Proposed Exemptions; Fidelity Management Trust Company (FMTC) and its Affiliates, et al

SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

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

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

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

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

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

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

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

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

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

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

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

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

Department of Labor, 200 Constitution Avenue, 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.

Fidelity Management Trust Company (FMTC) and its Affiliates

(collectively, Fidelity) Located in Boston, Massachusetts; Proposed

Exemption

[Application No. D-09500]

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).

Section I--Exemption for Payment of Certain Fees to Fidelity

The restrictions of section 406(b)(1) and (b)(2) of the Act and the

taxes imposed by section 4975 of the Code, by reason of section

4975(c)(1)(E) of the Code, shall not apply to the payment of certain

performance fees (the Performance Fee) to Fidelity by employee benefit

plans for which Fidelity provides investment management or

discretionary trustee services (the Client Plans) pursuant to an

investment management or trust agreement (the Agreement) entered into

between Fidelity and the Client Plans either individually, through the

establishment of a single client separate account (Single Client

Account), or collectively as participants in a multiple client

commingled account (Multiple Client Account), provided that the

conditions set forth below in Section III are satisfied. (Single Client

Accounts and Multiple Client Accounts are collectively referred to

herein as Accounts.)

Section II--Exemption for Investments in a Multiple Client Account

The restrictions of section 406(a)(1)(A) through (D) of the Act and

the taxes imposed by section 4975 of the Code, by reason of section

4975(c)(1)(A) through (D) of the Code, shall not apply to any

investment by a Client Plan in a Multiple Client Account managed by

Fidelity, provided that the conditions set forth below in Section III

are satisfied.

Section III--General Conditions

(a) The investment of plan assets in a Single or Multiple Client

Account, including the terms and payment of any Performance Fee, shall

be approved in writing by a fiduciary of a Client Plan which is

independent of Fidelity (the Independent Fiduciary). Notwithstanding

the foregoing, Fidelity may authorize the transfer of cash from a

Single Client Account to a Multiple Client Account provided that: (1)

The Multiple Client Account has similar investment objectives and the

identical fee structure as the Single Client Account; (2) the Agreement

governing the Single Client Account authorizes Fidelity to invest in a

Multiple Client Account; (3) Fidelity receives no additional fees from

the Single Client Account for cash invested in the Multiple Client

Account; (4) a binding commitment to make the transfer to the Multiple

Client Account occurs within six months of the Independent Fiduciary's

decision to allocate assets to the Single Client Account or, in the

event Fidelity's binding commitment to make the transfer occurs more

than six months after such fiduciary's decision, Fidelity obtains an

additional authorization from the Independent Fiduciary; and (5) each

transfer of assets from the Single Client Account to the Multiple

Client Account occurs within sixty (60) days of the actual transfer of

such assets to the Single Client Account.

(b) The terms of any investment in an Account and of any

Performance Fee shall be at least as favorable to the Client Plans as

those obtainable in arm's-length transactions between unrelated

parties.

(c) At the time any Account is established and at the time of any

subsequent investment of assets (including the reinvestment of assets)

in such Account: [[Page 31502]]

(1) Each Client Plan shall have total net assets with a value in

excess of $50 million; and

(2) No Client Plan shall invest, in the aggregate, more than five

percent (5%) of its total assets in any Account or more than ten

percent (10%) of its assets in all Accounts established by Fidelity.

(d) Prior to making an investment in any Account, the Independent

Fiduciary of each Client Plan investing in an Account shall receive

offering materials from Fidelity which disclose all material facts

concerning the purpose, structure, and operation of the Account,

including any fee arrangements.

(e) With respect to its ongoing participation in an Account, the

Independent Fiduciary of each Client Plan shall receive the following

written information from Fidelity:

(1) Audited financial statements of the Account prepared by

independent public accountants selected by Fidelity no later than

ninety (90) days after the end of the fiscal year of the Account;

(2) Quarterly and annual reports prepared by Fidelity relating to

the overall financial position of the Account and, in the case of a

Multiple Client Account, the value of such Client Plan's interest in

the Account. Each such report shall include a statement regarding the

amount of fees paid to Fidelity during the period covered by such

report;

(3) Annual reports indicating the fair market value of the

Account's assets determined using market sources and valuation

methodologies acceptable to the Independent Fiduciary of the Client

Plan for a Single Client Account or the responsible independent

fiduciaries of Client Plans and other authorized persons acting for

investors in a Multiple Client Account (the Responsible Independent

Fiduciaries, as defined in Section IV(c) below), or if market sources

are not available, values determined by a qualified appraiser

independent of Fidelity which has been approved by the Independent

Fiduciary or Responsible Independent Fiduciaries. However, no

independent appraisals shall be required for assets acquired for the

Account within the twelve (12) months preceding the end of the period

covered by the report, unless such appraisals are necessary for

purposes of determining any compensation due to Fidelity based on the

value of the assets in the Account for that period; and

(4) In the case of any Multiple Client Account, a list of all other

investors in the Account.

(f) The total fees paid to Fidelity shall constitute no more than

reasonable compensation.

(g) The Performance Fee shall be payable after the Client Plan has

received distributions from the Account in excess of an amount equal to

100% of its invested capital plus a pre-specified annual compounded

cumulative rate of return (the Threshold Amount), except that in the

case of Fidelity's removal or resignation, Fidelity shall be entitled

to receive a Performance Fee payable either at the time of removal, or

in the event of Fidelity's resignation, on the scheduled termination

date of the Account, subject to the requirements of paragraph (j)

below, as determined by a deemed distribution of the assets of the

Account based on an assumed sale of such assets at their fair market

value (in accordance with market sources or independent appraisals as

described in paragraph (k) below), only to the extent that the Client

Plan would receive distributions from the Account in excess of an

amount equal to the Threshold Amount at the time of Fidelity's removal

or resignation. Both the Threshold Amount and the amount of the

Performance Fee, expressed as a percentage of the amount distributed

(or deemed distributed) from the Account in excess of the Threshold

Amount, shall be established by the Agreement and agreed to by the

Independent Fiduciary of the Client Plan.

(h) The Threshold Amount for any Performance Fee shall include at

least a minimum rate of return to the Client Plan, as defined below in

Section IV(d). The Independent Fiduciary acting for a Client Plan shall

specifically agree in writing with Fidelity, prior to any investment in

the Account, that it would be appropriate for the minimum rate of

return applicable to the Account to be based upon the rate of change in

the consumer price index (CPI) during the period specified in the

Agreement, as described in Section IV(d).

(i) For any sale of an asset in an Account which shall give rise to

the payment of a Performance Fee to Fidelity prior to the termination

of the Account, the sale price of the asset shall be at least equal to

a target amount (the Target Amount), as defined in Section IV(e), in

order for Fidelity to sell the asset and receive its Performance Fee

without further approvals. If the proposed sale price of the asset is

less than the Target Amount, the proposed sale shall be disclosed to

and approved by the Independent Fiduciary for a Single Client Account

or the Responsible Independent Fiduciaries for a Multiple Client

Account, in which event Fidelity will be entitled to sell the asset and

receive its Performance Fee. If the proposed sale price is less than

the Target Amount and the Independent Fiduciary's or Responsible

Independent Fiduciaries' approval is not obtained, Fidelity shall still

have the authority to sell the asset, if the Agreement provides

Fidelity with complete investment discretion for the Account, provided

that the Performance Fee that would have been payable to Fidelity by

reason of the sale of the asset is paid only at the termination of the

Account.

(j) In the event Fidelity resigns as investment manager or trustee

of an Account, the Performance Fee shall be calculated at the time of

resignation based upon a deemed distribution of the assets of the

Account at their fair market value (determined using market sources or

independent appraisals as described in paragraph (k) below). The amount

arrived at by this calculation shall be multiplied by a fraction, the

numerator of which shall be the sum of the disposition proceeds of all

assets in the Account received prior to the termination date plus the

fair market value of the assets remaining in the Account on the

termination date and the denominator of which shall be the aggregate

value of the assets in the Account used in determining the amount of

the Performance Fee as of the date of resignation, provided that this

fraction shall never exceed 1.0. The resulting amount shall be the

Performance Fee payable to Fidelity on the scheduled termination date

of the Account.

(k) With respect to the valuation of the assets in an Account for

purposes of determining any Performance Fee based on a deemed

distribution of such assets, Fidelity shall establish the fair market

value for the assets using market sources and valuation methodologies

disclosed to, and approved in writing by, the Independent Fiduciary for

a Single Client Account or the Responsible Independent Fiduciaries for

a Multiple Client Account. In the event market sources are not

available for the valuation of assets in the Account, the fair market

value of such assets shall be determined by an independent qualified

appraiser approved by either the Independent Fiduciary for a Single

Client Account or the Responsible Independent Fiduciaries for a

Multiple Client Account prior to any valuation of the assets. If a new

appraiser for an asset is chosen by Fidelity, the appraiser shall be

approved by such Fiduciaries prior to any valuation of the asset. In

any event, the fair market value of all assets involved in any deemed

distribution shall be based on the current market value of such assets

as of the date of the transactions giving rise to the payment of the

Performance Fee. [[Page 31503]]

(l) Fidelity shall maintain, for a period of six years, the records

necessary to enable the persons described in paragraph (m) of this

Section III to determine whether the conditions of this exemption have

been met, except that: (1) A prohibited transaction will not be

considered to have occurred if, due to circumstances beyond the control

of Fidelity, the records are lost or destroyed prior to the end of the

six year period, and (2) no party in interest, other than Fidelity,

shall be subject to the civil penalty that may be assessed under

section 502(i) of the Act or to the taxes imposed by section 4975(a)

and (b) of the Code if the records are not maintained or are not

available for examination as required by paragraph (m) below.

(m)(1) Except as provided in paragraph (m)(2) and notwithstanding

any provisions of sections 504(a)(2) and (b) of the Act, the records

referred to in paragraph (l) of this Section III shall be

unconditionally available at their customary location for examination

during normal business by:

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

(ii) Any fiduciary of a Client Plan or any duly authorized employee

or representative of such fiduciary;

(iii) Any contributing employer to any Client Plan or any duly

authorized employee or representative of such employer; and

(iv) Any participant or beneficiary of any Client Plan, or any duly

authorized employee or representative of such participant or

beneficiary.

(2) None of the persons described above in paragraph (m)(1)(ii)-

(iv) shall be authorized to examine the trade secrets of Fidelity or

any commercial or financial information which is privileged or

confidential.

Section IV--Definitions

(a) An ``affiliate'' of a person includes:

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

intermediaries, controlling, controlled by, or under common control

with the person;

(2) Any officer, director, employee, relative of, or partner of any

such person; and

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

officer, director, partner or employee.

(b) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(c) The term ``Responsible Independent Fiduciaries'' means with

respect to a Multiple Client Account the Independent Fiduciary of

Client Plans invested in the Account and other authorized persons

acting for investors in the Account which are not employee benefit

plans as defined under section 3(3) of the Act (such as governmental

plans, university endowment funds, etc.) that are independent of

Fidelity and that collectively hold at least 50% of the interests in

the Account.

(d) The term ``Threshold Amount'' means with respect to any

Performance Fee an amount which equals all of a Client Plan's capital

invested in an Account plus a pre-specified annual compounded

cumulative rate of return that is at least a minimum rate of return

determined as follows:

(1) A non-fixed rate which is at least equal to the rate of change

in the CPI during the period from the deposit of the Client Plan's

assets in the Account until distributions of the Client Plan's assets

from the Account equal or exceed the Threshold Amount; or

(2) A fixed rate which is at least equal to the average annual rate

of change in the CPI over some period of time specified in the

Agreement, which shall not exceed 10 years.

(e) The term ``Target Amount'' means a value assigned to each asset

in the Account established by Fidelity either (1) at the time the asset

is acquired, by mutual agreement between Fidelity and the Independent

Fiduciary for a Single Client Account or the Responsible Independent

Fiduciaries for a Multiple Client Account, or (2) pursuant to an

objective formula approved by such fiduciaries at the time the Account

is established. However, in no event will such value be less than the

acquisition price of the asset.

(f) The term ``Account'' means any Single Client Account or

Multiple Client Account established with Fidelity, under a written

investment management or trust agreement, that is invested primarily

(i.e. more than 50%) in securities or other assets which are not

publicly-traded equity securities or publicly-traded, investment grade

debt securities, pursuant to written instructions and guidelines

established and approved by an Independent Fiduciary for the Client

Plan prior to any investment by the Client Plan in the Account. For

purposes of an ``Account'' meeting the 50% test for assets which are

not ``publicly-traded equity securities'' or ``publicly-traded,

investment grade debt securities'', any private market securities held

by the Account that become publicly-traded securities shall not be

considered as such for a period of thirty (30) months following the

date such securities become publicly-traded so as to allow Fidelity

sufficient time to dispose of such securities in order for the Account

to remain primarily invested in assets which are not publicly-traded

securities, including for such purposes any publicly-traded debt

securities which are not investment grade.1

\1\As noted above in Section III(f), an Independent Fiduciary

must specifically agree in writing with Fidelity that it would be

appropriate for the minimum rate of return applicable to the Account

to be based upon the rate of change in the CPI during the period

specified in the Agreement. However, with respect to any Account

with an investment strategy designed to invest in distressed,

defaulted or other non-performing debt instruments that may be

publicly-traded securities at the time they are acquired by the

Account, the Department encourages Client Plan fiduciaries to

determine whether or not any of the published indices for publicly-

traded debt securities would be a more appropriate performance

benchmark to measure a minimum rate of return for such securities.

The availability of this exemption, if granted, will be subject to

the express condition that the material facts and representations

contained in the application are true and complete, and that the

application accurately describes all material terms of the transactions

which are the subject of this exemption.

Summary of Facts and Representations

1. FMTC is a Massachusetts trust company with its principal office

located in Boston, Massachusetts, and is a ``bank'' as defined under

the Investment Advisers Act of 1940. FMTC manages approximately $24

billion worth of assets for a variety of clients, virtually all of

which are employee benefit plans. FMTC's client accounts consist of

either separate accounts for a single client or commingled accounts for

multiple clients.

2. Fidelity will offer the investment arrangement described below

involving the payment of a Performance Fee to Client Plans that seek to

invest primarily in securities and have aggregate net plan assets with

a fair market value in excess of $50 million.2 Fidelity will serve

such Client Plans as the investment manager or discretionary trustee of

either a Single Client Account or a Multiple Client Account. In

general, Fidelity will have complete discretion for identifying

appropriate investments, making investment decisions, and managing and

disposing of the securities or other assets acquired for the Accounts.

However, with respect to certain Single Client Accounts, Fidelity will

not exercise absolute investment discretion and will be required to

obtain approval for certain investment [[Page 31504]] decisions from

the Independent Fiduciary of the Client Plan. Such approvals will

typically be obtained from the Client Plan sponsor or an investment

committee appointed by the Client Plan sponsor.

\2\In the case of multiple plans maintained by a single employer

or a single controlled group of employers, the assets of which are

invested on a commingled basis (e.g. through a master trust), this

$50 million threshold will be applied to the aggregate assets of all

such plans.

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3. Single Client Accounts will be established pursuant to

Agreements negotiated with the Independent Fiduciaries of the Client

Plans. The terms of Fidelity's compensation will be established in the

Agreements governing the Single Client Account and will be fully

disclosed to the Independent Fiduciary prior to the investment of

assets of the Client Plan in the Single Client Account. If agreed to by

the Independent Fiduciary, the compensation arrangement involving the

payment of the Performance Fee (as described in Item 5 below) will be

included in the Agreement.3 The term of each Account will be

predetermined in the Agreement and approved by the Independent

Fiduciary of the Client Plan (see Item 8 below).

\3\Section 404 of the Act requires, among other things, that a

plan fiduciary act prudently and solely in the interest of the

plan's participants and beneficiaries. Thus, the Department expects

a plan fiduciary, prior to entering into any performance- based

compensation arrangement with an investment manager, to fully

understand the risks and benefits associated with the compensation

formula following disclosure by the investment manager of all

relevant information pertaining to the proposed arrangement. In

addition, a plan fiduciary must be capable of periodically

monitoring the actions taken by the investment manager in the

performance of its duties and must consider, prior to entering into

the arrangement, whether such plan fiduciary is able to provide

oversight of the investment manager during the course of the

arrangement.

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A Multiple Client Account typically will be organized either as a

common law trust or a group trust as defined in IRS Revenue Ruling 81-

100 (as to which Fidelity would serve as discretionary trustee), or as

a limited partnership (as to which Fidelity would be general

partner).4 For any Multiple Client Account, various decisions

regarding the Account other than investment management decisions for

the Account (such as the initial decision to allocate Client Plan

assets to the Account, decisions with respect to the removal of

Fidelity or the termination of the Account) will be made by the

Responsible Independent Fiduciaries. Fidelity represents that in all

instances the Responsible Independent Fiduciaries will be acting for

Account investors that collectively hold at least 50% of the interests

in the Account. The exact percentage required for such decisions will

be specified in the governing documents of the Account.

\4\With respect to any Multiple Client Account organized by

Fidelity as a limited partnership, Fidelity represents that its

interest as a general partner will not exceed 1% of the aggregate

outstanding partnership interests of such limited partnership at any

time.

The decision to invest assets of a Client Plan in any Multiple

Client Account will be made by the Independent Fiduciary of such Client

Plan, based upon full written disclosure of the Performance Fee prior

to such investment. Notwithstanding the foregoing, Fidelity may

authorize the transfer of cash from a Single Client Account to a

Multiple Client Account where: (i) The Multiple Client Account has

similar investment objectives and the identical fee structure as the

Single Client Account; (ii) the Agreement governing the Single Client

Account authorizes Fidelity to invest in a Multiple Client Account;

(iii) Fidelity receives no additional fees from the Single Client

Account for cash invested in the Multiple Client Account; (iv) a

binding commitment to make the transfer to the Multiple Client Account

is made within six months of the Independent Fiduciary's decision to

allocate assets to the Single Client Account or, in the event

Fidelity's binding commitment to make the transfer occurs more than six

months after such fiduciary's decision, Fidelity obtains an additional

authorization from the Independent Fiduciary; and (v) each transfer of

assets from the Single Client Account to the Multiple Client Account

occurs within sixty (60) days of the actual transfer of such assets to

the Single Client Account. Fidelity represents that its commitment to

invest the cash would normally occur within six months of the

Independent Fiduciary's decision to allocate assets to the Single

Client Account. However, if more than six months has transpired since

the Independent Fiduciary's decision to invest the assets in the Single

Client Account, Fidelity will obtain an additional authorization from

such fiduciary. Such authorization will occur following written

disclosure to the Independent Fiduciary of Fidelity's binding

commitment to make a cash transfer to the Multiple Client Account which

will be deemed approved unless such fiduciary objects within a

reasonable time.

After a transfer of cash, the fee structure for the Multiple Client

Account will govern all fees received by Fidelity for such Client Plan

assets. The precise terms of Fidelity's compensation arrangement will

be established as part of the documents pursuant to which the Multiple

Client Account is organized and can be amended only with the

affirmative approval of the Responsible Independent Fiduciaries.

4. The applicant represents that, in general, the investment

objectives of each Account will be to obtain current income and/or

capital appreciation through investments primarily in various types of

private market securities and real estate related investments. Fidelity

represents that it offers a wide range of investment services and

utilizes a wide variety of investment approaches. While the bulk of

Fidelity's business entails investing Client Plan assets in publicly-

traded securities which are readily valued or easily liquidated, other

aspects of its investment business entail, at least in part, investing

Client Plan assets in non-publicly-traded securities and other

property.

Fidelity's objective with respect to the requested exemption is to

achieve sufficient flexibility to respond to client demands and

preferences for utilization of a Performance Fee arrangement of the

type described below. Fidelity believes that such a fee arrangement may

be attractive to Client Plans in situations involving Accounts which

are to be invested primarily (i.e. more than 50%) in certain types of

assets other than publicly-traded equity securities or publicly-traded,

investment grade debt securities. For purposes of an Account meeting

the 50% test for assets which are not ``publicly-traded equity

securities'' or ``publicly-traded, investment grade debt securities'',

any private market securities held by the Account that become publicly-

traded securities shall not be considered as such for a period of

thirty (30) months following the date such securities become publicly-

traded so as to allow Fidelity sufficient time to dispose of such

securities in order for the Account to remain primarily invested in

assets which are not publicly-traded securities, including for such

purposes any publicly-traded debt securities which are not investment

grade.5

\5\The Department notes that a ``publicly-traded security''

would include any security that is a ``publicly-offered security''

as described in the Department's regulations relating to the

definition of ``plan assets'' in the context of certain plan

investments (see 29 CFR 2510.3-101(b) (2)-(4)).

An Account could entail a wide range of types of investments,

including privately placed debt and equity securities, high-yield fixed

income securities, publicly-traded debt securities issued by distressed

companies, partnership interests in venture capital operating

companies, various real estate or real estate-related interests, and

other ``alternative investments'' which have greater risk but

potentially greater returns than traditional classes of equity or debt

[[Page 31505]] securities.6 Fidelity states that it would not

necessarily enter into a Performance Fee arrangement for all Accounts

which are invested in the these types of assets. However, Fidelity

wishes to have the opportunity to do so in circumstances where an

Independent Fiduciary has specifically approved the particular

investment objectives and fee arrangements for the Account, as being

appropriate for the payment of such a Performance Fee. The Accounts may

be designed as either ``blind'' accounts for which Fidelity will select

the investments after the Client Plans have invested therein or ``pre-

identified asset'' accounts for which Fidelity identifies particular

securities or other assets for investment prior to the Client Plans'

investments in the Accounts.

\6\In this regard, Fidelity represents that an Account will not

invest in or use any swap transactions (including caps, floors,

collars, or options relating thereto), forward contracts, exchanged-

traded futures transactions, or options (other than covered call

options). The Department notes that no relief is being provided in

this proposed exemption for any underlying investments made by an

Account which may involve parties in interest with respect to the

Client Plans invested in the Account.

In addition, the Department is expressing no opinion as to

whether the investment of ``plan assets'' by an Account in any

particular type of asset would violate any provision of Part 4 of

Title I of the Act. Thus, the Department is not providing an opinion

regarding whether any particular category of investments or

investment strategy would be considered prudent or in the best

interests of a Client Plan as required by section 404 of the Act.

However, the Department notes that in order to act prudently in

making investment decisions, plan fiduciaries must consider, among

other factors, the availability, risks and potential return of

alternative investments for the plan. A particular investment by a

plan, which is selected in preference to other available

investments, would generally not be prudent if such investment

involves a greater risk to the security of ``plan assets'' than

other comparable investments offering a similar return.

The Department notes further that Client Plan fiduciaries must

thoroughly understand the risks involved with any investment course

of action and must be capable of monitoring at appropriate intervals

the investment course of action taken by Fidelity, particularly with

respect to any period when the payment of a Performance Fee to

Fidelity would be applicable. In this regard, section 405(a) of the

Act states, among other things, that a plan fiduciary shall be

liable for a breach of fiduciary responsibility of another fiduciary

for the same plan if, by his failure to comply with section

404(a)(1) in the administration of his specific duties which give

rise to his status as a fiduciary, he has enabled such other

fiduciary to commit a breach.

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5. Fidelity proposes to have the Client Plans pay for investment

management or discretionary trustee services rendered to the Accounts

based upon a two-part fee structure which will be approved in advance

by the Independent Fiduciaries of the Client Plans. In addition to an

on-going investment management or trustee fee (the Base Fee) paid to

Fidelity by the Client Plan, the fee structure may include the

Performance Fee, a fee payable upon a distribution (or deemed

distribution) of the assets from the Account after the Client Plan has

received (or would receive) a return of all its invested capital plus a

certain pre-specified rate of return on its investments in the Account.

Fidelity requests an exemption for the payment by Client Plans of the

Performance Fee under circumstances described below.

With respect to the Base Fee, such fee will be paid throughout the

term of the Account on a pre-specified periodic basis. The amount of

the Base Fee will be based on either (i) a percentage of the net fair

market value of the Client Plan assets in the Account (i.e. without

regard to any leveraged amounts) as of the last day of each period or

(ii) a percentage of the assets allocated to the Account (i.e. the

invested capital) less any amounts thereof which have been distributed

from the Account. In either event, the Base Fee will be pro-rated for

any partial periods. The exact percentage to be used in determining the

Base Fee will be negotiated between Fidelity and the Independent

Fiduciary of the Client Plan prior to the initial investment of any

Plan assets in the Account.

If the Base Fee is calculated based upon the fair market value of

the assets in the Account as of a specified determination date, the fee

will be based upon values determined using market sources approved in

writing by the Independent Fiduciary of the Client Plan (or specified

in the documents establishing the Account, in the case of a Multiple

Client Account).7 If market sources are not available, the fee

will be based upon values determined immediately prior to the payment

of such fee by an appraiser independent of Fidelity. For any appraisal

used to determine the Base Fee, Fidelity will initially notify in

writing the Independent Fiduciary for a Single Client Account or the

Responsible Independent Fiduciaries for a Multiple Client Account

regarding the identity of the appraiser whom Fidelity proposes to

retain to value the asset. The Independent Fiduciary or the Responsible

Independent Fiduciaries will have an opportunity to approve or

disapprove the suggested appraiser with an approval being deemed to

have occurred unless such fiduciaries object to the appraiser within a

reasonable time. Once approved, the appraiser could perform all future

valuations of the particular asset unless either (i) the Independent

Fiduciary or Responsible Independent Fiduciaries affirmatively withdraw

the prior approval of the appraiser, or (ii) Fidelity suggests a

different appraiser, in which case an approval by such fiduciaries

would again be required.

\7\Fidelity states that in instances where the Base Fee is

determined based on the amount of capital invested in the Account,

rather than on the value of the assets in the Account, no such

market valuations will be utilized to determine the Base Fee. Thus,

the independent valuation requirements discussed herein, including

any independent appraisal of assets in an Account, will be limited

to situations where such valuations are used to calculate either the

Base Fee or the Performance Fee.

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In lieu of the Base Fee described above, Fidelity and the

Independent Fiduciaries of the Client Plans may agree to an alternative

fee arrangement for an Account (the Alternative Fee) which is based

upon either a fixed amount or amounts or an objective formula to be

negotiated (in either case) between Fidelity and the Independent

Fiduciary of the Client Plan prior to the initial investment of any

Client Plan assets in the Account. Neither the Base Fee nor any such

Alternative Fees will be covered by the requested exemption.8

\8\Fidelity represents that both the Base Fee and the

Alternative Fee would be covered by section 408(b)(2) of the Act and

the regulations thereunder (see 29 CFR 2550.408b-2). However, the

Department expresses no opinion as to whether the payment of such

fees, as described herein, would meet the conditions of section

408(b)(2) of the Act.

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The Performance Fee will be payable either (i) after the Client

Plan has actually received distributions from the Account, or (ii) in

the case of the removal or resignation of Fidelity, based on deemed

distributions from the Account (as discussed in Item 7 below), which in

each case must be at least equal to such Plan's invested capital plus a

pre-specified annual compounded cumulative rate of return (i.e. the

Threshold Amount). The Performance Fee will be equal to a fixed

percentage (or several fixed percentages) of all amounts distributed

from an Account in excess of the Threshold Amount (or several Threshold

Amounts). In this regard, Fidelity represents that there is a

possibility that several Threshold Amounts may be established with

different percentages being utilized to determine the Performance Fee

depending upon which Threshold Amount has been exceeded.9 Fidelity

states that this structure will allow a Client Plan to negotiate an

arrangement pursuant to which the [[Page 31506]] amount of the

Performance Fee will increase as the level of investment performance

increases. Both the annual rate(s) of return used in determining the

Threshold Amount(s) and the percentage(s) used to determine the amount

of the Performance Fee will be negotiated between, and agreed to by,

Fidelity and the Independent Fiduciary of the Client Plan prior to the

Client Plan's initial investment in the Account.

\9\For example, a Client Plan could negotiate a Performance Fee

whereby Fidelity would receive 10% of all distributions from the

Account once an initial Threshold Amount (e.g. return of all

invested capital plus an 8% annual return) has been achieved and 20%

of all distributions once a second Threshold Amount (e.g. return of

all invested capital plus a 12% annual return) has been achieved.

With respect to the determination of the Threshold Amount, Fidelity

represents that all amounts invested by a Client Plan in an Account

will have to earn a pre-specified rate of return, which is at least

equal to the minimum rate of return specified in Section IV(d)

above,10 for the entire period such assets are in the Account and

must actually be distributed (or deemed distributed) back to the Client

Plan in order for the Threshold Amount to be reached. Fidelity states

that a bookkeeping account will be maintained for each Client Plan

which will show the amount required to be distributed from the Account

to satisfy the Threshold Amount. When a certain amount is invested in

the Account on a particular date, this bookkeeping account will be

reduced by the full amount of the distribution. Thereafter, the

required return will be added to this reduced amount until the next

distribution is made when the bookkeeping account will be reduced to

reflect the amount of that distribution. Only when this bookkeeping

account is reduced to zero will the Threshold Amount be satisfied. At

this time, the Performance Fee will be payable to Fidelity on all

further distributions (or any deemed distribution) from the Account.

\10\Fidelity represents that the Independent Fiduciary acting

for a Client Plan shall specifically agree in writing with Fidelity,

prior to any investment in the Account, that it would be appropriate

for the performance benchmark used to measure the minimum rate of

return applicable to the Account to be based upon the rate of change

in the CPI over the period specified in the Agreement. However, the

Department notes that a Client Plan fiduciary should thoroughly

scrutinize the performance objectives for the Account prior to

agreeing with Fidelity that such a performance benchmark is

appropriate to measure the required minimum rate of return. In this

regard, the Department encourages Client Plan fiduciaries to analyze

whether any performance benchmarks other than a minimum rate of

return based on changes in the CPI, such as an index of publicly-

traded equity or debt securities, would be more appropriate to

measure the Account's performance.

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Fidelity states that for any sale of an asset in an Account which

causes the payment of a Performance Fee and which occurs prior to the

termination of the Account, the sale price for the asset must be at

least equal to a Target Amount (as defined in Section IV(e) above), in

order for Fidelity to be able to sell the asset and receive its

Performance Fee without any further approvals. The Target Amount will

be established by Fidelity either at the time the asset is acquired, by

mutual agreement between Fidelity and the Independent Fiduciary for a

Single Client Account or the Responsible Independent Fiduciaries for a

Multiple Client Account, or pursuant to a formula approved by such

fiduciaries at the time the Account is established. If the proposed

sale price of the asset is less than the Target Amount, the proposed

sale will be disclosed to the Independent Fiduciary or Responsible

Independent Fiduciaries for approval in order for Fidelity to receive

its Performance Fee as a result of the sale. Such approval will be

deemed to have occurred unless the Independent Fiduciary or Responsible

Independent Fiduciaries object to the sale within a reasonable time

after notice of the proposed transaction. If the proposed sale price is

less than the Target Amount and the Independent Fiduciary's or

Responsible Independent Fiduciaries' approval is not obtained, Fidelity

will still have the authority to sell the asset in situations where the

Agreement provides Fidelity with complete investment discretion for the

Account. However, in such instances and in all other circumstances

where the sale price is less than the Target Amount and the Independent

Fiduciary's or Responsible Independent Fiduciaries' approval is not

obtained, the Performance Fee which would have been payable to Fidelity

by reason of the sale of such asset will be paid only at the

termination of the Account. In this regard, Fidelity states that any

Performance Fee which is not paid currently to Fidelity because of the

Target Amount rule will be segregated within the Account and invested

until the termination of the Account with Fidelity to receive any

income (or loss) earned by such investment.

6. All realized income, and proceeds from the sale of the assets of

the Account, net of expenses (including reasonable reserves), will be

either (i) distributed from the Account to the applicable investors in

such Account, including Client Plan(s), or (ii) if the documents

pursuant to which the Account is maintained so provide, reinvested

until a specified date, with any income and proceeds (net of expenses,

including reasonable reserves) of the Account after such date to be

distributed to the applicable investors. All distributions from the

Account shall be included in calculating whether the Threshold Amount

has been reached. Only actual distributions from an Account, and not

any amounts reinvested as described above, will be included in

calculating whether the Threshold Amount has been reached for purposes

of the payment of the Performance Fee.

7. Fidelity may be removed as investment manager or trustee for an

Account at any time, without cause, upon the delivery of a notice of

removal to Fidelity by the Independent Fiduciary for a Single Client

Account or by the Responsible Independent Fiduciaries of a Multiple

Client Account. Fidelity may resign as investment manager or trustee of

an Account at any time, without cause, upon written notice to the

Independent Fiduciary for a Single Client Account or the Responsible

Independent Fiduciaries for a Multiple Client Account.

With respect to a Single Client Account, such removal or

resignation will not become effective until a successor investment

manager or trustee is appointed by the Independent Fiduciary for the

Account.

With respect to a Multiple Client Account, the removal of Fidelity

will become effective when either: (i) A successor investment manager

or trustee is appointed by the Responsible Independent Fiduciaries; or

(ii) sixty (60) days (or such greater number of days as may be

specified by the Responsible Independent Fiduciaries) elapse, whichever

is sooner. Any resignation by Fidelity for a Multiple Client Account

will become effective when either: (i) A successor investment manager

or trustee is appointed by the Responsible Independent Fiduciaries; or

(ii) 180 days elapse, whichever is sooner.

Upon removal of Fidelity as investment manager or trustee, Fidelity

will be entitled to receive a Performance Fee if the Client Plans would

receive distributions from the Account in excess of an amount equal to

the Threshold Amount at the time of Fidelity's removal. Such

Performance Fee will be determined by a deemed distribution of the

assets of the Account based on an assumed sale of such assets at their

fair market value using market sources approved by the Independent

Fiduciary of the Client Plan (or specified in the documents

establishing the Account, in the case of a Multiple Client Account). If

market sources are not available, the fair market value of the assets

will be determined by an independent appraiser mutually agreed upon by

Fidelity and the Independent Fiduciary of each Client Plan in the case

of a Single Client Account or the [[Page 31507]] Responsible

Independent Fiduciaries in the case of a Multiple Client Account. If

Fidelity and such fiduciaries cannot agree on an appraiser, then the

fair market value of such assets will be equal to the average of the

two closest appraisals generated by three independent appraisers--one

selected by Fidelity, one selected by such fiduciaries, and the third

selected by the two appraisers chosen by the parties.

Upon Fidelity's resignation as investment manager or trustee,

Fidelity will not receive a Performance Fee until the scheduled

termination date for the Account. The amount of the Performance Fee

will be based upon a deemed distribution of the assets of the Account

at their fair market value at the time of Fidelity's resignation, as

determined using market sources approved by the Independent Fiduciary

of the Client Plan (or specified in the documents establishing the

Account, in the case of a Multiple Client Account). If such market

sources are not available, the fair market value of the assets will be

determined by an independent appraiser mutually agreed to by Fidelity

and the Independent Fiduciary of the Client Plan in the case of a

Single Client Account or the Responsible Independent Fiduciaries in the

case of a Multiple Client Account. However, if Fidelity and such

fiduciaries cannot agree on an appraiser, the procedure described above

will be followed.

The Performance Fee will be calculated at the time of resignation

based upon the total value of the assets in the Account. The amount of

the Performance Fee for such assets will be multiplied by a fraction,

the numerator of which will be the sum of the disposition proceeds of

all assets in the Account received prior to the termination date plus

the fair market value of the assets remaining in the Account on the

termination date and the denominator of which will be the aggregate

value of the assets in the Account used in determining the amount of

the Performance Fee as of the date of resignation, provided that this

fraction will never exceed 1.0. The resulting amount will be the

Performance Fee payable to Fidelity on the scheduled termination date

of the Account. Thus, even if the value of the assets declines after

Fidelity's resignation, Fidelity will still receive the Performance Fee

for the period of time that it acted as an investment manager or

discretionary trustee for the Account if the Client Plans would have

received distributions from the Account in excess of an amount equal to

the Threshold Amount at the time of Fidelity's resignation, subject to

the operation of the fraction discussed above. The fraction ensures

that an appropriate reduction in the Performance Fee will be made upon

termination of the Account if the value of the assets in the Account

declines after Fidelity resigns as the investment manager or

discretionary trustee of the Account, based on the valuation of such

assets at the time of resignation.

8. A Single Client Account will terminate upon expiration of the

period of years specified as the term for the Account in the Agreement

or upon the removal or resignation of Fidelity. However, the period of

years specified in the Agreement may be extended by the Independent

Fiduciary of the Client Plan. In addition, a Single Client Account may

be terminated at any time by the Independent Fiduciary upon ninety (90)

days written notice to Fidelity.

A Multiple Client Account will terminate upon the occurrence of any

of the following events: (i) The affirmative decision of the

Responsible Independent Fiduciaries; (ii) the failure of the

Responsible Independent Fiduciaries to appoint a successor investment

manager or trustee; (iii) expiration of the period of years specified

as the term of the Account in the Agreement, provided that the period

of years is not extended by the Responsible Independent Fiduciaries;

(iv) the distribution of all assets of the Account; or (v) such other

circumstances as may be specified in the documents governing the

Accounts.

Upon termination of a Single Client Account, the assets in the

Account will be distributed to the Client Plan in cash or in kind as

agreed to by Fidelity and the Independent Fiduciary. In case of a

Multiple Client Account, such distributions (i.e., cash or in-kind)

will be agreed to by Fidelity and the Responsible Independent

Fiduciaries for the Account.

Fidelity will be entitled to the Performance Fee upon termination

of the Account for all remaining distributions made from the Account if

the Threshold Amount has been or would be reached at such time. In the

case of an in kind distribution of assets of the Account, the

Performance Fee will be based on the fair market value of the assets of

the Account as determined using market sources approved by the

Independent Fiduciary of the Client Plan (or specified in the documents

establishing the Account, in the case of a Multiple Client Account). If

market sources are unavailable, the fair market value of the assets

will be determined by an independent appraiser mutually agreed to by

Fidelity and the Independent Fiduciary of the Client Plan in the case

of a Single Client Account or the Responsible Independent Fiduciaries

in the case of a Multiple Client Account. If Fidelity and such

fiduciaries cannot agree on an appraiser, then the same procedure

described in Item 7 above will be followed.

9. Each Client Plan will receive throughout the term of an Account

the following information:

(a) Quarterly and annual reports prepared by Fidelity relating to

the overall financial position of the Account and, in the case of a

Multiple Client Account, the balance of such Client Plan's interest in

the Account. In addition, such reports will include a statement

regarding the amount of all fees paid to Fidelity during the period

covered by the report.

(b) Annual reports indicating the current fair market value of all

assets in the Account as established by using market sources or

independent appraisals (provided that no such appraisals will be

required for assets acquired for the Account within twelve (12) months

preceding the end of the period covered by the report unless such

appraisals are necessary for purposes of determining any compensation

due to Fidelity based on the value of the assets in the Account for

that period).

(c) In the case of a Multiple Client Account, a list of the

investors in the Multiple Client Account.

(d) Audited financial statements prepared by independent public

accountants selected by Fidelity, within ninety (90) days of the end of

the Account fiscal year.

The Independent Fiduciary for the Client Plan, as well as other

authorized persons described above in paragraph (m)(1) of Section III,

will have access during normal business hours to Fidelity's records for

the Accounts in which the Client Plan has an interest.

10. In summary, the applicant represents that the proposed

transactions satisfy the statutory criteria of section 408(a) of the

Act because, among other things:

(a) Each investment in any Account will be authorized in writing by

an Independent Fiduciary of a Client Plan;

(b) No Client Plan may establish a Single Client Account or invest

in a Multiple Client Account unless the Client Plan has total net

assets with a value in excess of $50 million. In addition, a Client

Plan may not invest, in the aggregate, more than five percent (5%) of

its total assets in any one Account or more than ten percent (10%)

[[Page 31508]] of its total assets in all Accounts established by

Fidelity;

(c) Prior to making an investment in any Account, an Independent

Fiduciary for each Client Plan will receive offering materials

disclosing all material facts concerning the purpose, structure and

operation of the Account, including any fee arrangements;

(d) Fidelity will provide each Independent Fiduciary of a Client

Plan with periodic written disclosures with respect to the financial

condition of the Account, the fees paid to Fidelity, the balance of

each Client Plan's interest in the Account, the fair market value of

the Account's assets using market sources or independent appraisals

approved by the Independent Fiduciary where the value of such assets

was used to calculate Fidelity's compensation and, in the case of a

Multiple Client Account, a list of other investors in the Account;

(e) The total fees paid to Fidelity will constitute no more than

reasonable compensation; and

(f) The timing and formula for determining the Performance Fee will

be established and agreed to by the Independent Fiduciary for each

Client Plan prior to the Client Plan's investment in the Account and

will be based on pre-specified percentages of the Client Plan's assets

distributed (or deemed distributed) from the Account in excess of an

agreed upon Threshold Amount.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

Bankers Trust Company (Bankers Trust) Located in New York, NY; Proposed

Exemption

[Application No. D-09869]

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

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)

through (E) of the Code, shall not apply as of October 28, 1994, to the

cash sale of certain structured notes (the Notes) for $432,131,250 by

three collective investment funds for which Bankers Trust acts as

trustee (the Funds) to Bankers Trust New York Corporation (BTNY), a

party in interest with respect to employee benefit plans invested in

the Funds, provided that the following conditions were met:

(a) Each sale was a one-time transaction for cash;

(b) Each Fund received an amount which was equal to the greater of

either (i) the par value of the Notes owned by the Fund at the time of

sale, (ii) the purchase price paid by the Fund for its interest in each

of the Notes, or (iii) the fair market value of the Notes owned by the

Fund, as determined by bid quotations for the Notes obtained from

independent broker-dealers at the time of sale;

(c) The Funds did not pay any commissions or other expenses with

respect to the sale;

(d) Bankers Trust, as trustee of the Funds, determined that the

sale of the Notes was in the best interests of each Fund, and the

employee benefit plans invested in the Fund, at the time of the

transactions;

(e) Bankers Trust took all appropriate actions necessary to

safeguard the interests of the Funds, and the employee benefit plans

invested in the Funds, in connection with the transactions; and

(f) The Funds received a reasonable rate of return during the

period of time that the Funds held the Notes.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective

as of October 28, 1994.

Summary of Facts and Representations

1. Bankers Trust, a New York banking corporation, is a leading

commercial bank which provides a wide range of banking, fiduciary,

recordkeeping, custodial and investment services to corporations,

institutions, governments, employee benefit plans, governmental

retirement plans and private investors worldwide. Bankers Trust is

wholly owned by BTNY, which is a bank holding company established in

1965 under the laws of the State of New York. As of December 31, 1993,

BTNY and its affiliates had consolidated assets in excess of $92

billion and capital of approximately $4.5 billion.

2. Bankers Trust is one of the largest providers of trust and other

services to employee benefit plans. Many of these plans also engage

BTNY or an affiliate to provide investment advice or to be the plan's

investment manager, within the meaning of the Act. Bankers Trust

maintains more than 80 collective investment funds for employee benefit

plan investment.

3. The Funds are the Bankers Trust Pyramid Aggressive Cash Fund

(the BT Aggressive STIF), the Bankers Trust Pyramid Cash Plus Fund (the

BT Cash Plus Fund), and the Bankers Trust Pyramid Super Cash Fund (the

BT Super Cash Fund).

These three Funds are actively managed, market valued money market

vehicles which endeavor to provide a rate of return in excess of

traditional par valued short-term money market funds by extending

eligible maturities, modifying credit restrictions, and taking

advantage of trading opportunities in the money markets. The applicant

represents that there are certain differences in the investment

strategies used by each Fund, including the duration of average

maturities and, in the case of the BT Aggressive STIF, the permitted

use of equities and equity equivalents. Bankers Trust states that the

Notes were permissible investments under the investment guidelines for

each Fund and initially paid above market returns. However, unexpected

increases in interest rates during 1994 adversely affected the market

value of the Notes. Therefore, the Funds sold the Notes to BTNY on

October 28, 1994, for an amount equal to the par value of the Notes

owned by each Fund. The Funds had purchased the Notes for an amount

which equalled the par value of the Notes, except for Note #2 which was

purchased at a slight discount (see Paragraph 5 below).

4. The Notes consisted of U.S. Government Constant Maturity

Treasury (CMT) Notes issued by various U.S. Government agencies, and

Index Amortizing Notes (IANs) issued by various private sector

corporations (as described in Paragraph 5 below). All of the issuers

were parties unrelated to the Funds and employee benefit plans invested

in the Funds (the Plans) as well as BTNY or any affiliate. In addition,

the Notes were purchased by the Funds from broker-dealers that were

independent of the Funds, the Plans, BTNY and its affiliates.

The CMT Notes were debt instruments which initially paid a premium

rate of interest monthly based on changes in a specified index, such as

the London Interbank Offered Rate (LIBOR), the U.S. Treasury Bill Rate

or the U.S. Federal Reserve's Cost of Funds Index (COFI). However,

under the terms of CMT Notes at the time of issuance, the formula for

interest rate payments, and the index upon which such payments were

based, was scheduled to change on a specified future date to a

different formula based on the U.S. Treasury CMT Rate. Bankers Trust

states that the formulas for the interest rate payments made the market

value of CMT Notes particularly sensitive to certain changes in the

U.S. Treasury CMT Rate. In this regard, Bankers Trust represents that

the CMT Notes paid a [[Page 31509]] rate of return that was higher than

the existing rates for U.S. Treasury securities of comparable maturity

as long as the yield curve for such securities was ``steep''--with

interest rates falling based on the specified index. However, Bankers

Trust states that once the yield curve became ``flat'' (i.e. with

short-term interest rates rising faster than long-term interest rates)

or ``climbed'' (i.e. with a general rise in both short-term and long-

term rates), the relative yield on the CMT Notes fell and their market

value was below par.

The IANs were debt instruments which initially paid a premium rate

of interest monthly based on LIBOR, pursuant to certain formulas used

to calculate such rates at various specified times. However, the IANs

risked a maturity extension if short-term interest rates, as measured

by LIBOR, rose above a certain level. Under such circumstances, once

the maturity on the IANs was extended, the IANs would stop paying

interest and the outstanding principal balance would be paid down over

the remaining term pursuant to certain specified schedules.

5. The terms of the Notes, and the circumstances relating to their

yield as investments for the Funds, are described as follows:

Note #1 was a five-year CMT note issued by the Federal National

Mortgage Association (FNMA or ``Fannie Mae''), which was purchased by

the Funds on February 15, 1994 from McDonald & Company for $95 million,

with final maturity on March 2, 1999. Note #1 paid interest monthly at

a rate equal to one-month LIBOR plus 20 basis points for the first and

second years, .65 times the two-year CMT rate plus 129 basis points for

the third through fifth years. At the time of the sale of Note #1 by

the Funds to BTNY, the note was paying a coupon of LIBOR plus 20 basis

points. Bankers Trust states that at the time of sale, the forward

curve (i.e. a measurement of future interest rates based on yields for

U.S. Treasury securities of comparable duration) suggested that the

performance of Note #1 would be significantly impaired once the LIBOR-

based coupon payment period ended. According to the forward curve

determined by Bankers Trust on October 28, 1994, the comparable

investment rate for the time horizon of February 15, 1996 through March

15, 1999 was 7.55%. Bankers Trust represents that Note #1 would have

had a market value greater than par if the ``time weighted average'' of

the expected coupons had been greater than or equal to 7.55%. However,

at the time of sale, Bankers Trust did not expect that the coupons to

be received on Note #1 would be greater than the comparable investment

rate for the duration of Note #1. Therefore, Bankers Trust determined

that it was appropriate to sell the security.

Note #2 was a three-year CMT note issued by the Federal Home Loan

Bank (FHLB), which was purchased by the BT Cash Plus Fund on October

27, 1993 from McDonald & Company for $26,831,250, with a final maturity

on November 12, 1996. The par value of Note #2 was $27 million. Thus,

the BT Cash Plus Fund purchased Note #2 at a discounted price. Note #2

paid interest quarterly at a rate equal to the three-month U.S.

Treasury Bill Rate plus 25 basis points for the first year and .4 times

the two-year CMT rate plus 205 basis points for the second and third

years. At the time of the sale of Note #2 by the BT Cash Plus Fund to

BTNY, the period for the note to pay the three-month U.S. Treasury Bill

Rate plus 25 basis points had ended. Bankers Trust states that once

this payment period ended, the forward curve suggested that the

performance of Note #2 would be significantly impaired. According to

the forward curve determined by Bankers Trust on October 28, 1994,

since the remaining life of Note #2 was two years, the comparable

investment rate was equal to the then current two-year CMT rate which

was 6.82%. Bankers Trust represents that Note #2 would have had a

market value greater than par if the ``time weighted average'' of the

expected coupons had been greater than 6.82%. However, at the time of

sale, Bankers Trust did not expect that the coupons to be received on

Note #2 would be greater than the comparable investment rate for the

duration of Note #2. Therefore, Bankers Trust determined that it was

appropriate to sell the security.

Note #3 was a five-year CMT note issued by Fannie Mae, which was

purchased by the BT Cash Plus Fund on February 7, 1994 from McDonald &

Company for $95 million, with final maturity on February 17, 1999. Note

#3 paid interest monthly at a rate equal to the COFI rate plus 10 basis

points for the first and second years, .4 times the two-year CMT rate

plus 245 basis points for the third through fifth years. At the time of

the sale of Note #3 by the BT Cash Plus Fund to BTNY, the note was

paying the COFI rate plus 10 basis points. However, Bankers Trust

states that once this COFI-based coupon payment ended, the forward

curve suggested that the performance of the note would be significantly

impaired. According to the forward curve determined by Bankers Trust on

October 28, 1994, the comparable investment rate for the period

February 17, 1996 to February 1, 1999 was 7.53%. Bankers Trust

represents that Note #3 would have had a market value greater than par

if the ``time weighted average'' of the expected coupons had been

greater than 7.53%. At the time of sale, Bankers Trust did not expect

that the coupons to be received on Note #3 would be greater than the

comparable investment rate for the duration of Note #3. Therefore,

Bankers Trust determined that it was appropriate to sell the security.

Note #4 was a five-year CMT note issued by the Federal Home Loan

Mortgage Corporation (FHLMC or ``Freddie Mac''), which was purchased by

the BT Cash Plus Fund and the BT Super Cash Fund on February 16, 1994

from Nikko Securities for $71 million, with final maturity on March 2,

1999. Note #4 paid interest monthly at a rate equal to .5 times the

two-year CMT rate plus 209 basis points. According to the forward curve

determined by Bankers Trust on October 28, 1994, the comparable

investment rate for the period October 28, 1994 through March 2, 1999

was 7.4%. Bankers Trust represents that Note #4 would have had a market

value greater than par if the ``time weighted average'' of the expected

coupons had been greater than 7.4%. However, at the time of sale,

Bankers Trust did not expect that the coupons to be received on Note #4

would be greater than the comparable investment rate for the duration

of Note #4. Therefore, Bankers Trust determined that it was appropriate

to sell the security.

Note #5 was a three-year CMT note issued by the Student Loan

Marketing Association (SLMA or ``Sallie Mae''), which was purchased on

February 10, 1994 from Nikko Securities for $95 million, with final

maturity on February 24, 1997. Note #5 paid interest monthly at a rate

equal to one-month LIBOR plus 20 basis points for the first year and

.65 times the two-year CMT rate plus 75 basis points for the second and

third years. At the time of the sale of Note #5 by the Funds to BTNY,

the note was paying LIBOR plus 20 basis points. However, Bankers Trust

states that once this LIBOR-based coupon payment ended, the forward

curve suggested that the performance of the note would be significantly

impaired. According to the forward curve determined by Bankers Trust on

October 28, 1994, the comparable investment rate was equal to the then

current two-year CMT rate which was 6.82%. Bankers Trust represents

that Note #5 would have had a market value greater than par if the

``time weighted average'' of the expected coupons had been greater than

6.82%. At the time of sale, Bankers Trust did not expect that the

coupons to be received on Note #5 would be greater [[Page 31510]] than

the comparable investment rate for the duration of Note #5. Therefore,

Bankers Trust determined that it was appropriate to sell the security.

Note #6 was an IAN issued by Rabobank, which was purchased by the

Funds on November 9, 1993 from Lehman Brothers for $14 million, with

initial maturity on November 17, 1994. Note #6 paid interest quarterly

at a rate equal to three-month LIBOR plus 50 basis points until

November 17, 1994 and paid 4.33% thereafter. Bankers Trust states that

Note #6 was subject to the risk of a maturity extension if short-term

rates rose above a certain level on a specified date. Under the terms

of Note #6, if three-month LIBOR was less than 4.9% on November 15,

1994, the note would mature and the principal would be repaid in full

on November 17, 1994. However, if three-month LIBOR was above 4.9% on

November 15, 1994, the term of Note #6 would be extended for three

years with a fixed coupon rate of 4.33% and principal would be repaid

according to a pre-set amortization schedule. On October 28, 1994,

three-month LIBOR was 5.69%, approximately 79 basis points above Note

#6's trigger rate of 4.9%. Thus, it appeared highly probable that the

note's maturity would be extended until November 1997. Bankers Trust

considered the fixed coupon rate of 4.33% on Note #6 to be

significantly below the comparable investment rate for the duration of

the note, which was calculated to be 7.14%. Therefore, Bankers Trust

determined that the security should be sold.

Note #7 was an IAN issued by Prudential Funding, which was

purchased by the Funds on September 24, 1993 from Lehman Brothers for

$34 million, with initial maturity on October 18, 1994. Note #7 paid

interest quarterly at a fixed rate of 4.75% until October 18, 1994.

Like Note #6 described above, Bankers Trust states that Note #7 was

subject to the risk of a maturity extension if short-term rates rose

above a certain level on a specified date. Under the terms of Note #7,

if three-month LIBOR was above 5.04% on October 16, 1994, the maturity

of the note extended for three years at a 0% coupon rate with quarterly

payments of principal in amounts based on a pre-set amortization

schedule. If three-month LIBOR was below 5.04% on October 16, 1994,

Note #7 would mature in full on that date. However, Bankers Trust

states that three-month LIBOR was above 5.04% on October 16, 1994. At

the time of sale, Note #7 was scheduled to pay a 0% coupon and its

maturity had been extended. Thus, Bankers Trust determined that the

security should be sold.

Note #8 was an IAN issued by E.I. du Pont, which was purchased by

the BT Super Cash Fund on September 24, 1993 from Morgan Stanley for

$1.3 million, with initial maturity on October 14, 1994. Note #8 paid

interest quarterly at a fixed rate of 4.75%. Like Note #7 described

above, Bankers Trust states that Note #8 was subject to the risk of a

maturity extension if short-term rates rose above a certain level on a

specified date. Under the terms of Note #8, if three-month LIBOR was

above 5.04% on October 12, 1994, the maturity of the note extended for

three years at a 0% coupon rate with quarterly payments of principal in

amounts based on a pre-set amortization schedule. If three-month LIBOR

was below 5.04% on October 12, 1994, Note #8 would mature in full on

October 14, 1994. Since three-month LIBOR was above 5.04% on October

12, 1994, the maturity of Note #8 extended for three years paying a 0%

coupon. Thus, Bankers Trust determined that the security should be

sold.

6. Bankers Trust had the Funds sell their respective interests in

the Notes to BTNY on October 28, 1994, for the par value of the Notes,

which in each case was greater than the fair market value of the Notes

owned by the Fund (see table below). At the time of the transaction,

the par value of the Notes was equal in each case to the outstanding

principal balance of the Notes because no principal payments had been

made on any of the Notes (see charts in Paragraph 7 below). In

addition, Bankers Trust states that the par value of the Notes was

either greater than or equal to the initial purchase price paid by the

Fund for its interest in the Notes.

Bankers Trust obtained bids from independent broker-dealers to

establish the fair market value of the Notes at the time of the

transaction. The most recent bids obtained by Bankers Trust prior to

the sale of the Notes were as of October 21, 1994. Bankers Trust states

that bids for the Notes obtained on October 31, 1994 showed no

significant change had occurred over the ten-day period, thereby

confirming that the fair market value of the Notes was significantly

less than the par value of the Notes on the transaction date of October

28, 1994. Bankers Trust represents that on both October 21, 1994 and

October 31, 1994, the bids for Note #1 through Note #5 were quoted by

Nikko Securities, for Note #6 and Note #7 by Lehman Brothers, and for

Note #8 by Morgan Stanley. The bids for the Notes were quoted by the

broker-dealers as a percentage of the outstanding principal balance of

each Note. These bids, in comparison with the par value of the Notes,

were as follows:

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

Price quoted

Note -------------------------- Price received (par

10/21/94 10/31/94 value)

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

#1................... 1196.06 96.00 100 ($95,000,000)

#2................... 96.10 96.05 100 (27,000,000)

#3................... 91.15 91.08 100 (95,000,000)

#4................... 94.08 94.00 100 (71,000,000)

#5................... 96.00 95.27 100 (95,000,000)

#6................... 90.29 90.25 100 (14,000,000)

#7................... 79.25 80.21 100 (34,000,000)

#8................... 80.38 80.50 100 (1,300,000)

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

11Bankers Trust states that the prices quoted are per $100 of principal.

To determine the total price quoted, the face value of each Note is

multiplied by the quote, expressed as a percentage of 100. Thus, for

example, since the par value of Note #1 is $95,000,000, the quoted

price on October 21, 1994 would have been $91,257,000 since

$95,000,000 x .9606 = $91,257,000.

In addition, Duff & Phelps Capital Markets Co. (D&P) in Chicago,

Illinois, provided an opinion letter to Bankers Trust on October 27,

1994, which stated that the fair market value of each Note was less

than its par value at that time. In providing this opinion, D&P used a

valuation methodology which was based on a predicted stream of cash

flows for each Note, discounted at a rate that reflected each Note's

credit risk and average life. D&P established the predicted stream of

cash flows based on implied forward interest rates for each Note

adjusted according to the terms of the Note. In doing this analysis,

D&P states that it attempted to apply conservative assumptions whenever

possible such that the analysis would tend to overvalue rather than

undervalue the Notes. Bankers Trust states that D&P's opinion letter

helped confirm that the market value of the Notes was less than par at

the time of sale because D&P's conclusions were consistent with the bid

quotations received by Bankers Trust for each Note as well as Bankers

Trust's own analysis of the Notes.

7. The Funds' holdings regarding each Note, including the

percentage of the Fund that the Note represented and the interest

earnings on the Note as of October 28, 1994, are shown on the tables

below:12 [[Page 31511]]

\12\With respect to the figures shown for each Note in the

tables, if a Fund did not own an interest in the particular Note a

zero dollar amount is shown.

BT Aggressive STIF

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

Purchase price/ Outstanding Approx. % of Interest

Note basis balance fund earnings

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

#1.............................................. $10,000,000 $10,000,000 19.95 $295,965

#2.............................................. 0 0 0.00 0

#3.............................................. 0 0 0.00 0

#4.............................................. 0 0 0.00 0

#5.............................................. 5,000,000 5,000,000 9.97 120,617

#6.............................................. 2,500,000 2,500,000 4.99 162,556

#7.............................................. 3,000,000 3,000,000 5.98 146,458

#8.............................................. 0 0 0.00 0

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

20,500,000 20,500,000 40.89 725,596

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

BT Cash Plus Fund

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

Purchase price/ Outstanding Approx. % of Interest

Note basis balance fund earnings

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

#1.............................................. $70,000,000 $70,000,000 5.44 $2,071,758

#2.............................................. 26,831,250 27,000,000 2.08 383,229

#3.............................................. 95,000,000 95,000,000 7.38 2,572,424

#4.............................................. 55,000,000 55,000,000 4.27 1,803,636

#5.............................................. 70,000,000 70,000,000 5.44 1,688,635

#6.............................................. 5,500,000 5,500,000 0.43 939,705

#7.............................................. 26,000,000 26,000,000 2.02 960,555

#8.............................................. 0 0 0.00 0

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

348,331,250 348,500,000 27.06 10,419,942

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

BT Super Cash Fund

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

Purchase price/ Outstanding Approx. % of Interest

Note basis balance fund earnings

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

#1.............................................. $15,000,000 $15,000,000 5.32 $295,376

#2.............................................. 0 0 0.00 0

#3.............................................. 0 0 0.00 0

#4.............................................. 16,000,000 16,000,000 5.67 524,694

#5.............................................. 20,000,000 20,000,000 7.09 482,467

#6.............................................. 6,000,000 6,000,000 2.13 369,828

#7.............................................. 5,000,000 5,000,000 1.77 244,097

#8.............................................. 1,300,000 1,300,000 0.46 46,313

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

63,300,000 63,300,000 22.43 1,962,775

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

Bankers Trust represents that the Notes paid the Funds a reasonable

rate of interest during the period of time that the Funds held the

Notes. For example, Bankers Trust states that the annualized rate of

interest for each Note at the time of the transaction was as follows:

(i) 5.2% for Note #1; (ii) 5.34% for Note #2; (iii) 4.05% for Note #3;

(iv) 5.39% for Note #4; (v) 5.26% for Note #5; (vi) 5.44% for Note #6;

(vii) 4.75% for Note #7; and (viii) 4.75% for Note #8.

8. Bankers Trust, as trustee of the Funds, believed that the sale

of the Notes to BTNY was in the best interests of each Fund, and the

employee benefit plans invested in the Fund, at the time of the

transaction. Bankers Trust states [[Page 31512]] that any sale of the

Notes on the open market would have produced significant losses for the

Funds and for the individual employee benefit plan investors

involved.13

13The Department is expressing no opinion in this proposed

exemption regarding whether the acquisition and holding of the Notes

by the Funds violated any of the fiduciary responsibility provisions

of Part 4 of Title I of the Act.

The Department notes that section 404(a) of the Act requires,

among other things, that a fiduciary of a plan act prudently, solely

in the interest of the plan's participants and beneficiaries, and

for the exclusive purpose of providing benefits to participants and

beneficiaries when making investment decisions on behalf of a plan.

Section 404(a) of the Act also states that a plan fiduciary should

diversify the investments of a plan so as to minimize the risk of

large losses, unless under the circumstances it is clearly prudent

not to do so.

In this regard, the Department is not providing any opinion as

to whether a particular category of investments or investment

strategy would be considered prudent or in the best interests of a

plan as required by section 404 of the Act. The determination of the

prudence of a particular investment or investment course of action

must be made by a plan fiduciary after appropriate consideration to

those facts and circumstances that, given the scope of such

fiduciary's investment duties, the fiduciary knows or should know

are relevant to the particular investment or investment course of

action involved, including a plan's potential exposure to losses and

the role the investment or investment course of action plays in that

portion of the plan's portfolio with respect to which the fiduciary

has investment duties (see 29 CFR 2550.404a-1). The Department also

notes that in order to act prudently in making investment decisions,

a plan fiduciary must consider, among other factors, the

availability, risks and potential return of alternative investments

for the plan. Thus, a particular investment by a plan, which is

selected in preference to other alternative investments, would

generally not be prudent if such investment involves a greater risk

to the security of a plan's assets than other comparable investments

offering a similar return or result.

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

9. Bankers Trust represents that it took all appropriate actions

necessary to safeguard the interests of the Funds, and the employee

benefit plans invested therein, in connection with the transactions.

Bankers Trust ensured that each Fund received the appropriate amount of

cash from BTNY in exchange for such Fund's interests in the Notes at

the time of the transactions. Bankers Trust reviewed the latest

information regarding the fair market value of the Notes, based on bid

quotations received from independent broker-dealers. Bankers Trust also

ensured that the Funds did not pay any commissions or other expenses

for the sale of the Notes to BTNY.

10. In summary, the applicant represents that the transactions

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

section 4975 of the Code because: (a) Each sale of the Notes by the

Funds was a one-time transaction for cash; (b) each Fund received an

amount which was equal to the greater of either (i) the par value of

the Notes owned by the Fund at the time of sale, (ii) the purchase

price paid by the Fund for its interest in each of the Notes, or (iii)

the fair market value of the Notes owned by the Fund as determined by

bid quotations for the Notes obtained by Bankers Trust from independent

broker-dealers at the time of sale; (c) the Funds did not pay any

commissions or other expenses with respect to the sale; (d) Bankers

Trust, as trustee of the Funds, determined that the sale of the Notes

was in the best interests of each Fund, and the employee benefit plans

invested in the Fund, at the time of the transaction; (e) Bankers Trust

took all appropriate actions necessary to safeguard the interests of

the Funds in connection with the transactions; and (f) the Funds

received a reasonable rate of return during the period of time that the

Funds held the Notes.

Notice to Interested Persons

The applicant states that notice of the proposed exemption shall be

made by first class mail to the appropriate Plan fiduciaries for each

employee benefit plan participating in the Funds at the time of the

transactions. Notice to the plan fiduciaries shall be made within

fifteen (15) days following the publication of the proposed exemption

in the Federal Register. This notice shall include a copy of the notice

of proposed exemption as published in the Federal Register and a

supplemental statement (see 29 CFR 2570.43(b)(2)) which informs

interested persons of their right to comment on and/or request a

hearing with respect to the proposed exemption. Comments and requests

for a public hearing are due within forty-five (45) days following the

publication of the proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

General Electric Pension Trust (the Trust) Located in Fairfield,

Connecticut; Proposed Exemption

[Application No. D-09880]

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

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)

through (E) of the Code, shall not apply effective August 3, 1994, to

the past and continued lease (the Lease) by the Trust of office space

in a commercial office building located at 201 Mission Street in San

Francisco, California (the Property), to GE Capital Aviation Services,

Inc. (GE Aviation), a party in interest with respect to employee

benefit plans participating in the Trust, provided the following

conditions are met:

(a) All terms and conditions of the Lease are at least as favorable

to the Trust as those which the Trust could have obtained in an arm's-

length transaction with an unrelated party at the time the Lease was

executed;

(b) The rent paid by GE Aviation to the Trust under the Lease is

not less than the fair market rental value of the office space, as

established by an independent qualified real estate appraiser;

(c) David P. Rhoades (Mr. Rhoades), acting as a qualified,

independent fiduciary for the Trust reviewed all terms and conditions

of the Lease prior to the transaction, as well as any subsequent

modifications to the Lease, and determined that such terms and

conditions would be in the best interests of the Trust at the time of

the transaction; and

(d) Mr. Rhoades represents the interests of the Trust for all

purposes under the Lease as a qualified, independent fiduciary for the

Trust, monitors the performance of the parties under the terms and

conditions of the Lease and the exemption, and takes whatever action is

necessary to safeguard the interests of the Trust throughout the

duration of the Lease.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective

for the period from August 3, 1994, until the scheduled termination

date of the Lease (i.e. September 16, 1999) or, if earlier, the date

the Lease is actually terminated by the parties.

Summary of Facts and Representations

1. The Trust holds assets of the General Electric Company Pension

Plan (the GE Pension Plan), the Knolls Atomic Laboratories Pension

Plan, ERC Retirement Plan, GE Components Pension Plan For Puerto Rico,

and Neutron Devices Department Pension Plan (collectively, the Plans).

The Plans are all defined benefit plans that cover employees of General

Electric Company (GE) and various GE subsidiaries. There are a total of

over 488,000 participants and beneficiaries under the Plans. As of

December 31, 1993, the Trust held approximately $27.3 billion in

assets.

The trustees of the Trust are five individuals (the Trustees) who

are [[Page 31513]] officers of GE and its subsidiaries. The Trustees

are appointed by the GE Benefit Plans Investment Committee, an

oversight committee that determines the investment policies of the

Trust. The Trustees maintain overall responsibility for investment of

the Trust's assets. The Trustees have delegated specific responsibility

for investment management of most of the Trust's assets to the General

Electric Investment Corporation (GEIC).

GEIC, a Delaware corporation and a wholly-owned subsidiary of GE,

is a registered investment adviser under the Investment Advisers Act of

1940. GEIC provides investment management services to a variety of GE-

affiliated entities. As of January 1, 1994, GEIC managed approximately

$40.4 billion in assets.

2. GE Aviation, a Delaware corporation formerly known as the

Polaris Corporation, is a wholly-owned subsidiary of General Electric

Capital Corporation. The primary business of GE Aviation is airplane

equipment leasing. GE Aviation's employees are participants in the GE

Pension Plan.

3. The transaction for which an exemption is requested involves the

leasing of office space between the Trust, as landlord, and GE

Aviation, as tenant, in the office building located at 201 Mission

Street in San Francisco, California (the Property).

The Property is a 30-story office building located in the southern

financial district of San Francisco. The Property is part of a series

of high-rise buildings developed during the 1980s on the fringes of the

city's traditional financial district. The ground floor is leased to

retail businesses and the other floors are leased as office space. The

rentable area of the Property is approximately 475,675 square feet. The

current value of the Property is approximately $40 million.

Construction of the Property was completed in 1981. The Trust

financed the acquisition of the Property by an unrelated party that

subsequently went into receivership. The Trust acquired the Property by

deed in lieu of foreclosure in April 1993. The Trust currently owns the

Property through a real estate title holding company, Pacific Gateway

Realty Corporation.

Most of the office space in the Property was originally rented by

Bank of America. Bank of America subsequently decided to relocate and

consolidate its offices, and vacated one-half of the office space it

occupied in the Property in 1991. At that time, the vacated area was

leased on a short-term basis to Pacific Gas & Electric (PG&E), which

was making repairs to its existing offices as a consequence of

earthquake damage. While there were negotiations in 1993 for PG&E to

extend its existing lease and to lease additional space, PG&E's board

of directors ultimately decided against remaining in the Property. PG&E

intends to vacate the Property in January 1996, when the repairs to its

original offices are expected to be completed.

Bank of America vacated the other half of the office space it

occupied in the Property in late 1993 upon completing its relocation.

As a result, about 34 percent (i.e. 160,014 square feet) of the

rentable area in the Property was vacant as of early 1994, compared to

a general vacancy rate in San Francisco-area office buildings of around

12 percent at that time.

In the months after Bank of America vacated, the managers of the

Property actively searched for tenants, in an effort to lease the

vacant space as quickly as possible before PG&E leaves. As of June

1994, tenants had been found for approximately 77,000 square feet of

space, or about 16 percent of rentable area, leaving around 18 percent

of the Property vacant. One of the tenants was GE Aviation.

4. The applicant represents that in early 1994 GE Aviation had its

offices at Four Embarcadero Center in San Francisco's main business

district. However, GE Aviation was in the process of downsizing its

operations and was looking for smaller space in a less expensive part

of San Francisco. In the course of its search for office space, GE

Aviation contacted Sentre Partners (Sentre), the independent property

manager retained by the Trust to manage the Property. GE Aviation

decided that it was interested in leasing space in the Property and

entered into negotiations with Sentre.

The Lease was executed by GE Aviation in July 1994, after which the

documents were sent to Sentre. The Lease was executed by Pacific

Gateway Realty Corporation as landlord on August 3, 1994, following

receipt of the report by Mr. Rhoades, the independent fiduciary acting

for the Trust in connection with the subject transaction. The applicant

states that once the Lease was signed by all of the parties, the

landlord began making extensive improvements to the space in order to

accommodate a planned occupancy date for GE Aviation of September 1,

1994.

5. Under the Lease, GE Aviation has leased approximately 9,376

square feet of space located on the eastern and southern portions of

the 27th floor of the Property. This space constitutes approximately

two percent of the rentable square footage in the Property. The term of

the Lease is five years, which commenced on September 16, 1994, the

date that work on the premises was substantially completed. The annual

rent is $20 per square foot of rentable area, or $187,520, for the

first three years of the Lease, and $21 per square foot of rentable

area, or $196,896, for the fourth and fifth years, payable monthly. The

Lease requires that GE Aviation pay its proportionate share of the

Trust's real estate taxes and expenses relating to the Property for

years after 1995, to the extent these taxes and expenses exceed those

for 1995 (the ``base'' year) or to the extent any additional taxes or

expenses are properly chargeable solely to GE Aviation in connection

with its activities with the leased space.

Late payments are subject to a 5% late payment charge after written

notice is given. If the late payment becomes an event of default, or in

the event of any failure by GE Aviation to perform its obligations

under the Lease, GE Aviation will be obligated for interest charges and

other amounts necessary to compensate the Trust for damages caused by

GE Aviations' failure to perform.

GE Aviation does not have any options or rights to expand or extend

the Lease, nor has it received any period of free rent. Any assignments

or subleases by GE Aviation are void unless the Trust has provided

prior written consent and, if consented to, are subject to additional

charges.

6. The Trust has provided agreed-upon improvements to the space

which, prior to the Lease, contained only nominal improvements. The

total cost of the improvements shall not exceed $42.50 per rentable

square foot ($398,480), with any additional costs to be paid by GE

Aviation.14 The Trust is responsible to repair any defects in this

work of which it is notified by GE Aviation within one year, other than

defects resulting from compliance with the specifications provided by

GE Aviation's architect or engineer. GE Aviation is responsible at its

expense for any additional work it needs or desires that is not part of

the agreed-upon [[Page 31514]] improvements. Any alterations to be made

during the term of the Lease are subject to the Trust's written

consent. Alterations generally become the property of the Trust and

remain at the expiration of the Lease, except that the Trust may

require the alterations to be removed at GE Aviation's expense.

\14\The Department expresses no opinion in this proposed

exemption as to whether the expenses incurred by the Trust relating

to the tenant improvements provided for GE Aviation would violate

any provision of Part 4 of Title I of the Act. In this regard, the

Department notes that section 404(a) of the Act requires, among

other things, that plan fiduciaries act prudently and solely in the

interest of the plan's participants and beneficiaries when making

investment decisions on behalf of a plan. In addition, section

404(a) of the Act requires that plan fiduciaries act for the

exclusive purpose of providing benefits to participants and

beneficiaries and to defray reasonable expenses of administering the

plan.

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

7. Mr. Rhoades was retained by GEIC to act as an independent

fiduciary for the Trust in connection with the Lease. Mr. Rhoades is

president of the real estate appraisal and consulting firm of David P.

Rhoades & Associates, Inc., of San Francisco, California. Mr. Rhoades

represents that he and his firm are independent of, and unrelated to,

GE and its affiliates. Mr. Rhoades states that he is a Member of the

Appraisal Institute (MAI) and has 22 years experience as a real estate

appraiser dealing with the valuation and analysis of all types of

property, including urban office buildings similar to the Property. Mr.

Rhoades has acknowledged in writing that he is a fiduciary for the

Trust and that he understands his duties, responsibilities, and

liabilities as a fiduciary under the Act.

8. Mr. Rhoades reviewed the Lease and inspected the Property prior

to the transaction. In an appraisal dated July 6, 1994, Mr. Rhoades

concluded that the market rent for the space covered by the Lease would

be in the range of $19.00 to $21.00 per square foot. Thus, Mr. Rhoades

determined that the proposed average rental rate under the Lease of

$20.22 per square foot would be at the upper end of the range of rents

for comparable leases in the San Francisco area and would not be less

than the fair market rental value for the space. Mr. Rhoades states

that the terms of the Lease are comparable to the terms that would have

been negotiated in arm's-length transactions between unrelated parties.

Mr. Rhoades concluded that the Lease would be in the best interest of

the Trust because it would yield the Trust a market rate of return,

would avoid additional leasing efforts, and would avoid the lost

revenue and associated costs of having the space remain vacant.

Mr. Rhoades represents that the tenant improvement allowance for

the Lease of $42.50 per square foot was necessary because of the

unimproved condition of the particular space. Mr. Rhoades states that

the space on the 27th floor leased by GE Aviation was previously

demolished in connection with work that was done for another tenant,

who currently occupies part of the 27th floor and the two floors above

the 27th floor. In this regard, the applicant represents that the 27th

floor space previously was occupied by Bank of America, which had been

a major tenant in the Building from 1981 through 1991. The entire 27th

floor, when occupied by the Bank of America, was primarily open space

with movable partitions. At the time the Bank of America vacated the

27th floor space, substantial work on the space was needed to satisfy

applicable legal requirements, such as current fire and safety codes.

In addition, the Bank of America's use of the space was not readily

adaptable to a new tenant desiring up-to-date conventional office space

and was functionally obsolete. Consequently, the applicant states that

it was cost effective to demolish the entire floor when work was being

done for a new tenant that would occupy half of the 27th floor and to

re-build sufficiently to meet the minimum requirements for the entire

floor, including the part that was not yet being leased. As a result,

when the other half of the floor was leased to GE Aviation, it was in

unimproved condition. Thus, prior to the Lease, the space was

effectively ``first generation'' or unimproved space which required

relatively high outlays for tenant improvements.

Mr. Rhoades states that the improvements made to the space leased

by GE Aviation are functional and reusable by a wide range of tenants

without major costs, and are typical of the types of improvements

landlords usually build for such tenants. Mr. Rhoades maintains that

the residual value of the tenant improvements at the end of the Lease

(i.e. 5 years) will be about 50 percent of the original cost of the

tenant improvements, or approximately $21.25 per square foot.

9. With respect to the overall rate of return to the Trust under

the terms of the Lease, Mr. Rhoades conducted an analysis of both the

``internal rate of return'' (IRR) and the ``net present value'' (NPV)

to the Trust from the Lease.

Mr. Rhoades represents that the ``rate of return'' on a real estate

investment is the ratio of income to the original investment and the

``IRR'' is the annualized rate of return on capital that is generated

within an investment over a period of ownership.15 Thus, the IRR

measures the returns from an investment in relation to the original

capital outlay. In this case, Mr. Rhoades states that the ``returns''

consist of the rental income over the Lease term and the pass-through

of certain expenses after the first year, as well as the residual value

of the tenant improvements at the end of the Lease. The ``original

capital outlay'' consists of expenses relating to the leased space,

including the tenant improvements, operating expenses, brokerage fees,

parking, and taxes. This ``original capital outlay'' was approximately

$421,920.

15Mr. Rhoades cites The Dictionary of Real Estate

Appraisal (3rd edition) as his source for the definition of these

terms.

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

In addition, Mr. Rhoades states that the ``NPV'' is the difference

between the present value of all expected investment benefits, or

positive cash flows, and the present value of capital outlays, or

negative cash flows, over the entire period of the investment. The

present value calculation involved in determining NPV requires the use

of a specific discount rate, which operates as the annual rate of

return objective. In this regard, Mr. Rhoades used the standard real

estate industry rate of 9 percent for the NPV calculation, which

provided a basis for comparing the rate of return on the Lease to

different leasing arrangements in the Property.

Mr. Rhoades states that his approach to evaluating leases and

leasing costs is customary in the real estate industry. Mr. Rhoades

states further that he was consistent in using this approach to

evaluate the comparable leases in the Building and other comparable

properties for purposes of determining the fair market rental value of

the space under the Lease as well as the IRR and NPV of the Lease to

the Trust. However, Mr. Rhoades notes that his approach did not

consider the original cost or value of the Building in evaluating the

specific leases. In this regard, Mr. Rhoades has confirmed that it is

not customary to consider the cost or value of a building for this

purpose because the focus in valuing a lease is on the incremental

costs and income of the lease and the ongoing costs relating to the

space.

Based on an extensive analysis and comparison of the terms of the

Lease to all other leases in the Property at the time of the

transaction, Mr. Rhoades concluded that the Lease had a greater NPV and

would yield a higher IRR than any other lease of a comparable term in

the Property. Mr. Rhoades represents that the Lease will yield an IRR

to the Trust of approximately 10.83 percent on an annual basis and has

a NPV of $4.87 per square foot based on a discount rate of 9 percent,

when taking into account the residual value of the tenant improvements.

Therefore, Mr. Rhoades states that it is unlikely that the Trust would

have obtained a lease for the space on more favorable terms from

[[Page 31515]] other tenants in the market at the time of the

transaction.16

\16\Mr. Rhoades states in his letter dated August 12, 1994, that

the NPV of leaving the space vacant for the five year term of the

Lease would have been a negative $19.45 per square foot due to the

operational and tax expenses related to the space. Mr. Rhoades notes

that while it is unlikely that the space would have remained vacant

for the entire five year period, it would have taken about six

months for the Trust to have obtained a lease on terms at least as

favorable to the Trust, with the same IRR and NPV values, as the

terms of the Lease.

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10. Mr. Rhoades, as independent fiduciary for the Trust, will

monitor the Lease on an ongoing basis. Mr. Rhoades will determine GE

Aviation's compliance with the terms of the Lease and has the authority

to take any action necessary to enforce the rights of the Trust under

the Lease, including the termination of the Lease. Any renewals of the

Lease will be subject to the oversight, review and approval of Mr.

Rhoades. Such a renewal will not be executed in the absence of Mr.

Rhoades' opinion that the proposed renewal would be in the best

interests of the Trust.

11. In summary, the applicant states that the transaction meets the

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

of the Code because: (a) the terms of the Lease are at least as

favorable to the Trust as the terms which would exist in an arm's-

length transaction with an unrelated party; (b) the Trust will receive

rental amounts under the Lease equal to the fair market rental value

for the space, as determined by a qualified, independent appraiser; (c)

an independent fiduciary (i.e. Mr. Rhoades) acting for the Trust

reviewed the terms and conditions of the Lease and determined that the

transaction would be in the best interests of the Trust; (d) Mr.

Rhoades, as the independent fiduciary, will monitor the Lease on behalf

of the Trust and take whatever actions are necessary to protect the

interests of the Trust; and (e) the Lease only involves a small

percentage of the Trust's total assets.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

The Amended and Restated Profit Sharing Retirement Plan for Employees

of 84 Lumber Company (the Profit Sharing Plan) and The Amended and

Restated Savings Fund Plan for Employees of 84 Lumber Company (the

Savings Plan; together, the Plans) Located in Eighty Four,

Pennsylvania; Proposed Exemption

[Application Nos. D-09945 and D-09946]

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 extension of credit by 84

Lumber Company (Lumber) to the Plans in the form of loans (the Loans)

with respect to Guaranteed Investment Contract, Number CG0124601A

issued by Executive Life Insurance Company (ELIC) to the Profit Sharing

Plan and Guaranteed Investment Contract No. CG0124701A (both Contracts

together, the GICs) issued by ELIC to the Savings Plan; and (2) the

Plans' potential repayment of the Loans (the Repayments), provided: (a)

all terms of such transactions are no less favorable to the Plans than

those which the Plans could obtain in arm's-length transactions with an

unrelated party; (b) no interest and/or expenses are paid by the Plans;

(c) the Loans are made with respect to amounts invested by the Plans in

the GICs; (d) the Repayments are restricted to the amounts, if any,

paid to the Plans after the date of the Loans by ELIC or other

responsible third parties with respect to the GICs (the GIC Proceeds);

(e) the Repayments under each Loan will not exceed the total amount of

the Loan; and (f) the Repayments are waived with respect to the amount

by which any Loan exceeds the GIC Proceeds.

Summary of Facts and Representations

1. Lumber is a Pennsylvania general partnership engaged in the

retail lumber and building products business. As of January 1, 1995,

Lumber operated 374 individual store locations in 31 states. The

headquarters of Lumber are in Eighty Four, Pennsylvania. The managing

general partner of Lumber is Pierce-Hardy Real Estate, Inc., a

Pennsylvania business trust. Lumber is the sponsor of both Plans, each

of which covers the employees of Lumber. The Profit Sharing Plan also

covers employees of the Trusty Building Components Company, an

affiliate of Lumber.

2. Each of the Plans is a defined contribution plan that is

qualified under section 401(a) of the Code. The Savings Plan is

intended to constitute a qualified cash or deferred arrangement in

accordance with section 401(k) of the Code. The Savings Plan is a

participant-directed individual account plan under which the

participants may direct the investment of their accounts in one or more

investment funds. As of December 31, 1994, (i) the Profit Sharing Plan

had 3,018 active and terminated vested participants and total assets of

approximately $24,718,415; and (ii) the Savings Plan had 2,080 active

and terminated vested participants and total assets of approximately

$17,187,503.

3. On September 25, 1987, ELIC issued the GICs to the Plans. The

Profit Sharing Plan's GIC was in the principal amount of $2 million,

and the Savings Plan's GIC was in the principal amount of $1 million.

Each GIC guaranteed an annual interest rate of 9.92% from the issue

date to the September 25, 1992 maturity date. Interest accrued under

the GICs was payable yearly, and each Plan received interest payments

for 1988, 1989 and 1990. The final interest payments made by ELIC were

received by the Plans on September 25, 1990. No interest accrued under

the GICs was paid in 1991.

4. On April 11, 1991 (the Conservation Date), ELIC was placed in

conservatorship by the Commissioner of Insurance for the State of

California. As of that date, payments under the GICs were suspended,

and no payments were made to the Plans.17 As of the Conservation

Date, the accumulated book values of the GICs (Accumulated Book Value),

defined as the amount of deposits, plus interest at the contract rate,

less interest paid, were $2,051,440 for the Profit Sharing Plan and

$1,049,923 for the Savings Plan. Effective June 30, 1991, the Plans'

Administrative Committees (the Committees) froze the GICs and a

proportionate share of the accounts of participants with account

balances invested in the GICs. The Plans have not permitted

distributions or withdrawals from the respective plans with respect to

the frozen portion of a participant's account. Moreover, the Savings

Plan has not allowed participants to receive a loan from or reallocate

the frozen portion of their accounts to any other investment option

under the Savings Plan.

\17\The Department notes that the decisions to acquire and hold

the GICs are governed by the fiduciary responsibility provisions of

Part 4, Subtitle B, of 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 GICs by the Plans.

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5. On August 13, 1993, the Los Angeles Superior Court approved the

terms of the Rehabilitation/Liquidation Plan for ELIC effective

September 3, [[Page 31516]] 1993 (the Rehab Plan). On or about December

1, 1993, each ELIC contract holder was provided with an election form

and a summary of the Rehab Plan. Under the Rehab Plan, ELIC guaranteed

investment contracts were reduced in value to approximately 79% of the

Accumulated Book Value as of the Conservation Date and each holder of

such contracts was paid an amount for accumulated interest and fees for

the period between the Conservation Date and September 3, 1993 (the

Interim Payments). Each contract holder, including the Plans, was

informed that it could elect by February 12, 1994 to ``opt in'' or

``opt out'' of the Rehab Plan. By opting in, a contract holder would

have been issued a new 5-year guaranteed investment contract issued by

Aurora National Life Assurance Company (Aurora), the successor to ELIC,

in an amount equal to the restructured percentage of the Accumulated

Book Value as of the Conservation Date, plus the right to receive

possible distributions from certain trusts and settlements that may

occur in the liquidation of ELIC. Opting out of the Rehab Plan would

have resulted in a cash settlement, payment of which would be made by

immediate payments and future payments from an Allocation Holdback

Trust, plus the right to receive possible distributions from certain

trusts and settlements that may occur in the liquidation of ELIC.

6. After reviewing the Rehab Plan materials supplied by ELIC,

Lumber elected to ``opt in'' with respect to the GICs. As a result, the

Plans' GICs were replaced, effective February 27, 1994, with the Aurora

GICs in accordance with the approved Rehab Plan. A comparison of the

terms of the ELIC GICs and the Aurora GICs is set forth below:

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

ELIC GIC Aurora GIC

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

1. Profit sharing plan:

Contract number................. CG0214601A CG01246A1A

Maturity date................... 9/25/92 9/3/98

Account value................... $2,000,000 $1,280,487

Guaranteed interest rate........ 9.92% 5.61%

2. Savings Plan:

Contract number................. CG0214701A CG01247A1A

Maturity date................... 9/25/92 9/3/98

Account value................... $1,000,000 $640,243

Guaranteed interest rate........ 19.92% 5.61%

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

7. As the chart indicates, the present account value of the Aurora

GICs is substantially less than the pre- conservatorship book values of

the ELIC GICs. In addition, the interest rate on the Aurora GICs is

substantially less than the stated interest under the ELIC GICs.

Interest received by the Plans during ELIC's conservatorship and prior

to the consummation of the Rehab Plan was also substantially less than

the ELIC contract rate. The foregoing factors have resulted in a

significant reduction in value and yield of the contracts held by the

Plans.

8. The extended maturity date of the Aurora GICs has also had a

significant impact on participants in the Plans and their

beneficiaries. Under the terms of the Aurora GICs, the only payments

that may be made prior to maturity are semi-annual interest payments.

The only other benefit withdrawals permitted are the annuitization of

benefits under the contract, which is not permitted under the Plans

(which provide only a lump sum form of benefit).18 As a result,

participants who terminate their employment with Lumber are not able to

have their lump sum distributions paid out of the respective Aurora

GICs at this time.

18The applicant represents that pursuant to section

401(a)(11) of the Code, the Plans are not required to provide joint

and survivor annuities. The Department expresses no opinion with

respect to the applicant's representation.

9. In order to permit the Plans to resume full funding of all Plan

events, including distributions, withdrawals, loans, interfund

transfers and fund investments, Lumber proposes to make the Loans to

each of the Plans and has requested an exemption to permit the Loans

under the terms and conditions described herein. The Loans will be made

(i) pursuant to written agreements and (ii) as a single lump sum cash

payment to each Plan (the Loan Amount).19 It is contemplated that

the Loan Amount to the Profit Sharing Plan will be $1,378,000,

representing the original $2,000,000 principal amount of that Plan's

ELIC GIC, less an Interim Payment received by the Profit Sharing Plan

of $405,852, and less payments of $93,416 under the Aurora Replacement

GIC characterized as return of principal, and certain Rehab Plan

adjustments attributable to distributions from various trusts (see rep.

5, above) in the amount of $123,033. It is contemplated that the Loan

Amount to the Savings Plan will be $689,000, representing the original

principal amount of that Plan's ELIC GIC, less an Interim Payment

received by the Savings Plan of $202,925, and less payments of $46,708

under the Aurora Replacement GIC characterized as return of principal,

and certain Rehab Plan adjustments attributable to distributions from

various trusts (see rep. 5, above) in the amount of $61,516.20 The

Loans will be made as soon as practicable after the granting of the

exemption proposed herein, and a closing agreement with respect thereto

has been entered into between Lumber and the Internal Revenue Service.

The Repayments will be limited to the cash proceeds of any payments

received by the respective Plans as GIC Proceeds after the date of the

Loans. Repayments are due only when GIC Proceeds are received by the

Plans. No interest will be paid on the Loans. Under no circumstances

will Repayments exceed the Loan Amounts, even if GIC Proceeds should

exceed such amounts. At such time that Lumber learns that no further

GIC Proceeds will be received, Repayments of any outstanding Loan

Amounts will be waived by Lumber.

19The Department notes that this exemption, if granted,

will not affect the rights of any participant or beneficiary with

respect to any civil action against Plan fiduciaries for breaches of

section 404 of the Act in connection with any aspect of the GIC

transactions.

20The Loan Amounts have been rounded to $1,378,000 and

$689,000 for the Profit Sharing Plan and the Savings Plan,

respectively.

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10. If the exemption proposed herein is granted, the Committees

intend to value the Aurora GICs at the original principal amount of the

ELIC GICs. Each frozen account would then be adjusted to reflect this

new value, and the freeze placed on each participant's account would be

removed. The Plans would then resume distributions and withdrawals

under the Plans with [[Page 31517]] respect to frozen account balances.

Loans and interfund transfers under the Savings Plan would also resume

with respect to amounts that had been frozen.

11. In summary, the applicant represents that the proposed

transactions satisfy the criteria contained in section 408(a) of the

Act because: (a) All terms of the transactions will be no less

favorable to the Plans than those obtainable in arm's-length

transactions with unrelated parties; (b) the Loans will enable the

Plans to resume normal operations with respect to distributions,

withdrawals, loans, interfund transfers and fund investments; (c) the

Plans will pay no interest or other expenses in connection with the

Loans; (d) Repayments will be made only out of any cash proceeds of any

amounts received by the Plans as GIC Proceeds after the date of the

Loans; (e) the Repayments will not exceed the principal amount of the

Loans; and (f) the Repayments will be waived to the extent the Loan

Amounts exceed the GIC Proceeds.

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

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

Warburg Investment Management International Ltd. (Warburg

International) Located in London, England; Proposed Exemption

[Application No. D-09998]

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 securities between various

accounts managed by Warburg International or its Affiliates (the

Accounts) where at least one Account involved in any cross-trade is an

employee benefit plan account (Plan Account) for which Warburg

International acts as a fiduciary; provided that both the General

Conditions of Section I and the Specific Conditions of Section II below

are met.

Section I--General Conditions

(a) Each employee benefit plan comprising a Plan Account

participating in Warburg International's cross-trading program has

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

employee benefit plans maintained by a single employer or controlled

group of employers, the $25 million requirement may be met by

aggregating the assets of such plans if the assets are commingled for

investment purposes in a single master trust.

(b) A Plan's participation in the cross-trade program is subject to

a written authorization executed in advance by a qualified Plan

Fiduciary which is independent of Warburg International and its

Affiliates (the Independent Fiduciary).

(c) The authorization referred to in paragraph (b) above is

terminable at will without penalty to the Plan Account, upon receipt by

Warburg International of written notice of termination.

(d) Before an authorization is made for any Plan Account, the

Independent Fiduciary is furnished with any reasonably available

information necessary for the Independent Fiduciary to determine

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

to) a copy of the final exemption (if granted), an explanation of how

the authorization may be terminated, a description of Warburg

International's cross-trade practices, and any other reasonably

available information regarding the matter that the Independent

Fiduciary requests.

(e) Each cross-trade transaction involves only equity or debt

securities for which there is a generally recognized market. With

respect to any non-U.S. securities, only those securities traded on a

recognized foreign securities exchange for which market quotations are

readily available shall be covered by the exemption.21

\21\With respect to all non-U.S. securities that are ``plan

assets'' managed by Warburg or an Affiliate, the applicant

represents that the requirements of section 404(b) of the Act and

the regulations thereunder will be met (see 29 CFR 2550.404b-1). In

this regard, section 404(b) of the Act states that no fiduciary may

maintain the indicia of ownership of any assets of a plan outside

the jurisdiction of the district courts of the United States, except

as authorized by regulation by the Secretary of Labor. The

Department is providing no opinion herein as to whether such

requirements will be met.

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(f) Each cross-trade transaction is effected at the current market

value for the security on the date of the transactions. For equity

securities, this shall be the closing price for the security on the

date of the transaction. The ``closing price'' shall be the last trade

price on exchanges where dealing is order-driven and the closing mid-

market price (i.e. the average of the closing bid and offer prices)

where dealing is quote-driven. For debt securities, the current market

value shall be the fair market value 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.

(g) Neither Warburg International nor its Affiliates charges a Plan

Account affected by a cross-trade transaction any fee or commission for

such transaction.

(h) At least every three months, and not later than 45 days

following the period to which it relates, Warburg International

furnishes the Independent Fiduciary with a report disclosing: (1) a

list of all cross-trade transactions engaged in on behalf of the Plan

Account, and (2) 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.

(i) The Independent Fiduciary is furnished with a summary of

certain additional information 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: (1) A description of the total

amount of the Plan Account's assets involved in cross-trade

transactions during the period, (2) a description of Warburg

International's cross-trade practices, if such practices have changed

materially during the period covered by the summary, (3) a statement

that the Independent Fiduciary's authorization of cross-trade

transactions may be terminated upon receipt by Warburg International of

written notice to that effect, and (4) a statement that the Independent

Fiduciary's authorization of the Plan Account's participation in the

cross-trade program will continue in effect unless it is terminated.

(j) For all Accounts participating in the cross-trading program, if

the number of shares of a particular security which any Accounts need

to sell on a given day is less than the number of shares of such

security which any Accounts need to buy, or vice versa, the direct

cross-trade opportunity is allocated among the buying or selling

Accounts on a pro rata basis.

(k) The Accounts involved in cross-trade transactions do not

include assets of any Plan established or maintained by Warburg

International or its Affiliates.

Section II--Specific Conditions

(a) An Independent Fiduciary of each Plan specifically authorizes

each cross-trade transaction in accordance with the following

procedure:

(1) No more than three business days prior to the execution of any

cross-trade transaction, Warburg International shall inform an

Independent Fiduciary of each Plan Account involved in the

[[Page 31518]] cross-trade transaction that Warburg International

proposes to buy or sell specified securities in a cross-trade

transaction if an appropriate opportunity is available, the current

trading price for such securities, and the total number of shares to be

acquired or sold by each such Plan Account;

(2) Prior to each cross-trade transaction, the transaction shall be

authorized either orally or in writing by the Independent Fiduciary of

each Plan Account involved in the cross-trade transaction;

(3) If a cross-trade transaction is authorized orally by an

Independent Fiduciary, Warburg International shall provide written

confirmation of such authorization in a manner reasonably calculated to

be received by such Independent Fiduciary within one business day from

the date of such authorization;

(4) The authorization referred to in this Section II shall be

effective for a period of three business days; and

(5) No more than ten days after the completion of a cross-trade

transaction, the Independent Fiduciary shall be provided with a written

confirmation of the transaction and the price at which the transaction

was executed.

(b) A cross-trade transaction is effected only where the

transaction involves less than five (5) percent of the aggregate

average daily trading volume for the securities involved in 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 Plan

Accounts affected by the transaction, prior to the execution of the

cross-trade.

(c) The cross-trade transaction is effected at a price which is

within ten (10) percent of the closing price of the security on the day

before the date on which Warburg International received authorization

by the Independent Fiduciary to engage in the cross-trade transaction.

Section III--Definitions

For purposes of this proposed exemption:

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

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

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

control with Warburg International;

(c) ``Buying Account'' means the Account which seeks to purchase

securities in a cross-trade transaction;

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

securities between Accounts for which Warburg International or an

Affiliate is acting as investment manager;

(e) ``Plan Account'' means an Account managed by Warburg

International consisting of assets of one or more employee benefit

plans which are subject to the Act;

(f) ``Non-Plan Account'' means an Account managed by Warburg

International consisting of assets of clients which are not employee

benefit plans subject to the Act; and

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

securities in a cross-trade transaction.

Summary of Facts and Representations

1. Warburg International is a wholly-owned subsidiary of Mercury

Asset Management plc (MAM), a public limited company organized under

the laws of the United Kingdom. As of September 30, 1994, MAM and its

subsidiaries had over $90 billion of assets under management. Warburg

International is registered as an investment adviser under the U.S.

Investment Advisers Act of 1940 (the 1940 Act) and is a member of the

Investment Management Regulatory Organization Limited (IMRO) in the

United Kingdom. Warburg International's clients are primarily U.S.

institutional investors, such as qualified pension funds and registered

investment companies. As of December 31, 1994, Warburg International

had more than $3 billion in assets under management, of which

approximately $2 billion consisted of assets of Plan Accounts and

governmental plan accounts for which it had agreed to act as a

fiduciary.

2. The Accounts for which an exemption is requested are those Plan

Accounts for which Warburg International provides active portfolio

management. Investment decisions are generally subject to the

investment manager's discretion, subject to general written guidelines

as to which types of securities to acquire or sell for the Accounts.

For some Accounts, investment selections are based in part on the

corresponding decisions made for registered investment companies or

other institutional accounts for which Warburg International or an

Affiliate serves as the investment adviser. Thus, Accounts with the

same or similar investment guidelines or objectives often will be

acquiring or selling the same securities on the same day.

3. Warburg International states that the acquisition or disposition

of any particular security for an Account would be unrelated to the

fact that an opportunity for a cross-trade transaction may be

available. Under the cross-trade program, if Warburg International or

an Affiliate sells securities to another Account it manages, or

acquires such securities from another Account it manages, it would have

an opportunity to save commissions for both the selling or acquiring

Account. Under current procedures, all securities transactions are

effected by an independent broker which may be dealing with a second

broker acting for the party on the other side of the transaction. If

Warburg International effects a transaction through a broker on the

open market, the client would ordinarily be charged a commission at the

market rate (normally about 0.2 percent, but commissions vary according

to the country where the transaction is effected). However, under the

cross-trade program, Warburg International states that no commission

would be charged where the transaction is effected by Warburg

International or an Affiliate, and in certain markets, transfer or

registration taxes would also not be charged. Warburg International

states that even if a broker is involved, matching the buy and sell

orders for a particular day through a single broker in an off-market

transaction would still result in lower commission charges for the

Accounts.

4. Warburg International represents that the Plan Accounts would

also benefit under the cross-trade program by not incurring the cost

(in terms of price) of dealing with a person or a firm acting as

``market-maker'' for the specific security involved in the transaction.

This cost is generally measured by the spread between the asking and

the bidding price for the securities. In normal trading by Warburg

International, the Selling Account receives a lower ``bid'' price,

while the Buying Account pays a higher ``ask'' price. By contrast, in a

direct cross-trade, the price received by the Selling Account would be

the same as the price paid by the Buying Account, based on an average

of the ``bid'' and ``ask'' prices, without any dealer mark-ups. In

addition, if permitted to direct a cross-trading of securities from one

Account to another, Warburg International would be able to implement

its investment strategies at the earliest possible point in time.

Finally, the trading of some securities may be ``thin'', that is there

are limited numbers of shares available. In such cases, the spread may

be particularly wide. Matched sales would essentially provide the

Accounts with early opportunities to acquire or sell such thinly-traded

securities without paying the spread.

[[Page 31519]]

5. Participation by Plan Accounts in Warburg International's cross-

trade program will be subject to several conditions. Each cross-trade

transaction will involve only securities for which there is a generally

recognized market. With respect to any non-U.S. securities, only those

securities traded on a recognized foreign securities exchange for which

market quotations are readily available will be involved in the cross-

trade program. Each cross-trade transaction will be effected at the

current market value for the security on the date of the direct cross-

trade. For equity securities, the current market value will be the

closing price for the security on the date of the transaction. The

``closing price'' will be the last trade price on exchanges where

dealing is order-driven and the closing mid-market price (i.e. the

average of the closing bid and offer prices) where dealing is quote-

driven. For all domestic or foreign debt securities, the current market

value will be the fair market value of the security as determined

pursuant to paragraph (b) of 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 Warburg International or an Affiliate acts as an

investment advisor.

Warburg International will receive no fees or other incremental

compensation (other than its previously agreed upon investment

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

6. A fiduciary of a Plan Account independent of Warburg

International and its Affiliates (i.e. the Independent Fiduciary) will

provide written authorization allowing for the Plan Account's

participation in Warburg International's cross-trading program, before

any specific cross-trades for such Account are effected. This

authorization will be terminable at will without penalty to the Plan

Account upon written notice to Warburg International of such

termination. In addition, before any such general authorization is

granted, Warburg International will provide the Independent Fiduciary

with all materials necessary to permit an evaluation of the cross-trade

program. These materials will include (but not be limited to) a copy of

the proposed and final exemptions, an explanation of how the

authorization may be terminated, a description of Warburg

International's cross-trade practices, and any other reasonably

available information regarding the matter which the Independent

Fiduciary may request.

7. After a Plan Account's participation in Warburg International's

cross-trading program is authorized, Warburg International will furnish

periodic reports to the Independent Fiduciary, at least once every

three months, and no later than 45 days following the period to which

it relates, disclosing: (a) A list of all cross-trade transactions

engaged in on behalf of the Plan Account; and (b) 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. The

Independent Fiduciary will also be furnished with a summary of certain

additional information at least once per year. The summary will be

furnished within 45 days after the end of the period to which it

relates, and will contain the following: (a) A description of the total

amount of the Plan Account's assets involved in cross-trade

transactions during the period, (b) a description of Warburg

International's cross-trade practices, if such practices have changed

materially during the period covered by the summary, (c) a statement

that the Independent Fiduciary's authorization of cross-trade

transactions may be terminated upon receipt by Warburg International of

written notice to that effect, and (d) a statement that the Independent

Fiduciary's authorization of the Plan Account's participation in the

cross-trade program will continue in effect unless it is terminated.

8. The Accounts involved in cross-trade transactions will not

include assets of any Plan established or maintained by Warburg

International or its Affiliates to provide income to its employees or

to result in a deferral of income by employees for periods extending to

the termination of covered employment or beyond.

Each employee benefit plan comprising a Plan Account participating

in Warburg International's cross-trading program will have total assets

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

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

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

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

single master trust.

9. Warburg International states that a Plan Account's participation

in its cross-trade program will also be subject to certain special

conditions. In addition to requiring a general authorization of a Plan

Account's participation in the cross-trade program, an Independent

Fiduciary will specifically authorize each cross-trade transaction. Any

such authorization will be effective only for a period of three

business days and will be subject to certain pricing and volume

limitations (as discussed in Paragraph 10 below). The authorization to

proceed with the cross-trade transaction will be either oral or

written. If a cross-trade transaction is authorized orally by an

Independent Fiduciary, Warburg International will provide a written

confirmation of the authorization in a manner reasonably calculated to

be received by the Independent Fiduciary within one business day from

the date of such authorization. The Independent Fiduciary will be sent

a written confirmation of the cross-trade transaction, including the

price at which it was executed, within ten days of the completion of

the transaction.

10. Warburg International states that a cross-trade transaction

will be effected only where the trade involves less than five (5)

percent of the aggregate average daily trading volume for the

securities involved in the transaction for the week immediately

preceding the authorization of the transaction. A cross-trade will

exceed this limit only by express written or oral authorization of an

Independent Fiduciary for each Plan Account involved, prior to the

execution of the cross-trade. With respect to pricing, a cross-trade

transaction will not be made at a price which differs by more than ten

(10) percent from the price at the close on the day before specific

authorization was provided by the Independent Fiduciary.

11. Warburg International represents that it is conceivable that

situations will arise in which it will be necessary to allocate cross-

trade opportunities among several Accounts. Warburg International will

make these decisions pursuant to a non-discretionary pro-rata

allocation system. For example, in the event that the number of shares

of a particular security which a Selling Account needs to sell on a

given day is less than the number of shares of such security which

other Buying Accounts need to buy on that date, the cross-trade

opportunity will be allocated among potential Buying Accounts on a pro-

rata basis. A similar procedure would apply where the number of shares

of a particular security to be sold by Selling Accounts is more than

the number of such shares which any Buying Accounts need to buy on that

date. Thus, the Accounts participating in Warburg International's

cross-trade program will have the opportunity to participate on a

proportional basis in cross-trade [[Page 31520]] transactions during

the operation of the program. Warburg International states 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.

12. In summary, Warburg International represents that the proposed

transactions will satisfy the statutory criteria of section 408(a) of

the Act because, among other things: (a) An Independent Fiduciary will

provide written authorization, which will be terminable at will, to

Warburg International to permit the Plan Account to participate in the

cross-trading program; (b) cross-trades will always be executed at the

current market price of the security on the date of the transaction, as

determined by an independent, third party source; (c) specific oral or

written authorization will be provided by the Independent Fiduciary to

Warburg International prior to each cross-trade transaction; (d) all

securities involved in cross-trades will be securities for which there

is a generally recognized market; (e) Warburg International will

provide periodic reporting of the cross-trade transactions to the

Independent Fiduciary; (f) the Plan Accounts will realize significant

cost savings due to reduced brokerage commissions and avoidance of the

bid and offer spread and will benefit from more efficient

implementation of investment strategies; (g) each employee benefit plan

comprising a Plan Account participating in the cross-trade will have

total assets of at least $25 million or must be part of a master trust

of plans maintained by a single employer or controlled group of

employers which has at least $25 million in assets; (h) the cross-trade

transactions will not include any assets of a Plan established or

maintained by Warburg International or its Affiliates; and (i) neither

Warburg International nor its Affiliates will receive any additional

fees or other compensation as a result of the proposed cross-trade

transactions.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 9th day of June, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 95-14576 Filed 6-14-95; 8:45 am]

BILLING CODE 4510-29-P