# Proposed Exemptions; Phillips Petroleum Company

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## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** June 7, 1995
- **Citation:** 60 FR 30106

## Text

DEPARTMENT OF LABOR
[Application No. D-09909, et al.]

Proposed Exemptions; Phillips Petroleum Company

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 [[Page 30107]] 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.

Phillips Petroleum Company (Phillips), Located in Bartlesville, OK;
Proposed Exemption

[Application No. D-09909]

The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code by reason of section 4975(c)(1) (A) through (E) of the
Code, shall not apply to (1) The proposed making of interest-free loans
to the Thrift Plan of Phillips Petroleum Company (the Plan) by
Phillips, the Plan sponsor pursuant to the terms of a credit facility
arrangement; and (2) the proposed repayment of such loans by the Plan
to Phillips.
This proposed exemption is conditioned on the following
requirements:
(a) Each loan executed under the proposed credit facility
arrangement provides short-term funds to the Plan in connection with
inter-fund transfers, withdrawals and participant loans and permits the
orderly disposal of Phillips common stock.
(b) Each loan made under the proposed credit facility arrangement
is unsecured and no interest, commissions or expenses are paid by the
Plan.
(c) In the event of a loan default or delinquency, Phillips has no
recourse against the Plan.
(d) Each loan is initiated, accounted for and administered by an
independent fiduciary who monitors the terms and conditions of the
exemption, if granted.

Summary of Facts and Representations

1. Phillips, which maintains its principal place of business in
Bartlesville, Oklahoma, was incorporated in the State of Delaware on
June 13, 1917. Phillips is engaged in various business activities
ranging from worldwide petroleum exploration and production to the
production and distribution of chemicals. Phillips is also a leader in
research and development and it holds 3,400 patents in technology that
support company business lines. As of December 31, 1993, Phillips had
assets of approximately $10.9 billion, liabilities of approximately
$7.8 billion, annual revenues totaling $12.5 billion and net income of
$243 million. As of September 30, 1994, Phillips had 74,300
shareholders and 18,796 employees.
2. The Plan, of which Phillips is the sponsor, is a defined
contribution plan having 15,394 participants and total assets of $1.27
billion as of May 16, 1994. The trustee of the Plan (the Trustee) is
Bankers Trust Company of New York, New York.
3. The Plan permits participants to direct the investment of their
account balances among several investment funds (the Funds) and to
receive participant loans from their accounts. Generally, any regular
employee on the payroll of Phillips is eligible to participate in the
Plan except non-managerial retail outlet marketing employees. Plan
participants may have up to 15 percent of their pay deposited in the
Plan each month. The first 5 percent is designated as regular deposits
with any excess being designated as supplemental deposits. Deposits may
be further designated by a participant as ``before-tax'' or ``after-
tax'' deposits. Before-tax deposits represent participant contributions
made pursuant to an election by the participant under section 401(k) of
the Code to have his or her salary reduced in exchange for the
contribution. Before-tax deposits are participant contributions to the
Plan that are made from participant earnings prior to the payment of
Federal or state taxes. After-tax deposits are Plan contributions made
by a participant from the participant's pay after Federal and state
taxes have been paid. Plan participants are allowed to change their
investment directions and deposit rates only during designated
enrollment periods.
4. Employee deposits are placed in a special investment fund called
the ``Temporary Investment Fund.'' The deposits are initially invested
in certain short-term securities for up to 45 days after receipt by the
Trustee. Then, the deposits and earnings thereon are paid into four
other Funds, namely, Funds A, B, E or F as directed by the participant,
and invested as follows:
a. In Fund A, a commingled trust government/corporate bond index
fund held by Wells Fargo Institutional Trust Company.
b. In Fund B which holds Phillips common stock.
c. In Fund E, a Standard and Poor's equity index commingled fund
held by the Trustee.
d. In Fund F, a commingled money market fund managed by the
Trustee.1

1The applicant represents that investments by the Plan in Fund
E and Fund F are covered by and comply with section 408(b)(8) of the
Act. However, the Department expresses no opinion herein on whether
such investments satisfy the terms and conditions of section
408(b)(8) of the Act. [[Page 30108]]
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In addition to the above, there are two other Funds that comprise
the trust funds. They are Fund C and Fund D. Fund C is composed
primarily of Phillips common stock. Fund D, which is closed to new
deposits, holds guaranteed investment contracts.
Phillips contributes 25 percent of an employee's regular deposits
to Fund B and 15 percent of regular deposits to any of the other
investment Funds. The interest of a participant in each Fund is
represented by units allocated to such participant.
5. The Plan allows a participant to elect a direct rollover of most
distributions to an individual retirement account (the IRA) or to
another tax qualified plans. The Plan also provides for participant
loans as well as for transfers among certain of the Funds. In this
regard, the Plan does not permit transfers to Fund C, Fund D or the
Temporary Investment Fund.2 However, it does allow transfers from
these Funds with limited exceptions.3

2For example, with respect to the Temporary Investment Fund,
the applicant represents that its purpose is to hold participant
contributions until they are transferred to the elected investment
Fund. Due to the short-term nature of this Fund, the applicant
explains that participants are not entitled to transfer deposits to
the Temporary Investment Fund from any other Fund.
\3\In the case of Fund C, the applicant explains that
participants may make a one-time transfer from Fund C after
retirement. In the case of Fund D, the applicant represents that a
participant may not transfer from Fund D except to transfer upon the
expiration of such participant's Class Year (guaranteed investment
contract) Account.
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6. Phillips represents that the right to transfer monthly from Fund
to Fund and to borrow from the Plan has given participants greater
control of their plan investments. Thus, for any valuation date (the
Valuation Date) (i.e., the first working day for the Trustee and The
New York Stock Exchange following the 14th of each month), participants
may elect (to the extent permitted by the Plan) to transfer their
account balances from one investment alternative to another, to
withdraw funds or to borrow a portion of their account. As of the
Valuation Date, Phillips common stock will be valued based on the
closing sales prices for such stock. The steps that a participant may
undertake in effecting transfers, withdrawals or participant loans are
described as follows:
a. Inter-Fund Transfers. In order to transfer assets from one Fund
to another, a participant must complete a standard transfer form
applicable to all transfers or withdrawals. The transfer form must be
delivered to the Plan Administrator by the last business day before the
monthly Valuation Date. The transfer will be effective on the next
Valuation Date.
b. Withdrawals from Funds. If the participant wishes to withdraw
assets from a Fund, the procedure for withdrawal is essentially the
same as that to transfer Funds. The participant must complete a
withdrawal form and deliver it to the Plan Administrator by the last
business day before the monthly Valuation Date. The withdrawal is
effective as of the Valuation Date and it is usually paid within two
weeks. If the participant intends to have the assets paid to an IRA or
a qualified plan, the participant must provide the Plan Administrator
with descriptive information concerning such plan or IRA, including the
name and address. The participant must also verify that the recipient
plan or IRA will accept the direct payment from the Plan.
c. Participant Loans. Assuming the participant requests a
participant loan, such participant must be an active employee of
Phillips with a vested account in the Plan of $2,000 or more. A
participant may have up to two regular loans (any loan except a home
loan) and one home loan outstanding at any one time. The maximum amount
of any loan is limited to the lesser of: $50,000 less the highest loan
balance in the last 12 months (determined as of the previous month's
Valuation Date) or 50 percent of the vested account balance less the
current outstanding loan balance for all loans, with values determined
as of the previous month's Valuation Date. A participant may not apply
for a loan if he or she has the maximum number of loans outstanding,
has borrowed the maximum amount in the last 12 months or has an
outstanding loan that is delinquent. The minimum amount of any single
loan is $1,000.4

\4\The applicant represents that the Plan's participant loan
provisions are designed and administered to comply with section
408(b)(1) of the Act and applicable regulations. However, the
Department expresses no opinion herein on whether such loans satisfy
the terms and conditions of section 408(b)(1) of the Act and the
regulations promulgated thereunder.
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A participant may apply for a participant loan by telephone, then
sign a transaction authorization form approved by the Plan
Administrator and consent to irrevocable payroll deductions that will
provide the amount necessary to repay the loan. Loan applications can
be made only by telephone during the first 10 calendar days of each
month. Loans will be processed once a month on the applicable Valuation
Date. Proceeds will be paid within two to three weeks after the date
the loan is processed. Participants may not make a withdrawal on the
same Valuation Date that the loan is processed, even if the withdrawal
form is submitted first.
7. To effect the aforementioned transfers, withdrawals or
participant loans, the Trustee is required to liquidate assets held in
the Fund or Funds from which the proceeds are needed. In this regard,
the Plan document provides that the Trustee must take reasonable steps
to invest deposits received for Funds B and C in Phillips common stock
as soon as reasonably possible provided, however, that up to $10
million of cash equivalent investments may be maintained in the Funds
to effect transfers, withdrawals and loans on the next regular
Valuation Date. The Trustee must take reasonable steps to effect
transfers, withdrawals or participant loans from Funds B and C5
within 5 business days (on which both the Trustee and The New York
Stock Exchange are in business) following the appropriate Valuation
Date. The Trustee is also required to spread the sales of Phillips
common stock that will be used to effect the transfers, withdrawals or
participant loans ratably over the remaining trading days before the
next regular Valuation Date.6 However, if the number of shares
which are to be sold would result in ratable sales of less than 10,000
shares a day, the Trustee is not required to sell less than 10,000
shares per day.

\ 5\Although transfers are restricted from Fund C, withdrawals
are permitted of vested company contributions. Loans can be taken
from Fund C after all of the other Funds have been depleted subject
to the loan limitation rules in the Plan.
\ 6\Although the Department expresses no opinion herein on the
requirement that the Trustee spread the sales of Phillips common
stock over the remaining trading days before the next regular
Valuation Date, it notes that Trustee's decision to spread stock
sales should be in the interests of the Plan and consistent with the
provisions of section 404 of the Act.
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To the extent that the cash necessary to effect the transfers,
withdrawals and participant loans within the 5 day trading period
exceeds $10 million, the Trustee is permitted to borrow funds to
provide sufficient liquidity to Funds B and C. Expenses and other costs
attributable to such borrowings will be allocated to Funds B and C.
8. To bridge the gap between the immediate need for assets to fund
transfers, withdrawals or participant loans and the disposal of
Phillips common stock, the Trustee entered into a one-year, renewable
revolving credit facility arrangement with NationsBank of Dallas, Texas
on July 14, 1993. By its terms, the credit facility arrangement
initially permitted the Trustee, on behalf of the Plan, to borrow up to
$50 [[Page 30109]] million on a short-term and unsecured basis.
Interest is charged on a sliding scale margin above the London
Interbank Offered Rate. The Plan is required to repay each loan in cash
within 30 days of its making with proceeds from the sale of Phillips
common stock. In addition, NationsBank charges the Plan a commitment
fee of .10 percent of any unused amount of funds and a margin of .25
percent over NationsBank's actual cost of funds.
The Trustee has drawn upon the credit facility arrangement three
times, resulting in loans to the Plan in the following amounts over the
following time frames: (a) $3.3 million for 10 days; (b) $850,000 for
12 days; and (c) $10,000 for 8 days. As of March 10, 1995, the Plan had
repaid all principal for the loans, including interest and expenses
totaling $94,144. Although the credit facility arrangement was expected
to expire in July 1994, it has been extended by NationsBank until July
12, 1995. However, the credit facility amount has been reduced from $50
million to $25 million.
9. The Plan wishes to terminate its credit facility arrangement
with NationsBank. Therefore, Phillips requests an administrative
exemption from the Department in order that it may provide the Plan
with a similar lending arrangement. Phillips represents that it is
aware that Prohibited Transaction Exemption (PTE) 80-26 (45 FR 28545,
April 29, 1980) permits interest-free loans to a plan by a party in
interest. In this regard, Phillips notes that PTE 80-26 permits an
unsecured loan by a party in interest to a plan for a purpose
incidental to the ordinary operation of the plan and for a period not
exceeding 3 days. If the loan proceeds are used only for the payment of
operating expenses of the plan, including the payment of benefits,
Phillips explains that no time limit is imposed under PTE 80-26.
In view of the foregoing, Phillips represents that the extent to
which PTE 80-26 would cover the proposed credit facility arrangement is
unclear. Phillips believes that the inter-fund transfers and
participant loans that would be initially funded by its proposed
extension of credit may not be viewed as ordinary operating expenses of
the Plan under PTE 80-26. Even if viewed as ordinary operating
expenses, Phillips states that it is not clear whether the loans could
be repaid within 3 days inasmuch as the Plan documents require the
Trustee to spread sales of stock ratably over a Plan month to prevent
sales from negatively impacting the market.
10. Under its proposed credit facility arrangement, Phillips will
extend an initial line of credit of $25 million. The line of credit may
be renewed annually by Phillips and the Plan. Each loan made thereunder
will be unsecured and no administrative fees or interest will be
charged to the Plan in connection with any of the loans. Each loan will
be repaid within 31 days of its making. Funds for repaying the loans
will be derived from the Trustee's sale of stock held in Funds B and C.
Assets held in the other investment Funds will not be utilized for such
repayments. Further, Phillips will have no recourse against the Plan or
against any participant in the event of a loan default or delinquency
and it will also not charge any late fees.
11. The Trustee will serve on behalf of the Plan as the independent
fiduciary and, in such capacity, it will activate and administer the
proposed credit facility arrangement. The Trustee represents that it is
a leading provider of global financial services and that it has been
providing services to employee benefit plans since 1927. As of March
10, 1995, the Trustee represents that it had employee benefit plan
assets under management of over $165 billion and serves as a trustee
for more than $115 billion in defined contribution plan assets. As of
December 31, 1994, the Trustee states that it provided trust/custody
services to 575 clients with total assets under administration of
approximately $394 billion.
The Trustee represents that it is familiar with the Plan and its
investment portfolios since it has access to information regarding Plan
assets and can ascertain the extent to which the proposed credit
facility arrangement will affect the Plan's investment needs. The
Trustee also represents that it is independent of Phillips. In this
regard, the Trustee states that during 1994, the fees paid to it by
Phillips represented less than one percent of its total fiduciary and
funds management revenues.
The Trustee explains that the Plan and its trust document were
amended in 1993 to permit the credit facility arrangement with
NationsBank. In view of its experience in negotiating and monitoring
the NationsBank credit facility on behalf of the Plan, the Trustee
states that it is fully familiar with the terms and costs associated
with such arrangements. The Trustee points out that it has had to
resort to the NationsBank credit facility arrangement on only a small
number of occasions in the past 18 months. However, the costs
associated with using the facility and assuring its continued
availability could be avoided if Phillips were permitted to make
similar, short-term extensions of credit to the Plan on an interest-
free basis.
Consistent with relevant Plan provisions, the Trustee states that
it will be responsible for determining when and how much to borrow and
to cause the Plan to repay each loan within a 31 day period. The
Trustee represents that it will not receive an additional fee or other
compensation from the Plan as the result of the proposed credit
facility arrangement between the Phillips and the Plan.
In view of the above, the Trustee concludes that the proposed
interest-free loan program is in the best interest of the Plan and its
participants and beneficiaries. The Trustee believes that such
arrangement will result in cost savings to the Plan and enable the Plan
to complete transactions in a timely manner. Further, the Trustee
asserts that its ongoing, independent involvement in and oversight of
the program will provide protection for the Plan and its participants
and beneficiaries.
12. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) Each loan executed under the proposed credit facility
arrangement will provide short-term funds to the Plan in connection
with inter-fund transfers, withdrawals and participant loans and it
will permit the orderly disposal of Phillips common stock.
(b) Each loan made under the proposed credit facility arrangement
will be unsecured and no interest, commissions or expenses will be paid
by the Plan.
(c) In the event of a loan default or delinquency, Phillips will
have no recourse against the Plan.
(d) Each loan will be initiated, accounted for and administered by
the Trustee, which will also monitor the terms and conditions of the
exemption, if granted.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Universal Underwriters Group Thrift Plan (the Plan), Located in
Overland Park, Kansas; Proposed Exemption

[Application No. D-09947]

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
[[Page 30110]] the exemption is granted, the restrictions of sections
406(a), 406(b)(1) and (b)(2) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code shall not apply to (1) the
proposed extensions of credit (the Loans) to the Plan from Universal
Underwriters Insurance Company (the Employer), with respect to a
guaranteed investment contract (the GIC) issued by Confederation Life
Insurance Company (Confederation); (2) the Plan's potential repayment
of the Loans upon the receipt by the Plan of payments under the GIC;
and (3) the assignment by the Plan to the Employer of all claims or
causes of action it may have against the Plan's former GIC placement
advisor for recommending that the Plan purchase the GIC; provided the
following conditions are satisfied:
(A) All terms and conditions of such transaction are no less
favorable to the Plan than those which the Plan could obtain in arm's-
length transactions with unrelated parties;
(B) No interest or expenses are paid by the Plan in connection with
the proposed transaction;
(C) The Loans will be repaid only out of amounts paid to the Plan
by Confederation, its successors, or any other responsible third party;
(D) Repayment of the Loans will be waived to the extent that the
Loans exceed GIC proceeds;
(E) A qualified independent fiduciary will represent the interests
of the Plan throughout the duration of the proposed transaction; and
(F) The Employer's recovery resulting from a cause of action
assigned to the Employer by the Plan will be limited to the amount
necessary to pay for litigation expenses and to pay off the Plan's
outstanding Loan balance and any excess recovery will be transferred
back to the Plan.

Summary of Facts and Representations

1. The Plan is a defined contribution 401(k) plan which provides
for individual participant accounts and participant-directed
investments. The Plan had approximately 1,100 participants as of
December 30, 1993 and $45,924,914.96 in assets as of June 30, 1994. The
Plan trustee is United Missouri Bank, N.A. (UMB), located in Kansas
City, Missouri. The Employer is a Missouri corporation that provides
insurance protection for automobile dealerships and other businesses.
Under the terms of the Plan, participants have the option of investing
in any of six investment funds, including the Stable Interest Fund,
which invests primarily in interest-paying contracts with insurance
companies. As of December 31, 1994, the Stable Interest Fund held ten
guaranteed investment contracts and several other interest bearing
contracts, as well as approximately $74,413 in a deposit account. The
GIC, which was issued on February 10, 1994, is part of the Stable
Interest Fund. The GIC is a single-deposit non-participating contract
which allows the Plan to make benefit-responsive withdrawals to fund
benefit payments, investment fund transfers, hardship withdrawals and
participant loans (collectively, the Withdrawal Events). The terms of
the GIC provide for interest on the $5,500,000 principal amount at a
guaranteed interest rate of 6.12% over a period of 61 months. Interest
payments are to be made annually to the Plan on April 1 (beginning
April 1, 1995), up to the scheduled maturity date of April 1, 1999. As
of June 30, 1994, the GIC had an accumulated book value of
$5,615,769.50.
2. Confederation is a Canadian corporation doing business in the
United States through branches in Michigan and Georgia. The Employer
represents that on August 11, 1994, the Canadian insurance regulatory
authorities placed Confederation into a liquidation and winding-up
process, and on August 12, 1994, the insurance authorities of the State
of Michigan commenced legal action to place the U.S. operations of
Confederation into a rehabilitation proceeding. As a result of these
actions, Confederation suspended interest and maturity payments under
the GIC and significantly limited the circumstances under which
withdrawals may be obtained from the GIC. The Employer represents that
it has established a separate fund to which the portion of the Stable
Interest Fund attributable to the GIC has been transferred. This
separate fund has been frozen so that no payments for Withdrawal Events
are permitted.\7\

\7\The Department notes that the decisions to acquire and hold
the GIC are governed by the fiduciary responsibility requirements of
Part 4, Subtitle B, Title I of the Act. In this regard, the
Department is not herein proposing relief for any violations of Part
4 which may have arisen as a result of the acquisition and holding
of the GIC issued by Confederation.
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3. The Employer proposes to advance interest free loans to the Plan
at such times and in such amounts as required to fully realize the
interest payments due the Plan under the GIC, but only to the extent
that such amounts are not timely paid by or on behalf of Confederation.
Consequently, each Loan will be reduced by any amounts actually
received by the Plan, with respect to the particular interest payment
due, from Confederation or any other party making payment with respect
to Confederation's obligations under the GIC. In addition to the Loans
required to guarantee interest payments, the Employer is also proposing
a final Loan upon the GIC's final maturity date to the extent that
Confederation fails to pay the full amount due. The amount of interest
accrual and the final maturity payment due will be determined on the
basis of the GIC's principal plus interest at the guaranteed rate, less
previous withdrawals, as of the date of the Loan.
4. The Loans and their repayments will be made pursuant to a
written agreement (the Loan Agreement) between the Plan and the
Employer. The Plan and the Employer will also enter into a separate
agreement (the Assignment Agreement) under which the Plan will agree to
assign to the Employer any and all claims or causes of action it may
have as holder of the GIC against the Plan's former GIC placement
adviser, Buck Pension Fund Services, Inc. and its employees, agents,
and related entities (collectively referred to as Buck). The Employer's
recovery under the Assignment Agreement will be limited to the amount
necessary to pay for litigation expenses and to pay off the Plan's
outstanding Loan balance. If, pursuant to a cause of action assigned by
the Plan, the Employer recovers from Buck an amount exceeding such
litigation expenses and the outstanding Loan balance, the excess
recovery will be transferred back to the Plan.
5. UMB (see section 1--above) has agreed to serve as independent
fiduciary on behalf of the Plan throughout the duration of the
transaction. UMB has acknowledged its duties, responsibilities and
liabilities in acting as a fiduciary with respect to the proposed
transaction. UMB represents that the Employee Benefit Division of its
Trust Department has extensive experience as a provider of services to
employee benefit plans. UMB maintains that less than 1% of its business
is associated with the Employer. As independent fiduciary, UMB has
concluded that the proposed transaction is in the best interests of,
and protective of, the rights of the Plan's participants and
beneficiaries. In this regard, UMB represents that the Loan Agreement
will ensure that the Plan suffers no investment loss from its
investment in the GIC, will make it possible for Plan Participants to
gain access to their funds which have been frozen, and will allow the
Plan to reinvest the funds that were previously invested in the GIC. In
addition, UMB represents that the proposed transaction is protective of
the [[Page 30111]] Plan in that it provides the Plan with the cash it
needs to fund Withdrawal Events and permits the Employer to pursue any
claims that the Plan may have against the Plan's former GIC placement
advisor. UMB represents that, under this arrangement, the Employer, not
the Plan bears the risk of an uncertain recovery on a claim that would
be expensive and time consuming for the Plan to pursue. If the Employer
does bring any claim or cause of action against Buck, UMB has agreed to
monitor the division of any recovery obtained in such litigation to
assure that the Plan receives the portion to which it is entitled.
6. The Employer represents that it wishes to enter into the
proposed transaction in order to protect the Plan participants from the
effects of a prolonged rehabilitation process and from any potential
loss resulting from Confederation's inability to meet its obligations
under the GIC. In this regard, the Employer represents that the
proposed transaction would ensure the availability of benefits
equivalent to those anticipated by participants prior to the failure of
Confederation, at no additional cost to participants. In addition, the
Employer represents that the Loans will contribute to the Plan's
ability to fund Withdrawal Events. The Employer also represents that
the Loans will be non-interest-bearing and the Plan will not incur any
expenses in connection with the proposed transaction.
7. Repayment of the Loans under the Agreement is limited to
payments made to the Plan by or on behalf of Confederation, or its
successor, or any other responsible third parties. No other assets of
the Plan will be available for repayment of the Loans. If the payments
by or on behalf of Confederation are not sufficient to fully repay the
Loans, the Loan Agreement provides that the Employer will have no
recourse against the Plan, or against any participants or beneficiaries
of the Plan, for the unpaid amount. To the extent the Plan receives GIC
proceeds in excess of the total amount of the Loans, such additional
amounts will be retained by the Plan and allocated among the accounts
of the Plan's participants.
8. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) The transaction will preserve the Plan's ability to timely
fund participants' benefits; (2) The transaction will preserve any
cause of action that may exist against the Plan's GIC placement
advisor; (3) The Plan will not incur any expenses with respect to the
transaction; (4) Repayment of the Loans will be made only from amounts
paid to the Plan by Confederation, its successor, or any other third
party; (5) If the payments by or on behalf of Confederation are not
sufficient to fully repay the Loans, the Employer will have no recourse
against the Plan, or against any participants or beneficiaries of the
Plan, for the unpaid amount; and (6) Repayment of the Loans will be
waived with respect to the amount by which the Loans exceed the amount
the Plan receives from GIC proceeds.

FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
BlackRock Financial Management L.P. (BlackRock), Located in New York,
New York; Proposed Exemption

[Application No. D-09963]

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)(1)(A) and 406(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) of the Code, shall
not apply to the proposed cross-trading of equity or debt securities
between various accounts managed by BlackRock (the Accounts) where at
least one Account involved in any cross-trade is an employee benefit
plan account (Plan Account) for which BlackRock acts as a fiduciary.

Conditions and Definitions

This proposed exemption is subject to the following conditions:
1. (a) A Plan's participation in the cross-trade program is subject
to a written authorization executed in advance by a fiduciary with
respect to each such Plan, the fiduciary of which is independent of
BlackRock;
(b) The authorization referred to in paragraph (a) is terminable at
will without penalty to such Plan, upon receipt by BlackRock of written
notice of termination; and
(c) Before an authorization is made, the authorizing Plan fiduciary
must be furnished with any reasonably available information necessary
for the authorizing fiduciary to determine whether the authorization
should be made, including (but not limited to) a copy of this exemption
(if granted), an explanation of how the authorization may be
terminated, a description of BlackRock's cross-trade practices, and any
other reasonably available information regarding the matter that the
authorizing fiduciary requests.
2. (a) No more than three (3) business days prior to the execution
of any cross-trade transaction, BlackRock must inform an independent
fiduciary of each Plan involved in the cross-trade transaction: (i)
That BlackRock proposes to buy or sell specified securities in a cross-
trade transaction if an appropriate opportunity is available; (ii) the
current trading price for such securities; and (iii) the total number
of shares to be acquired or sold by each such Plan;
(b) Prior to each cross-trade transaction, the transaction must be
authorized either orally or in writing by the independent fiduciary of
each Plan involved in the cross-trade transaction;
(c) If a cross-trade transaction is authorized orally by an
independent fiduciary, BlackRock will provide written confirmation of
such authorization in a manner reasonably calculated to be received by
such independent fiduciary within one (1) business day from the date of
such authorization;
(d) The authorization referred to in this paragraph (2) will be
effective for a period of three (3) business days; and
(e) No more than ten (10) days after the completion of a cross-
trade transaction, the independent fiduciary authorizing the cross-
trade transaction must be provided a written confirmation of the
transaction and the price at which the transaction was executed.
3. (a) Each cross-trade transaction is effected at the current
market value for the security on the date of the transaction, which
shall be, for equity securities, the closing price for the security on
the date of the transaction, and for debt securities, the fair market
value for the security as determined in accordance with paragraph (b)
of Rule 17a-7 issued by the Securities and Exchange Commission (SEC)
under the Investment Company Act of 1940 (the 1940 Act);
(b) The cross-trade transaction is effected at a price that: (1) In
the case of any equity security, is within 10 percent of the closing
price for the security on the day before the date on which BlackRock
receives authorization from the independent Plan fiduciary to engage in
the cross-trade transaction; and (2) in the case of any debt security,
is within 10 percent of the fair market value of the security on the
last valuation date preceding the date on which BlackRock receives
authorization by the independent Plan fiduciary to engage in the cross-
trade transaction as [[Page 30112]] determined in accordance with SEC
Rule 17a-7(b) of the 1940 Act;
(c) The securities involved in the cross-trade transaction are
those for which there is a generally recognized market;
(d) The cross-trade transaction is effected only where the trade
involves less than five (5) percent of the aggregate average daily
trading volume of the securities which are the subject of the
transaction for the week immediately preceding the authorization of the
transaction. A cross-trade transaction may exceed this limit only by
express authorization of independent fiduciaries on behalf of Plans
affected by the transaction, prior to the execution of the cross-trade.
4. For all accounts participating in the cross-trading program, if
the number of units of a particular security which any accounts need to
sell on a given day is less than the number of units of such security
which any accounts need to buy, or vice versa, the direct cross-trade
opportunity must be allocated among the buying or selling accounts on a
pro rata basis.
5. (a) BlackRock furnishes the authorizing Plan fiduciary at least
once every three months, and not later than 45 days following the
period to which it relates, a report disclosing: (i) a list of all
cross-trade transactions engaged in on behalf of the Plan; and (ii)
with respect to each cross-trade transaction, the prices at which the
securities involved in the transaction were traded on the date of such
transaction; and
(b) The authorizing Plan fiduciary is furnished with a summary of
the information required under this paragraph 4(a) at least once per
year. The summary must be furnished within 45 days after the end of the
period to which it relates, and must contain the following: (i) A
description of the total amount of Plan assets involved in cross-trade
transactions during the period; (ii) a description of BlackRock's
cross-trade practices, if such practices have changed materially during
the period covered by the summary; (iii) a statement that the Plan
fiduciary's authorization of cross-trade transactions may be terminated
upon receipt by BlackRock of the fiduciary's written notice to that
effect; and (iv) a statement that the Plan fiduciary's authorization of
the cross-trade transactions will continue in effect unless it is
terminated.
6. The cross-trade transaction does not involve assets of any Plan
established or maintained by BlackRock or any of its affiliates.
7. All Plans that participate in the cross-trade program have total
assets of at least $25 million.
8. BlackRock receives no fee or other compensation (other than its
agreed upon investment management fee) with respect to any cross-trade
transaction.
9. BlackRock is a discretionary investment manager with respect to
Plans participating in the cross-trade program.
10. For purposes of this proposed exemption:
(a) Cross-trade transaction means a purchase and sale of securities
between accounts for which BlackRock or an affiliate is acting as an
investment manager;
(b) Affiliate means any person directly or indirectly through one
or more intermediaries, controlling, controlled by, or under common
control with BlackRock;
(c) Plan Account means an account holding assets of one or more
employee benefit plans that are subject to the Act, for which BlackRock
acts as a fiduciary.

Summary of Facts and Representations

1. BlackRock is a Delaware limited partnership with its principal
office located in New York City. BlackRock Management Partners L.P.
(BMP) is the general partner of BlackRock. The partners of BlackRock
and BMP executed an agreement with PNC Bank on February 28, 1995,
whereby all of the interests in BlackRock and BMP were sold to a
wholly-owned subsidiary of PNC Bank, N.A. In this regard, BlackRock
continues to conduct its business in the same manner as it did prior to
the sale. BlackRock provides a broad range of financial services to a
variety of clients, including corporations, financial institutions,
registered investment companies and employee benefit plans. BlackRock
serves as investment manager for a substantial number of qualified
pension plans and currently has more than $24 billion of assets under
management.
2. With respect to the employee benefit plans that will participate
in the proposed cross-trading program (the Plans), BlackRock will be
acting as a discretionary investment manager. The Plan Accounts
maintained by BlackRock are all considered ``managed accounts'' under
which BlackRock and the sponsor or other named fiduciary of the
underlying Plan have agreed that the investment of the assets in
question will be managed actively at the discretion of BlackRock,
pursuant to written guidelines as to which types of securities to buy
or sell for the account.
Under the investment guidelines for many of the Plan Accounts,
BlackRock manages the assets in accordance with investment parameters
that are designed to invest the assets in various types of fixed-income
securities, such as mortgage-backed securities, U.S. Government
securities or corporate debt securities. BlackRock primarily manages
such Plan assets using duration management techniques with the
performance and composition of the assets for the Plan Account measured
against a specified benchmark, such as various Salomon Brothers, Lehman
Brothers or Merrill Lynch indices that are selected by the Plan sponsor
or other named fiduciary. The duration of the assets held by the Plan
Account will be comparable to the portfolio specified by the referenced
benchmark. BlackRock states that the objective factors contained in or
required by these investment parameters may not be changed or otherwise
altered without the prior written approval of the Plan sponsor or other
named fiduciary. The types of securities held in these accounts are
generally the same for each Plan Account that retains BlackRock for
purposes of managing such an account, although the specific mix of
securities varies depending on the investment objectives of the
particular Plan Account.
3. Securities sales and purchases for Plan Accounts may result from
either: (a) The active decision-making by BlackRock's account manager
relating to new investments for the Plan Account; or (b) a change in
the overall level of investment as a result of investments and
withdrawals made to the Plan Account by the Plan sponsor or other named
fiduciary requiring a rebalancing of the account with transactions
involving the Plan Account's existing securities. Under either of these
circumstances, BlackRock's disposition of a particular security for one
Plan Account may involve a security that is desirable for another Plan
Account, presenting an opportunity to save substantial dealer markups
for both the liquidating Plan Account and the acquiring Plan Account.
This saving could be effected by a cross-trade transaction, which
involves matching BlackRock's sell orders for a particular day with its
buy orders for the same day in nondealer transactions.
The execution of such cross-trades between various BlackRock
accounts could involve trades between Plan Accounts, or between Plan
Accounts and investment companies managed by BlackRock, or between Plan
Accounts and private institutional accounts managed by BlackRock. In
this regard, because BlackRock has special expertise in fixed-income
securities, registered [[Page 30113]] investment companies and
institutional accounts for which BlackRock or an affiliate serves as
the investment advisor also hold the same types of securities as the
Plan Accounts, although in different combinations based on their
particular investment objectives.
4. BlackRock proposes to take advantage of opportunities to
eliminate unnecessary third-party dealer markups by cross-trading
securities, whenever possible, directly between Plan Accounts or
directly between Plan Accounts and other client accounts. BlackRock
represents that comparable trades of such securities on the open market
between unrelated parties often require dealer markups equal to between
one-sixteenth to one percent of the price of the securities for each
sale or purchase transaction. BlackRock proposes to execute cross-trade
transactions on behalf of the Plan Accounts without charging any
commissions or receiving any dealer markups.
5. BlackRock represents that by participating in the cross-trading
program, the Plan Accounts will benefit by not incurring the cost, in
terms of price, of dealing with a person or firm acting as ``market-
maker'' for the particular security involved in the cross-trade
transaction. This cost is generally measured by the spread between the
bid and offer prices for the security which would be paid to the
market-maker. The Plan Accounts will also benefit under the cross-
trading program by avoiding false pricing differentials that result in
transactions with a market-maker where the securities in question are
traded in odd-lot sizes. For example, in the case of debt securities,
BlackRock states that both buyer and seller will benefit by cross-
trading because the securities involved will be priced either by
reference to the last sale price for the securities on the date of the
transaction or, if no transactions have occurred that day, by averaging
the spread between the highest independent bid and lowest independent
offer obtained from at least two independent dealers, in accordance
with SEC Rule 17a-7(b) of the 1940 Act (see Paragraph 10 below). Thus,
in situations where an average of the current bid/offer prices is used,
the seller will receive a higher price than the dealers' bid price and
the buyer will pay a lower price than the dealers' offer price, which
would not, in all instances, be the case in an open market transaction
or a transaction directly with a dealer. BlackRock states further that
where trading of a particular debt or equity security is ``thin'' (i.e.
limited number of securities available) or round lots are not
available, participation in the cross- trading program may enable the
Plan Accounts to obtain early opportunities to acquire or sell such
securities at favorable prices. Therefore, by participating in the
cross-trading program, BlackRock represents that the Plan Accounts will
incur substantially lower expenses for the particular transactions and
will be better able to effect purchase and sale transactions.
6. BlackRock makes decisions regarding which securities to purchase
or sell for client accounts considering all of the relevant facts and
circumstances, including the composition of the portfolios and the
liquidity requirements of the accounts. BlackRock states that such
decisions will not be influenced by the fact that an opportunity for a
cross-trade may be available. In this regard, BlackRock represents that
the matching of sale and purchase orders for its accounts on any
particular day will be largely automatic.
With respect to the allocation of cross-trade opportunities among
various accounts, including the Plan Accounts, BlackRock proposes to
use a non-discretionary pro-rata allocation system. For example, if the
number of units of a particular security that any accounts need to sell
on a given day is less than the number of units of such security which
other accounts need to buy on that date, the cross-trade opportunity
would be allocated among the buying accounts on a pro-rata basis. The
same procedure would apply where the number of units of a particular
security to be sold by various accounts is more than the number of
units of such security which other accounts need to buy on that date,
so that in such instances the cross-trade opportunity would be
allocated among the selling accounts on a pro-rata basis. Thus, all
accounts participating in BlackRock's cross-trading program, including
the Plan Accounts, will have opportunities to participate on a
proportional basis in cross-trade transactions during the operation of
the program. BlackRock represents that this aspect of the cross-trading
program will be part of the information disclosed in writing to the
fiduciaries of the Plan Accounts prior to their authorization for
participation in the program (as discussed further below).
7. Under the requested exemption, only Plans with at least $25
million in total assets will be eligible to participate in the cross-
trading program. A Plan fiduciary that is independent of BlackRock must
provide written authorization allowing the Plan's participation in the
program before any specific cross-trade transactions can be executed
for such Plan. This authorization will be terminable at will upon
written notice by the appropriate independent Plan fiduciary. BlackRock
will receive no fee or other compensation (other than its agreed upon
investment management fee) with respect to any cross-trade transaction.
Thus, a Plan will not pay any separate fees to BlackRock for cross-
trading services. No penalty or other charge will be made as a result
of the termination of a Plan's participation in the cross-trading
program. In addition, before any authorization is made by a Plan for
participation in the cross-trading program, BlackRock must provide the
authorizing Plan fiduciary with all materials necessary to permit an
evaluation of the program. These materials will include a copy of the
proposed exemption and final exemption, if granted, an explanation of
how the authorization may be terminated, a description of BlackRock's
cross-trading practices, and any other available information that the
authorizing Plan fiduciary may reasonably request.
8. In addition to requiring a general authorization of a Plan's
participation in BlackRock's cross-trading program, an independent
fiduciary of each Plan must specifically authorize each cross-trade
transaction. Any such authorization will be effective only for a period
of three (3) business days and will be subject to certain pricing
limitations (as discussed below in Paragraph 10). The authorization to
proceed with the transaction may be either oral or written. If a cross-
trade transaction is authorized orally by an independent fiduciary,
BlackRock will provide a written confirmation of such authorization in
a manner reasonably calculated to be received by the independent
fiduciary within one (1) business day from the date of the
authorization. The Plan fiduciary will be sent a written confirmation
of the cross-trade, including the price at which it was executed,
within ten (10) days of the completion of the transaction.
9. BlackRock will provide the authorizing Plan fiduciary with a
report, at least once every three (3) months and not later than forty-
five (45) days following the period to which it relates, that sets
forth: (a) A list of all the cross-trade transactions conducted on
behalf of the Plan Account during the previous period; and (b) with
respect to each cross-trade transaction, the prices at which the
subject securities were traded on the date of the transaction. Each
Plan fiduciary will also be provided with a summary of the quarterly
reports, at least once a year and not later than 45 days after the end
of the period to which [[Page 30114]] it relates, that includes: (a) A
description of the total amount of Plan assets involved in cross-trade
transactions completed during the year; (b) a statement that the Plan
fiduciary's authorization to participate in the cross-trading program
can be terminated without penalty upon BlackRock's receipt of a written
notice to that effect; (c) a statement that the fiduciary's
authorization of the Plan's participation in the program will continue
unless it is terminated; and (d) a description of any material change
in BlackRock's cross-trade practices during the period covered by the
summary. These reports will provide the Plan fiduciaries with a
mechanism for monitoring the operation of the cross-trade program. The
applicant represents that the authorization of each cross-trade will
prevent BlackRock from favoring one account at the expense of another
in the cross-trade transaction.
10. The securities involved in any cross-trade transaction will be
only those for which there is a generally recognized market. BlackRock
represents that each cross-trade transaction will be effected at the
current market value for the securities on the date of the transaction.
For all equity securities, the current market value shall be the
closing price for the security on the date of the transaction. For all
debt securities, the current market value shall be the fair market
value of the security as determined on the date of the transaction in
accordance with SEC Rule 17a-7 under the 1940 Act. In this regard, SEC
Rule 17a-7(b) contains four possible means of determining ``current
market value'' depending on such factors as whether the security is a
reported security and whether its principal market is an exchange. This
Rule is also applicable to registered investment companies for which
BlackRock acts as an investment advisor.
In addition, BlackRock states that each cross-trade transaction
will be effected at a price that: (a) In the case of any equity
security, is within 10 percent of the closing price for the security on
the day before the date on which BlackRock receives authorization from
the independent Plan fiduciary to engage in the cross-trade
transaction; and (b) in the case of any debt security, is within 10
percent of the fair market value of the security on the last valuation
date preceding the date on which BlackRock receives authorization by
the independent Plan fiduciary to engage in the cross-trade
transaction. This safeguard prevents BlackRock from effecting cross-
trades at prices that were not contemplated at the time the independent
fiduciary authorized the transaction.
Finally, each cross-trade transaction will be effected only where
the trade involves less than five (5) percent of the aggregate average
daily trading volume of the securities which are the subject of the
transaction for the week immediately preceding the authorization of the
transaction. BlackRock states that a particular cross-trade transaction
may exceed this limit only by express authorization of independent
fiduciaries on behalf of Plans affected by the transaction, prior to
the execution of the cross-trade.
11. In summary, the applicant represents that the proposed
transactions will satisfy the statutory criteria of section 408(a) of
the Act because, among other things: (a) An independent Plan fiduciary
must provide written authorization, terminable at will and without
penalty, for each Plan's participation in the cross-trading program;
(b) oral or written authorization must be provided by the independent
Plan fiduciary to BlackRock prior to each cross-trade transaction; (c)
all cross-trades will be executed at the current market price for the
security on the date of the transaction, as determined by an
independent third party source; (d) a cross-trade transaction will be
effected only if certain price requirements are satisfied; (e) all
securities involved in cross-trades will be ones for which there is a
generally recognized market; (f) BlackRock will receive no commissions
or additional fees as a result of the proposed cross-trades; (g)
BlackRock will provide periodic reporting on cross-trade transactions
to the participating Plan's independent fiduciary; (h) Plans
participating in the cross-trading program will realize savings on
their transactions due to the elimination of brokerage commissions,
transaction fees and dealer markups; (i) the Plans participating in the
cross-trading program will have assets of at least $25 million; and (j)
the Plans participating in the cross-trading program will not include
any employee benefit plan established or maintained by BlackRock or its
affiliates.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.

Signed at Washington, DC, this 2nd day of June, 1995.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-13910 Filed 6-6-95; 8:45 am]
BILLING CODE 4510-29-P

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-13910. Public record. Not legal advice.