located in Chicopee, Massachusetts

where it is engaged primarily in the manufacture and distribution of

wiping products that include woven (textiles) and non-woven (paper and

synthetic) materials.

2. The Plan is a defined contribution plan with individual accounts

for participants that is intended to meet the qualification

requirements of sections 401(a) and 401(k) of the Code. The Plan

intends also to comply with section 404(c) of the Act whereby

participants self-direct the investments of assets in their respective

individual accounts. As of January 31, 1994, the Plan had 79

participants and total assets of $499,249.87. Approximately 2.25

percent of the total assets of the Plan, valued at $12,906.58, remain

invested in the GICs for individual accounts of 19 participants of

which 4 are retired.

At the adoption of the Plan by the Employer on September 29, 1989,

Edward S. Wright (president, director, and shareholder of the Employer)

and his wife, Jean C. Wright (treasurer, clerk, director, and

shareholder of the Employer) were appointed Trustees of the Plan. In

their undertakings, the Trustees are authorized by the Plan to employ

agents and to pay their reasonable expenses and compensation.

The Plan also provides that the Employer may make appointments of

persons to direct and manage the Plan. In the absence of such an

appointment the Employer is the Plan Administrator and Named Fiduciary.

Currently the Plan is administered by a committee (the Committee) which

consists of 11 members of which 4 members act as a quorum (the

Executive Committee) in administering daily activities of the Plan.

This includes the Executive Committee selecting the optional investment

vehicles used by Plan participants in directing investments for their

respective accounts. The Executive Committee also appoints legal

counsel, accountants, investment advisors, and administrators for the

Plan. The Executive Committee has currently retained Lamoriello &

Company, Inc. of Warwick, Rhode Island to perform various functions for

the Plan, which include the preparation and filing of annual earnings

reports and disbursing periodic reports to participants. The Executive

Committee also has retained Inside Management, Inc. of Wellesley,

Massachusetts as the current registered Investment Advisor for the

Plan.

When the Employer adopted the Plan in 1989, Feingold & Feingold

Insurance Agency, Inc. of Worcester, Massachusetts (Feingold) was

appointed Plan Administrator. Included in Feingold's duties, among

other things, was the responsibility to maintain books and records for

the Plan, manage Plan assets, and recommend investment vehicles for

Plan participants to invest the assets of their respective accounts.

Feingold submitted the GICs as one of its five recommended investment

vehicles for the Plan. The GICs were purchased from Executive Life by

Feingold at the direction of the respective participants and were held

in trust by its subsidiary, Feingold Investment Planning Trust, for the

benefit of the participants in the Plan.\14\ GIC 1303, with an issue

date of January 1, 1989, and a maturity date of December 31, 1995, was

to pay an annual interest yield of 8.95 percent until maturity. GIC

1344, with an issue date of January 1, 1990, and a maturity date of

December 31, 1996, was to pay an annual interest yield of 8.65 percent

until maturity.

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

\14\Feingold is no longer Plan Administrator for the Plan, but

its subsidiary continues to hold the GICs in trust for the Plan.

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As of March 31, 1991, GIC 1303 had a balance of $9,147.56, which

was determined by adding its earnings of $1,165.42 to the original

price of $9,227.31 and subtracting $1,245.17 in withdrawals. The GIC

1344 was determined, as of March 31, 1991, to have a balance of

$3,759.12 which was determined by the same calculation of adding its

earnings of $338.20 to the original price of $3,881.30 and subtracting

the withdrawals of $460.38.

3. On April 11, 1991, the California Department of Insurance

obtained a court order placing Executive Life under conservatorship and

freezing, as of March 31, 1991, the value of the GICs and their

interest payments.\15\ The following month, First Executive

Corporation, a Delaware corporation, which wholly owns Executive Life,

filed for reorganization under Chapter 11 of the Bankruptcy Code.

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\15\The Department notes that the decisions to acquire and hold

the GICs are governed by the fiduciary responsibility provisions of

Part 4 of Title I of the Act. In this regard, the Department is not

proposing relief for any violations of Part 4 which may have arisen

as a result of the acquisition and holding of the GICs.

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On August 13, 1993, the Superior Court of California approved a

Rehabilitation Plan of the Department of Insurance of California and

authorized the Insurance Commissioner for California and the successor

of Executive Life, Aurora National Life Insurance Company (Aurora), a

California corporation, to implement all the provisions of the

Rehabilitation Plan. Included in the implementation was an offer of an

option to every contract holder of Executive Life to continued coverage

through Aurora, or opt out of the Rehabilitation Plan and receive a

reduced return over a longer extended period of time.

On or about February 11, 1994, Feingold, with its subsidiary

holding the GICs in trust for the participants of the Plan, elected to

continue the GICs with Aurora under the Rehabilitation Plan.

Under the Rehabilitation Plan the maturity dates of the GICs were

extended to September 3, 1998, from their respective maturity dates of

December 31, 1995, and December 31, 1996. Also, under the

Rehabilitation Plan the interest rates for the GICs were reduced at

various periods of time from a low of 2.68 percent to the high of 5.34

percent.

In addition, the GICs are subject to an ongoing litigation

concerning a determination of the priority of payment to creditors of

Executive Life. The application represents that no payments to the

holders of the GICs are anticipated until all possible appeals to the

litigation are exhausted. The applicant represents that if the court

determines that holders of the GICs are creditors of Executive Life and

not insurance policy holders, the holders of the GICs will have little

or no recovery. The applicant further represents that the GICs do not

have the protection of the State Participating Guaranty Association.

4. In order to avoid the continued risk to the participants and

beneficiaries of the Plan with investments in the GICs, the Employer

proposes to purchase the GICs from the Plan for cash in a one-time

transaction with no expense to the Plan. The Employer intends to pay

the Plan the greater of either the fair market value of the GICs on the

date of the Sale, or an amount that is equal to the total funds

expended by the Plan in acquiring the GICs, less withdrawals, plus the

earnings the GICs would have received to the date of the Sale if

Executive Life had not been placed under conservatorship. In addition

the Employer will pay to the Plan any funds emanating from the GICs in

excess of the Sale price and received by the Employer after the date of

the Sale.

In a written statement dated September 15, 1994, Kidder, Peabody &

Co., Incorporated (Kidder, Peabody) represented that it was retained by

the Employer to make an independent determination on the date of the

Sale that the exact amount of payment will be made to the Plan in

accordance with the formula set forth by the Employer in its

application for exemption. Also, Kidder, Peabody represented that the

payment will not be less than the fair market value of the GICs on the

date of the Sale. Both Kidder, Peabody and Merrill Lynch stated that

there is no market for the GICs in written statements dated September

15, 1994, and July 28, 1994, respectively.

In a statement dated October 20, 1994, Feingold represents that the

Sale will enable the Plan and its participants and beneficiaries to

avoid continued risk associated with holding the GICs; and the proposed

Sale to the Employer is in the best interests of the Plan and its

participants and beneficiaries and protective of the rights of the

participants and beneficiaries.

5. In summary, the applicant represents that the proposed

transaction will satisfy the criteria for an exemption under section

408(a) of the Act because (a) the Plan will receive from the Employer

in a one-time transaction cash in an amount that is the greater of

either the fair market value of the GICs or an amount that is equal to

the total amount paid by the Plan for the GICs, less any withdrawals

during ownership of the GICs, plus earnings the GICs would have

received to the date of the Sale if Executive Life had not been placed

under conservatorship by the Superior Court of California, as well as,

any funds from the GICs in excess of the Sale price received by the

Employer subsequent to date of the Sale; (b) the transaction will

enable the Plan and its participants and beneficiaries to avoid any

risk associated with the continued holding of the GICs; (c) the Plan

will not incur any losses or expenses from the proposed transaction;

and (d) the fiduciaries of the Plan have determined that the proposed

transaction is in the best interests of the Plan and its participants

and beneficiaries.

FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver 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 that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 22nd day of November 1994.

Ivan Strasfeld

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 94-29168 Filed 11-25-94; 8:45 am]

BILLING CODE 4510-29-P