Proposed Exemptions; Retirement Plan for Employees of United Jewish Appeal-Federation of Jewish Philanthropies of New York and Affiliated Agencies and Institutions (the Plan)

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-09582, et al.]

Proposed Exemptions; Retirement Plan for Employees of United

Jewish Appeal-Federation of Jewish Philanthropies of New York and

Affiliated Agencies and Institutions (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

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

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

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

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

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

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

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

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

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

ADDRESSES: All written comments and requests 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.

[[Page 33860]]

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.

Retirement Plan for Employees of United Jewish Appeal-Federation of

Jewish Philanthropies of New York, Inc. and Affiliated Agencies and

Institutions (the Plan) Located in New York, New York

[Application No. D-09582]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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

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

Code, shall not apply effective May 29, 1990, to the past purchase and

sale of certain securities (the Securities) on May 29, 1990, between

the Plan and the endowment fund (the Fund) of the United Jewish Appeal-

Federation of Jewish Philanthropies of New York, Inc. (the Federation),

a sponsor of the Plan and a party in interest with respect to the Plan;

provided that the following conditions are satisfied:

(a) The transfer of the Securities was a one-time cash transaction;

(b) The transaction was at fair market value as determined by the

closing prices on May 25, 1990, on the New York Stock Exchange (NYSE)

and the American Stock Exchange (AMEX);

(c) The Plan paid no commissions with respect to the transaction;

(d) The Federation determined upon consultation with Delaware

Investment Advisors (Delaware) to engage in the transaction;

(e) The Securities transferred from the Fund to the Plan were all

listed on either the NYSE or AMEX, and constituted exactly a 50% pro

rata share of all the securities then owned by the Fund; and

(f) Over a three plan year period, the Federation will contribute

$513,009.39 to the Plan to make up the loss sustained by the Plan when

the Securities were sold out of the Plan portfolio.

EFFECTIVE DATE: If granted this exemption will be effective as of May

29, 1990.

Summary of Facts and Representations

1. The Plan is a defined benefit multiple employer plan. As of

September 30, 1993, the Plan had $76,919,425 million in net assets, and

as of October 1, 1994, the Plan had approximately 5634 participants.

Chemical Bank (formerly Manufacturers Hanover Trust Company) is the

Plan's trustee.

2. The Federation is a not-for-profit corporation which is exempt

from federal tax under section 501(c)(3) of the Code. The Federation is

a private, local voluntary human service organization. The Fund is a

special general asset account of the Federation.1

\1\ The Federation's consolidated assets are composed of amounts

received from donor-created endowments and funds designated by the

Federation's Board of Directors to provide for the Federation's

long-term needs.

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3. The investment committee (the Investment Committee) of the

Federation appoints investment managers to manage the Fund's and the

Plan's assets. The members of the Investment Committee are appointed by

the Board of Directors of the Federation. Delaware Investment Advisors

(Delaware), a division of Delaware Management Company Inc., served as

an investment manager for the Fund from 1983 through January of 1993,

and managed the Fund's assets of approximately $30 million. Fiduciary

Trust Co. was the custodian for this account.

4. The applicant represents that early in 1990, the Investment

Committee decided that it wanted to hire Delaware to replace another

investment manager, Delphi Management (Delphi), with respect to the

management of approximately $10 million of the Plan's assets. At that

time, the Investment Committee also determined that the total amount of

the Federation related assets, including the assets of the Plan and the

Fund, managed by any one investment manager should be limited. This

would limit the risk to the portfolios of the Fund and the Plan and

further protect the Federation, which as the Plan sponsor was

ultimately responsible for any losses to the Plan. Because Delaware was

already managing a desired maximum level of the Fund's assets, it was

determined that one half of this desired maximum should be managed by

Delaware for the Plan and one half managed by Delaware for the Fund.

Fees charged by Delaware for its investment management services

consisted of an annual charge (billed in quarterly installments) based

upon the amount of assets under management.

5. In April of 1990, James L. Rothkopf (Mr. Rothkopf), the chief

financial officer of the Federation, informed Delaware that the

Investment Committee wanted a portion of the Plan's assets at that time

managed by Delphi, to be invested with Delaware. Mr. Rothkopf also

indicated that to keep the total Federation related assets under

Delaware management at the same level, the Fund investment with

Delaware would be reduced to one-half the previous level and that one-

half of the Fund's investments would be transferred pro-rata to the

Plan portfolio. Delaware indicated to the Investment Committee that it

wanted the Plan's portfolio to be virtually identical to the Fund's

portfolio.

6. The purchase of Securities by the Plan from the Fund took place

on May 29, 1990, at the direction of the Assistant Comptroller of the

Federation. In order to accomplish the prescribed allocation, and to

avoid the Plan paying any commissions on the acquisition of the

Securities, approximately fifty percent (50%) of the amount of each

Security held in the Fund portfolio was transferred from Fiduciary

Trust Co., custodian for the Fund, into the Plan account at

Manufacturers Hanover Trust Company, the custodian of the Plan's

assets, and cash representing the fair market value of these Securities

($10,577,756.77) was transferred to a portion of the Fund asset

portfolio not

[[Page 33861]]

managed by Delaware. All the Securities involved in the transaction

were securities of companies listed on the NYSE, with the exception of

one Security listed on the AMEX. The fair market value of the

Securities was determined by using the exchanges' closing prices on

Friday, May 25, 1990. It is represented that the Plan did not pay any

fees related to the subject transaction.

7. The applicant represents that the actual transfer of the

Securities took place on Tuesday, May 29, 1990, because the prior

business day Monday, May 28 was a legal holiday and therefore, there

was no trading. The applicant represents that the closing price of the

Securities on Friday, May 25, 1990, was effectively equal to the

opening price of the Securities on Tuesday, May 29, 1990. Upon

completion of the transaction, the Plan held legal title to the

Securities acquired from the Fund. It is represented that at the time

of the transfer, approximately 17% of the Plan's assets were involved

in the transaction.

8. Delaware represents that the Federation consummated the

transaction upon facilitation by Delaware and approved the transfer of

the Securities from the Fund to the Plan. In an affidavit submitted to

the Department, Mr. Rothkopf of the Federation stated that Mr. Marion

Dixon, a former money manager with Delaware who was responsible for the

Fund portfolio and subsequently for the Plan portfolio, advised him

that the initial Plan portfolio should represent 50 percent (50%) of

the existing Fund portfolio. This would enable the Fund and the Plan to

have identical investment portfolios, thereby achieving the portfolio

structures desired by Mr. Dixon, and would also save brokerage

commissions. Delaware represents that Mr. Dixon agreed that the initial

portfolio for the Plan should contain substantially the same securities

as were in the Fund portfolio at that time. Delaware represents that

they were of the opinion then, as well as now, that the transfer

transaction was in the best interest and protective of the Plan.

9. The applicant states that between June 1990 and January 1993,

Delaware sold all the Securities purchased by the Plan in the

transaction subject to this exemption request. The determination of

gains and losses on the sale of the Securities by the Plan was

calculated on a ``first in first out'' basis. The total difference

between the aggregate purchase price of the Securities by the Plan and

the aggregate sale price of the Securities by the Plan, was an

aggregate loss of $513,009.39. The applicant maintains that the Plan

portfolio was a managed portfolio with transactions not necessarily

based on individual stock profit or loss positions, but based on the

portfolio's desired position. As such, stock was sold for a number of

reasons, including availability of stock with a better return potential

or less downside risk, diversity, cyclical markets, and a variety of

other factors. In this regard, stocks were often sold prior to a profit

realization because preferable alternative investments were available

or concentrations of stock needed to be changed. However, the applicant

represents that the Federation is now prepared to contribute to the

Plan an amount equal to $513,009.39 over a three plan year period (the

Contribution), in order to make up for the loss to the Plan. The

Contribution will be made at the same time that the last installment of

each annual contribution is made to the Plan for the applicable plan

year.

10. The applicant represents that subsequent to the transaction,

both the Plan and the Federation were audited by a ``Big Six''

accounting firm, and the transaction was not identified by the auditors

as being prohibited during either audit. In the summer of 1993, counsel

for the Federation contacted the law firm of Proskauer Rose Goetz &

Mendelson 2 (PRG&M) to discuss the Fund's and the Plan's claims in

a class action settlement against the issuer of one of the Securities

involved in the subject transaction. When the facts of the transaction

surfaced in the discussion, it was questioned whether a prohibited

transaction had occurred as a result of the Plan's purchase of the

Securities from the Fund. PRG&M then commenced an investigation of the

facts surrounding the transaction and the ERISA provisions involved.

The applicant then filed an exemption request in this matter.

2 This law firm was not counsel to the Federation nor the

Plan at the time of the transaction.

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11. The applicant has requested retroactive relief for the

transaction which occurred on May 29, 1990, noting, among other things

that: (1) The transaction was a one-time transfer of the Securities for

cash; (2) the transaction was in the interest and protective of the

Plan because the Plan was able to acquire the Securities at fair market

value and not pay any commissions; and (3) the Securities represented a

well-diversified portfolio of stock of recognized companies.

12. In summary, the applicant represents that the transaction

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

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

(a) The transfer of the Securities was a one-time cash transaction;

(b) The transaction was at fair market value as evidenced by the

closing prices on May 25, 1990 on the NYSE and the AMEX;

(c) The Plan paid no commissions with respect to the transaction;

(d) The Federation determined upon consultation with Delaware to

engage in the transaction;

(e) The Securities transferred from the Fund to the Plan were all

listed on either the NYSE or AMEX and constituted exactly a 50% pro

rata share of all the securities then owned by the Fund; and

(f) Over a three plan year period, the Federation will contribute

$513,009.39 to the Plan to make up the loss sustained by the Plan when

the Securities were sold out of the Plan portfolio.

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

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

General Motors Hourly-Rate Employes Pension Plan, General Motors

Retirement Program for Salaried Employees (the Salaried Plan), Saturn

Individual Retirement Plan for Represented Team Members, Saturn

Personal Choices Retirement Plan for Non-Represented Team Members, and

Employees' Retirement Plan for GMAC Mortgage Corporation (collectively,

the Plans) Located in New York, New York

[Application Nos. D-09859 through D-09863]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

is granted the restrictions of sections 406(a) 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 (D) of the Code, shall not

apply, effective April 9, 1994, to the acquisition by the Plans of

limited partnership interests (the Interests) in APA Excelsior III,

L.P. from Metropolitan Life Insurance Company (Metropolitan), a party

in interest with respect to the Plans; provided that the following

conditions are satisfied:

(A) All terms and conditions of the transaction were at least as

favorable to the Plans as those which the Plans

[[Page 33862]]

could obtain in an arm's-length transaction with an unrelated party;

(B) Metropolitan is not, and has not been, a fiduciary with respect

to any assets of the Plans involved in the transaction;

(C) The transaction was a one-time transaction for cash in which

the purchase price did not exceed the fair market value of the

Interests;

(D) The methodology for determining the fair market value of the

Interests was in accordance with standards maintained by professional

venture capital valuation specialists for the valuation of limited

partnership interests in venture capital partnerships; and

(E) Metropolitan did not participate in the Plans' determination of

the fair market value of the Interests.

EFFECTIVE DATE: This exemption, if granted, will be effective as of

April 9, 1994.

Summary of Facts and Representations

Introduction: In April 1994, the Plans acquired limited partnership

interests (the Interests) in A.P. Excelsior III, Limited Partnership

(the Partnership) from Metropolitan Life Insurance Company

(Metropolitan). This transaction occurred without a determination

having been made that Metropolitan was a party in interest with respect

to the Plans. Subsequently, the parties discovered that the entity from

which the Plan acquired the Interests, Metropolitan, is a service-

provider party in interest with respect to certain of the Plans, and an

exemption is now requested for the Plans' past acquisition of the

Interests from Metropolitan, under the terms and conditions described

herein.

1. The Plans are defined benefit and defined contribution employee

benefit plans maintained by General Motors Corporation and its

affiliates (GM), with approximately 831,530 participants as of October

1, 1994. The approximate fair market value of the total assets of the

Plans as of May 31, 1994 was $41 billion. The assets of the Plans are

maintained in two trusts (the Plans' Trusts): The General Motors

Salaried Employees Pension Trust, which holds the assets of the

Salaried Plan, and the General Motors Hourly-Rate Employees Pension

Trust, which holds the assets of the other four Plans. The named

fiduciary with respect to each Plan is the Finance Committee of the

board of directors of GM (the Finance Committee).

2. The Finance Committee has delegated certain fiduciary

responsibilities to the Pension Investment Committee (the PIC),

including the responsibility for allocating funds among asset classes

in accordance with broad investment guidelines established by the

Finance Committee and overseeing in-house investing for a portion of

the assets of the trusts which fund the Plans. The PIC is comprised of

executive officers of GM. The PIC carries out its investment oversight

responsibility through the General Motors Investment Management

Corporation (GMIMCO), a registered investment adviser under the

Investment Advisers Act of 1940, as amended. Certain members of the PIC

serve on the board of directors of GMIMCO. The Finance Committee

reviews the actions of the PIC and GMIMCO on a periodic basis to

evaluate performance and to assure that the Finance Committee's

delegation of authority continues to be prudent.

3. GMIMCO is involved in all aspects of the management of the

Plans' assets, and its functions with respect to the Plans' involvement

in private market transactions are executed by its private market

investments staff (PMI Staff). The PMI Staff consists of twelve

professionals (the PMI Staff) who research, document and negotiate

private market transactions on behalf of the Plans, with the assistance

of GMIMCO's legal staff. Under current procedures, all private market

transactions subject to final approval by GM's in-house investment

management function are directed to the PMI Staff for review, analysis

and, if needed development. After an investment has been reviewed,

analyzed and favorably approved by the PMI Staff, the additional levels

of approval required for authorization of the investment depends upon

the amount of the investment. Final approval authority for private

market transactions rests with the PIC, for investments of amounts of

$75 million and under, and the Finance Committee, for investments of

amounts over $75 million. The PIC's final approval authority for the

investment of amounts of $30 million or less is exercised by a special

PIC subgroup, the Private Investment Review Team (the PIRT).

4. The current assets of the Plans under the authority of the PIC

include the Plans' Trusts' interests in the First Plaza Group Trust

(First Plaza). First Plaza, which invests solely in private market

investments, is a group trust maintained by GM on behalf of the Plans'

Trusts, each of which owns approximately 50 percent. The trustee of

First Plaza is Mellon Bank, N.A. (Mellon Bank). On April 19, 1994,

pursuant to the direction of the PIC and GMIMCO, First Plaza invested

$2,465,784 in the APA Excelsior III, L.P. (the Partnership) by

purchasing limited partnership interests (the Interests) from

Metropolitan Life Insurance Company (Metropolitan). The Interests

purchased by the Plan represent 4.2 percent of the Partnership's total

limited partnership interests. The Partnership is a venture capital

operating company, the purpose of which is to generate long-term

capital appreciation by acquiring a broad portfolio of equity-oriented

investment positions in quoted and nonquoted companies in a variety of

industries in the United States. As a result of such purchase, First

Plaza succeeded to the obligation to make additional capital

contributions of $1,150,000 to the Partnership. GM represents that the

Interests represent a total capital contributions commitment of $5

million to the Partnership, $3,850,000 of which had been paid by

Metropolitan prior to First Plaza's purchase of the Interests. GM

states that the difference between the $2,465,784 paid for the

Interests by First Plaza and the $3,850,000 invested in the Interests

by Metropolitan represents (a) distributions Metropolitan had already

received from the Partnership, and (b) a discount negotiated by GMIMCO

on behalf of First Plaza. GM represents that in June 1994, the PIC and

GMIMCO and Metropolitan became aware that the transaction was a

prohibited transaction under the Act, due to the fact that Metropolitan

is a service-provider party in interest with respect to the Plans. The

PIC and GMIMCO are requesting an exemption for the Plans' past purchase

of the Interests from Metropolitan, effective April 9, 1994, under the

terms and conditions described herein.

5. Metropolitan is a mutual life insurance company organized under

the laws of the state of New York, with total assets under management

of approximately $163.4 billion as of December 31, 1993. Metropolitan

represents that it offers a wide variety of insurance products, asset

management and administrative services for thousands of employee

benefit plans subject to the Act. GM and Metropolitan represent that

Metropolitan is totally independent from GM, except as provider to the

Plans of services which are not involved in the subject transaction. GM

represents that Metropolitan's services to the Plans are described as

follows:

(a) In 1940, the General Motors Retirement Program for Salaried

Employee's was funded by a deferred group annuity contract under which

annuities were purchased from Metropolitan and other insurance

companies. Effective January 1, 1977,

[[Page 33863]]

the funding under the deferred group annuity was changed to a deposit

administration contract with immediate participation guarantee. It

remains in effect but no additional funds have been deposited in the

contract since 1985.

(b) Metropolitan coordinates the transfer of all insured after-tax

employee contributions to the Plans' trustee for distribution upon a

Plan participant's retirement.

(c) Since 1988, Metropolitan has served as recordkeeper under the

Saturn Individual Retirement Plan for Represented Team Members and,

upon request, provides annuities with respect to employee contributions

under the Saturn Personal Choices Retirement Plan for Non-Represented

Team Members.

GM represents that neither Metropolitan nor any of its affiliates

is a fiduciary with respect to any of the Plans' assets which were used

to purchase the Interests or any assets to be used to pay the remaining

capital contributions with respect to the Interests. Metropolitan

represents that it maintains procedures for determining whether a

proposed transaction is prohibited under the Act, and that such

procedures were inadvertently not utilized in advance of the subject

transaction.

6. GM and Metropolitan represent that the transaction was

negotiated at arm's length and in good faith upon the mistaken

assumption that Metropolitan was not a party in interest with respect

to the Plans, and, accordingly, that the parties were unaware that the

transaction with First Plaza was prohibited under section 406(a) of the

Act. GM represents that the PIC and GMIMCO maintain comprehensive and

up-to-date lists of parties in interest with respect to the Plans in

order to guard against inadvertent party in interest transactions, and

that Metropolitan was reflected in such lists due to its holding and

investment of employee after-tax contributions under the Plans under

both separate account and general account arrangements. GM maintains

that, as with all investments directed by the PIC and GMIMCO, the

normal due diligence procedures were followed. GM notes that the

investment contracts with Metropolitan were entered into almost 50

years ago and are not administered by the PMI Staff, which effected the

purchase of the Interests from Metropolitan. As a result, Metropolitan

was not recognized by the PMI Staff as a party in interest, and the PMI

staff did not refer to the party in interest list in advance of the

transaction. GM also notes that the current party in interest list

indicates 1,375 entities which are parties in interest with respect to

the Plans. GM represents that the staffs and attorneys of the PIC and

GMIMCO and the PIRT each believed that another responsible party had

reviewed the party in interest list as the transaction proceeded.

7. GM represents that the potential purchase of the Interests by

First Plaza was an opportunity which was brought to the PMI Staff by

the general partner of the Partnership, and not by Metropolitan. GM

states that this recommendation was subject to the same thorough

investigation and analysis by the PMI Staff as any other private market

transaction proposed for the Plans. GM represents that all aspects of

the investment analysis, the determination and negotiation of the

purchase, and the continued monitoring of the investment have proceeded

strictly in accordance with the procedures which the PIC and GMIMCO

maintain to ensure that such investments meet the Plans' investment

criteria and do not subject the Plans to any unnecessary risk.

8. Valuation of the Interests: GM represents that the purchase

price paid for the Interests was not in excess of the fair market value

of the Interests as of the sale date, as determined by GMIMCO's PMI

Staff contemporaneously with the transaction. In this regard, GM

represents that the PMI Staff utilized the valuation methodology

utilized by GMIMCO in any transaction requiring the calculation of the

fair market value of interests in a venture capital fund. GM describes

the method of determining the fair market value of the Interests as

follows:

The PMI Staff requested and received from the general partner of

the Partnership (the General Partner) the most recent statement of the

value of Metropolitan's capital account in the Partnership. The PMI

Staff adjusted this value by adding all drawdowns to the Partnership by

Metropolitan, and subtracting all distributions from the Partnership to

Metropolitan, since the date of the statement. Each public company in

the Partnership's portfolio was valued using the latest available

public market value, and then an appropriate liquidity discount was

taken. The specific discount rate applied to each such portfolio

company depended on how soon it was then anticipated that its security

would be distributed from the Partnership to the limited partners.

The PMI Staff requested and received information from the General

Partner regarding the private (i.e. non-publicly-traded) investments in

the Partnership. Using this information and other information which the

PMI Staff was able to obtain from other sources, the private

investments in the Partnership's portfolio were valued by the PMI

Staff. In valuing each such company, the PMI Staff elected to use

conservative standards and, in fact, valued some companies at zero, not

because that was the actual value, but because there was not enough

information available at that time to make a reasonable determination

of fair market value. GM represents that such ``zero valuation'' is

standard practice of financial analysis in the venture capital

industry.

With respect to the Partnership's holdings of interests in

publicly-traded companies and those non-public companies for which

significant financial performance information was available, the PMI

Staff projected what each company would be worth in the future and then

discounted that amount back to the present using an appropriate

discount rate. The future projections were based on the PMI Staff's

knowledge of each particular company, including projected cash flow of

the company, probability of when and if the company would be going

public, the company's business plan, the anticipated timing of

distribution of a company's securities after the company has gone

public or the sale proceeds from the sale of the company to a third

party, and information regarding the General Partner.

After determining the discounted values of the portfolio companies

and the adjusted book value of the Partnership's limited partnership

interests, the PMI Staff entered into negotiations with Metropolitan

which resulted in a purchase price which was not more than the PMI

Staff's determination of the fair market value of the Interests.

9. GM represents that the process and methodology utilized by the

PMI Staff, described above, reflects the venture capital industry

standards for evaluation. Specifically, GM states that GMIMCO developed

this methodology in consultations with two widely-known sponsors of

venture capital funds, Brinson Partners, Inc. (Brinson) and Chancellor

Capital Management, Inc., each of which uses the same methodology when

purchasing limited partnership interests in the secondary market.

Brinson, a registered investment adviser which maintains a fund

investing solely in limited partnership interests sold on the secondary

market, has reviewed and evaluated the methodology utilized by the PMI

Staff in determining the fair market value of the Interests for

purposes of First Plaza's

[[Page 33864]]

purchase of the Interests from Metropolitan. Brinson represents that

the methodology used by the PMI Staff was appropriate and reasonable,

and that this conclusion is based on Brinson's experience as a seasoned

long-term venture capital and secondary partnership investor. GM

represents that at no time was Metropolitan a part of the process by

which the PMI Staff determined the fair market value of the Interests.

10. In summary, the applicants represent that the criteria of

section 408(a) of the Act are satisfied in the subject transaction for

the following reasons: (1) The transaction was a one-time transaction

for cash; (2) Metropolitan was not and is not a fiduciary with respect

to any assets involved in the transaction; (3) The purchase price did

not exceed the Interests' fair market value, as determined by the PMI

Staff; (4) The fair market value of the Interests was determined by the

PMI Staff according to GMIMCO's standard procedures for valuation of

interests in venture capital funds; and (5) Brinson determined that the

methodology utilized by the PMI Staff in determining the Interests'

fair market value was appropriate and reasonable.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

First and Farmers Bank of Somerset, Inc. (the Bank) Located in

Somerset, Kentucky

[Application Numbers D-09921 through D-09926]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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 April 25, 1995, to the

cash sale of certain collateralized mortgage obligations (CMOs) held by

six employee benefit plans for which the Bank acts as trustee (the

Plans) to the Bank, a party in interest with respect to the Plans.

This proposed exemption is subject to the following conditions: (1)

Each sale was a one-time transaction for cash; (2) Each Plan received

an amount that was equal to the greater of: (a) the outstanding

principal balance for each CMO owned by the Plans, plus accrued but

unpaid interest, at the time of the sale, (b) the amortized cost for

each CMO owned by the Plans, plus accrued but unpaid interest, as

determined by the Bank on the date of the sale; or (c) the fair market

value of each CMO owned by the Plans as determined by the Bank on the

basis of reasonable inquiry from at least three sources that are

broker-dealers or pricing services independent of the Bank at the time

of the sale; (3) The Plans did not pay any commissions or other

expenses with respect to the sale; (4) The Bank, as trustee of the

Plans, determined that the sale of the CMOs is in the best interests of

each of the Plans and their participants and beneficiaries at the time

of the transaction; (5) The Bank took all appropriate actions necessary

to safeguard the interests of the Plans and their participants and

beneficiaries in connection with the transactions; and (6) Each Plan

received a reasonable rate of return on the CMOs during the period of

time that it held the CMOs.

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

April 25, 1995.

Summary of Facts and Representations

1. The Bank is a Kentucky chartered commercial bank that was

organized in November of 1870. First and Farmers Bancshares, Inc., a

one-bank holding company incorporated in Kentucky in 1983, owns 80.43

percent of the Bank. The Bank offers the traditional services of a

community bank (e.g., checking, savings, loans and trusts) to both

individuals and entities in the Somerset area. The Bank serves as

trustee of the Plans and has investment discretion with respect to the

assets of the Plans.

The Plans are the Adams and Adams Keogh Retirement Plan (the Adams

Plan); the Lake Cumberland Home Health Agency Employee Retirement Plan

(the Lake Plan); the Bank of Cumberland Money Purchase Pension Plan

(the Cumberland Plan); the Childrens Clinic Money Purchase Pension Plan

(the Clinic Plan); the Ruckels Farm Supply Defined Contribution Plan

(the Ruckels Plan); and the First and Farmers Bank Employee Retirement

Plan (the Bank Plan). All of the Plans are defined contribution plans

except the Bank Plan, which is a defined benefit plan.

As of December 30, 1994, the Adams Plan had seven participants and

total assets of $377,074; the Lake Plan had 271 participants and total

assets of $939,926; the Cumberland Plan had twenty-one participants and

total assets of $520,996; the Clinic Plan had fifteen participants and

total assets of $593,925; the Ruckels Plan had ten participants and

total assets of $147,207; and the Bank Plan had 124 participants and

total assets of $662,513. Thus, as of December 30, 1994, the Plans had

448 participants and total assets of approximately $3,241,641.

2. The Bank represents that at various times during September,

November and December of 1993, assets of the Plans were invested in the

CMOs, which were purchased from broker-dealers that were independent of

the Plans as well as the Bank and its affiliates. The CMOs are

investment products through which investors purchase mortgage-backed

securities that represent interests in a pool of residential mortgage

loans. In general, investors receive payments of principal and interest

or, in some cases, either principal or interest only, depending upon

the type of security purchased. Interest payments change monthly in

relation to a specific index, such as the London Interbank Offered Rate

(LIBOR), contained in a formula used to calculate the interest rate for

such securities. Principal payments vary in amount and timing depending

upon how quickly the various mortgage-backed securities prepay due to

the prepayment speed of the mortgages in the mortgage pools. The

repayment of principal and interest is usually guaranteed by various

U.S. Government Agencies, such as the Federal National Mortgage

Association (FNMA or ``Fannie Mae'').

3. The CMOs are described as follows: (a) CUSIP 31358JAU5, FNMA

Guaranteed REMIC Pass-Through Certificates, Fannie Mae REMIC Trust

1991-110, Class E; (b) CUSIP 31358NCV2, FNMA Guaranteed REMIC Pass-

Through Certificates, Fannie Mae REMIC Trust 1992-96, Class E; (c)

CUSIP 31359GDX1, FNMA Guaranteed REMIC Pass-Through Certificates,

Fannie Mae REMIC Trust 1993-225, Class SM; (d) CUSIP 31359GDTO, FNMA

Guaranteed REMIC Pass-Through Certificates, Fannie Mae REMIC Trust

1993-225, Class SO.3

3 The applicant states further that if a plan acquires a

``guaranteed governmental mortgage pool certificate'', the plan's

assets include the certificate but not any of the mortgages

underlying such certificate (see 29 CFR 2510.3-101(i)). A

``guaranteed governmental mortgage pool certificate'' is a

certificate (i) that is backed by, or evidences an interest in,

specified mortgages or participation interests, and (ii) whose

interest and principal payments are guaranteed by the Government

National Mortgage Association (GNMA), the Federal Home Loan Mortgage

Corporation (FHLMC or ``Freddie Mac''), or FNMA. Thus, the applicant

represents that since all of the CMOs have interest and principal

payments payable under the CMOs guaranteed by FNMA, the

[[Page 33865]]

assets of the Plans do not include any of the mortgages underlying such

CMOs.

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

All of the CMOs mentioned above are structured as a real estate

mortgage investment conduits (``REMIC'') under section 860D of the

Code. The various classes of certificates receive principal and,

possibly, interest payments in differing portions and at differing

times from the cash flows provided from the monthly payments received

on the underlying mortgages.

The repayment of principal from the underlying mortgages fluctuates

significantly. To facilitate the structuring of such REMICs, the

prepayments on the pools of mortgages are commonly measured relative to

a variety of prepayment models. The model used for these REMICs is the

Public Securities Association's standard prepayment model or ``PSA''.

This model assumes that mortgages will prepay at an annual rate of .2

percent in the first month after origination, then the prepayment rate

increases at an annual rate of .2 percent per month up to the 30th

month after origination and then the prepayment rate is constant at 6

percent per annum in the 30th and later months. This assumption is

called 100 PSA.

The REMIC structure allocates principal payments to the various

classes or ``tranches'' in varying amounts as principal payments are

made accordingly to the allocations specified in the prospectuses. The

exact date of repayment of all principal to any REMIC class is not

known until the mortgage-backed securities are paid in full. The

maturity for the various classes is referred to as the ``weighted

average life'' (WAL). The WAL of a class refers to the average amount

of time, expressed in years, which will elapse from the date of its

issuance until each dollar of principal has been repaid to the investor

based on the PSA assumption. The holders of all classes will receive

all of their principal back. However, the timing of when that principal

is returned is dependent on how quickly the underlying mortgages are

repaid or refinanced. In no event will the time for the recovery of

principal exceed the final maturity date of the underlying mortgages.

Each month the monthly payments on the underlying mortgages are

collected and distributed to the holders of the various REMIC classes.

Depending upon the structure of the REMIC, interest may be paid monthly

according to a specific formula. The CMOs owned by the Plans, described

in further detail below, are either ``principal only'' or ``inverse

floaters'' indexed to one month LIBOR.

Principal only bonds are similar to Series E savings bonds in that

the investor purchases the bond at a discount and receives the

principal cash flow off the collateral. The difference in the principal

amount invested and the face value equates to the investment's yield.

The timing of the cash flows received determines the ultimate yield on

the investment. With a principal only bond, the faster the collateral

pays down, the higher the yield the investor receives. Income is

recognized by accreting the discount over the expected life of the

security; however, there are no regular interest payments received on

principal only bonds. There is no loss of principal because the

investor will ultimately receive face value. However, because there is

no guarantee as to the timing of the cash flows, the bond's ultimate

yield is unknown.

The remaining CMOs are ``inverse floaters'' so described, because

the formulas used to calculate the interest payments, which adjust

monthly for each certificate, usually raise the rate when the index

falls and lower the rate when the index rises. ``LIBOR'' refers to the

arithmetic mean of the London Interbank offered quotations for one-

month Eurodollar deposits. LIBOR moves up or down as interest rates

move up or down. The movement of LIBOR has an inverse relationship with

the interest paid on all inverse floating rate classes.

The Bank, as trustee of the Plans, purchased all of the CMOs from

Andrew F. Cashiola of Government Securities Corporation of Texas,

located in Houston, Texas, and Randy Stevens of Hart Securities, Inc.,

located in Houston, Texas. The Bank states that neither the brokers

(i.e. Mr. Cashiola or Mr. Stevens) nor their brokerage firms have any

relationship to the Plans, the employers that maintain the Plans, the

Bank or any of its affiliates.

A description of each CMOs, including the respective interest rate

formulas, WAL and PSA assumptions are set forth below in the Appendix.

4. At the time of the purchase of the CMOs by the Bank, as trustee

of the Plans, the Bank anticipated that each CMO would be retired

within one to three years of the date of purchase due to prepayments of

the underlying mortgages in each pool as obligors refinanced their

mortgages at lower interest rates. Because of recent increases in

interest rates, the market value of the CMOs had decreased

significantly. On April 25, 1995, the Bank obtained bids to determine

the fair market value of each CMO held by the Plans on the date of sale

from three different independent broker-dealers--PNC Securities in

Louisville, Kentucky; Commerce Union Investments in Memphis, Tennessee;

and First Tennessee Corporation in Memphis, Tennessee (the Broker-

Dealers). The Bank states that as of the date of the sale, the Broker-

Dealers were not related to, or associated with, the Bank or the Plans.

The Broker-Dealers provided the following bids as of April 25, 1995:

4

4 The Broker-Dealers' bids shown in the table represent a price

quoted per $100 of principal. To determine the fair market value for

each CMO based on the average bid quoted, the par value of the CMO

would be multiplied by the particular quote, expressed as a

percentage of 100. For example, if the par value of the CMO was

$10,000 and the average bid for the CMO on April 25, 1995 was $39.50

per $100 of principal, the quoted price would have been $3950 since

$10,000 x .3950 = $3950.

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

Average

CUSIP No. PNC Securities Commerce Union First Tennessee bid

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

31358JAU5................................... 35.00 37.00 46.50 39.50

31358NCV2................................... 42.00 37.00 39.50 39.50

31359GDT0................................... 29.00 29.75 27.25 28.67

31359GDX1................................... 14.00 20.00 24.50 19.50

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

Based on the pricing information obtained from the Broker-Dealers,

the Bank represents that the fair market value of the CMOs was

significantly below the original purchase price of the CMOs (as noted

in the first table below in Representation #7). The expectation of

additional interest rate increases in the near future caused the Bank

to believe that the CMOs would not appreciate in the near term. As a

result of these changing market conditions, the Bank anticipated that

the CMOs will not be retired for fifteen to twenty years due to the

slowing of the prepayment speed because of the recent increases in the

interest rates.5

[[Page 33866]]

5 The Department is expressing no opinion in this proposed

exemption regarding whether the acquisition and holding of the CMOs

by the Plans 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 the plan's potential exposure to losses

and the role the investment or investment course of action plays in

that portion of the plan's investment 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

such 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

comparable investments offering a similar return or result.

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

5. Under the terms of the Plans and the applicable law, a Plan

participant who retires or terminates employment is eligible to receive

a distribution of the value of his or her account in the Plan, sometime

immediately following retirement or termination. For purposes of this

distribution, the value of the participant's account is the value of

the account as of the Plan's last valuation date. If the Plans

continued to hold the CMOs, the value of each participant's account, as

of the valuation date, would reflect the recent decreases in fair

market value of the CMOs. In order to mitigate such potential losses,

the Bank purchased the CMOs on April 25, 1995 from the Plans at an

amount, which in each case was equal to the greater of: (a) The

outstanding principal balance for each CMO owned by the Plans, plus

accrued but unpaid interest, at the time of the sale, (b) the amortized

cost for each CMO owned by the Plans, plus accrued but unpaid interest,

as determined by the Bank on the date of sale; or (c) the fair market

value of each CMO owned by the Plans on the basis of reasonable inquiry

from at least three sources that are broker-dealers or pricing services

independent of the Bank.

6. The Bank calculated the value of the CMOs held by the Plans, as

of April 25, 1995, using an amortized cost computation. The Bank states

that the computation of the amortized cost was arrived at by a series

of computations. First, the Bank determined the amount of the discount

paid upon purchase (Purchase price--100 = Discount). The par value or

face value of each CMO was 100. The Bank states that any discount must

be allocated monthly in order to be properly matched to the principal

payments to be received over the life of the investment. Also, any

discount must be allocated monthly in order to properly account for the

income to be earned over the life of the investment. The number of

months to which the Bank allocated each discount was determined by the

WAL for each CMO at the time of purchase (expressed in years)

multiplied by twelve (WAL x 12 = amortizing months).6 Then, the

Bank determined the amount of each discount to be allocated to each

month by dividing each discount by the number of amortizing months. The

Bank determined the number of months remaining in the life of each CMO

by subtracting from the number of amortizing months the number of

months that the Plan actually held each CMO. The Bank states that the

remaining months were then multiplied by each monthly discount amount

to arrive at the discount balance for each CMO. The discount balance

was added to the par value for each CMO (i.e., 100) to arrive at the

amortized cost remaining for each CMO. Thus, the Bank states that the

formula it used for calculating amortized cost was as follows: 7

\6\ As noted previously in Representation #3, the WAL for a CMO

is determined at the time of purchase based on various assumptions

about the speed of principal repayments and interest rate changes,

using financial data provided by independent sources (such as

Bloomberg Financial Markets). The Bank states that changes to the

formula for calculating the amortized cost based on WAL assumptions

other than at the time of purchase would not provide an

administratively acceptable method of allocating the discount for a

CMO because such a method would require constant adjustments which

are not material to the concept of income recognition as it relates

to CMOs.

\7\ For example, assume that a particular CMO investment has

been held by a Plan for 6 months. If the WAL was 2.02 years and the

cost was 90 based on the par value being 100, the formula would be:

[[(90-100)/(2.02 x 12)] x [(2.02 x 12) - 6)]] + 100

= [(-10/24.24) x (24.24 - 6)] + 100

= (-.4125413 x 18.24) + 100

= -7.5247533 + 100

= 92.475247

As the formula indicates, the amortized cost using the average

life at purchase would be $92.475247 as compared to the actual cost

of $90.00. Therefore, the Bank states that the amortized cost

formula will cause the Plan to be paid an amount for this CMO

investment which is slightly more than the Plan's original cost

(i.e. basis).

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

7. The Bank also calculated the remaining principal balance, plus

accrued but unpaid interest, on the CMO investments held by each Plan

as of April 25, 1995, based on the original cost of the securities and

the principal and interest payments received by the Plans through that

date. As shown on the table below, the Bank represents that, as of

April 25, 1995, all of the Plans would have received more than the

remaining principal balances (plus accrued but unpaid interest) on

their CMO investments by using the Bank's amortized cost computation

for the CMOs. In addition, the table below shows the fair market values

of the CMOs held by each Plan, based on the Bank's solicitation of bids

from the Broker-Dealers.

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

Plan Amort. cost Prin. bal. Mkt. value

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

Adams Plan....................... $62,321 $53,845 $19,650

Lake Plan........................ 259,723 225,534 80,643

Cumberland Plan.................. 132,126 111,662 34,889

Clinic Plan...................... 139,288 116,543 30,108

Ruckels Plan..................... 14,466 11,698 2,925

Bank Plan........................ 243,234 210,076 72,895

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

The Bank also determined that, as of April 25, 1995, a sales price

for the CMOs held by each Plan based on amortized cost, plus the total

principal and interest payments received by the Plans through the date

of sale, produced a total return to the Plans that exceeded the Plans'

total original cost for the CMOs.

[[Page 33867]]

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

Interest Principal Total Original

Plan received received Amort. cost receipts cost

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

Adams Plan..................................... $4,080 ........... $62,321 $66,401 $57,925

Lake Plan...................................... 18,117 15,689 259,723 293,529 259,273

Cumberland Plan................................ 10,199 18,826 132,126 161,151 140,688

Clinic Plan.................................... 12,376 ........... 139,288 151,664 128,884

Ruckels Plan................................... 1,531 ........... 14,466 15,997 13,228

Bank Plan...................................... 17,513 20,395 243,234 281,142 247,927

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

The Bank represents that each Plan received a reasonable rate of

return on the CMOs during the period of time that it held the CMOs. In

this regard, the Bank states that the annualized weighted average rate

of return received by each Plan on its CMOs, net of the principal

investment, was as follows: (i) 14.28% for the Adams Plan; (ii) 13.57%

for the Lake Plan; (iii) 16.62% for the Cumberland Plan; (iv) 17.91%

for the Clinic Plan; (v) 21.53% for the Ruckels Plan; and (vi) 14.16%

for the Bank Plan.8

\8\ The formula for the annualized rate of return for the months

held was computed for each CMO as follows: [[((Interest Collected +

Accretion Income) / Number of Months Held) x 12] / Total Cost].

The term ``Accretion Income'' represents the accretion of the

discount received off of the face value of each CMO allocated to the

number of months each CMO was held. To arrive at an annualized

weighted average rate of return for each Plan, the annualized rate

of return for each CMO was calculated to reflect the return of each

CMO held by each Plan. The individual CMOs held by each Plan were

``weighted'' according to the amount invested to compute the total

weighted average rate of return for each Plan.

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

Based on the Bank's determination that the amortized cost method

resulted in the greatest sales price as of April 25, 1995, the Bank

purchased the CMOs from the Plans on April 25, 1995 at each CMOs'

amortized cost for a total of $851,158.

8. The Bank, as trustee of the Plans, states that the sale of the

CMOs was in the best interests of the Plans and their participants and

beneficiaries. The Bank states that the sale allowed the Plan

participants to insulate themselves from further decreases in the fair

market value of the CMOs and to mitigate any losses. In addition, the

Bank states that the sale of the CMOs shifted the consequences

associated with selling the CMOs before their retirement from the Plan

participants to the Bank.

9. The Bank represents that it took all appropriate actions

necessary to safeguard the interests of the Plans and their

participants and beneficiaries in connection with the sale of the CMOs.

The Bank ensures that each Plan received the appropriate amount of cash

from the Bank in exchange for such Plan's CMOs on April 25, 1995. The

Bank also ensures that the Plans did not pay any commissions or other

expenses in connection with the sale of the CMOs to the Bank.

10. In summary, the Bank represents that the sale satisfied the

statutory criteria of section 408(a) of the Act and section 4975 of the

Code because: (a) Each sale was a one-time transaction for cash; (b)

Each Plan received an amount that was equal to the greater of: (i) The

outstanding principal balance for each CMO owned by the Plan, plus

accrued but unpaid interest, at the time of the sale; (ii) the

amortized cost for each CMO owned by the Plans, plus accrued but unpaid

interest, as determined by the Bank on the date of sale; or (iii) the

fair market value of each CMO owned by the Plan as determined by the

Bank on the basis of reasonable inquiry from at least three sources

that are broker-dealers or pricing services independent of the Bank;

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

respect to the sale; (d) The Bank, as trustee of the Plans, determined

that the sale of the CMOs would be in the best interests of each Plan

and its participants and beneficiaries; (e) The Bank took all

appropriate actions necessary to safeguard the interests of the Plans

and their participants and beneficiaries in connection with the

proposed transactions; and (f) Each Plan received a reasonable rate of

return on the CMOs during the period of time it held the CMOs.

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 within

fifteen 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 days following the

publication of the proposed exemption in the Federal Register.

Appendix

A. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae

REMIC Trust 1991-110, Class E were issued by Fannie Mae as part of an

issue of pass-through certificates with nine various classes in the

total amount of $200,010,000. The Bank, as trustee of the Plans,

purchased portions of one of those classes. The Certificates are

secured by first lien residential mortgages with an original term to

maturity of 360 months or less.

This REMIC uses a 300 PSA assumption regarding principal repayment

(3 times 100 PSA). The WAL for the E class based on a 300 PSA was 10.9

years at the time of purchase.

This REMIC is a principal only bond and, therefore, does not bear

interest. The initial interest rate and final distribution date for

class E was 9.1 percent and May of 2021, respectively.

B. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae

REMIC Trust 1992-96, Class B were issued by Fannie Mae as part of an

issue of pass-through certificates with six various classes in the

total amount of $300 million. The Bank, as trustee of the Plans,

purchased portions of one of those classes. The Certificates are

secured by first lien residential mortgages with an original term to

maturity of 360 months or less.

This REMIC uses a 375 PSA assumption regarding principal repayment

(3.75 times 100 PSA). The WAL for the B class based on a 375 PSA was

5.9 years at the time of purchase.

This REMIC is a principal only bond and, therefore, does not bear

interest. The initial interest rate and final distribution date for

class B was 8.3 percent and May of 2022, respectively.

C. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae

REMIC Trust 1993-225, Classes SM and SO were issued by Fannie Mae as

part of an issue of pass-through certificates with 130 various classes

in the total amount of $3,102,000,000. The Bank, as trustee of the

Plans, purchased a portion of one class. The Certificates are secured

by first lien residential mortgages with an original term to maturity

of 360 months or less.

[[Page 33868]]

This REMIC uses a 200 PSA assumption regarding principal repayment

(2 times 100 PSA). The WAL for class SM and SO based on a 200 PSA was

20.2 years and 9.4 years, respectively, at the time of purchase.

The formula for the interest on class SM is

27.7289%-(LIBOR x 4.26589) with a minimum rate of 0.0% and a maximum

rate of 27.7289%.9 For class SO, the interest is 23.1358% -

(LIBOR x 3.30495) with a minimum rate of 0.0% and a maximum rate of

23.135. As an inverse floater, the movement of LIBOR has an inverse

relationship on the interest paid on all inverse floating rate classes.

The initial interest rates for the SM and SO classes were 14.92206% and

12.60047, respectively. The final distribution dates for the SM and SO

classes were December 2023 and November 2022, respectively. The

interest rate for the SM class can drop to 0.0% if LIBOR reaches 6.5%

or higher. The interest rate for the SO class can drop to 0.0% if LIBOR

reaches 7.0% or higher.

\9\ ``LIBOR'' refers to the arithmetic mean of the London

interbank offered quotations for one-month Eurodollar deposits.

LIBOR moves up or down as interest rates move up or down. The

movement of LIBOR has an inverse relationship on the interest paid

on all inverse floating rate classes.

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

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

PaineWebber Incorporated Located in New York, New York

[Application No. D-09953]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

is granted, PaineWebber Incorporated and each of its affiliates

(collectively, PaineWebber), shall not be precluded from functioning as

a ``qualified professional asset manager'' pursuant to Prohibited

Transaction Class Exemption 84-14 (PTCE 84-14, 49 FR 9494, March 13,

1984) solely because of a failure to satisfy section I(g) of PTCE 84-

14, as a result of General Electric Company's ownership interest in

PaineWebber, including any current or future affiliate of PaineWebber

which is, or in the future may become, eligible to serve as a QPAM

under PTCE 84-14; provided the following conditions are satisfied:

(A) This exemption is not applicable to any affiliation by

PaineWebber with any person or entity convicted of any of the felonies

described in part I(g) of PTCE 84-14, other than G.E; and

(B) This exemption is not applicable with respect to any

convictions of G.E. for felonies described in part I(g) of PTCE 84-14

other than those involved in the G.E. Felonies, described below.

Summary of Facts and Representations

Introduction: General Electric Company (G.E.), an approximately 22

percent owner of PaineWebber Group Inc. (P.G.I.), has been convicted

during the past ten years of certain felonies relating to G.E.'s

government contracts operations prior to its acquisition of interests

in P.G.I. Because G.E. acquired ownership interests in P.G.I. during

1994, the felony convictions could bar P.G.I. and its wholly-owned

subsidiaries from acting as ``qualified professional asset managers''

(QPAMs) under Prohibited Transaction Class Exemption 84-14 (PTCE 84-14,

49 FR 9494, March 13, 1984). Part I(g) of PTCE 84-14 requires that no

person owning, directly or indirectly, 5 percent or more of the QPAM

has been convicted of certain felonies within ten years preceding the

transaction for which the QPAM intends to utilize PTCE 84-14.

PaineWebber Incorporated (PaineWebber), a wholly-owned subsidiary of

P.G.I, and two of PaineWebber's wholly-owned subsidiaries

(collectively, the Applicants) are requesting an exemption to enable

them to qualify as QPAMs without regard to any failure to satisfy part

I(g) of PTCE 84-14 by reason of G.E.'s ownership of P.G.I., under the

terms and conditions described herein.

1. PaineWebber, a Delaware corporation which is wholly owned by

P.G.I., engages in a variety of securities services, with its principal

place of business in New York, New York. PaineWebber is registered as a

broker-dealer and an investment adviser, maintaining memberships on all

principal securities and commodities exchanges in the United States as

well as the National Association of Securities Dealers, Inc.

PaineWebber represents that it provides investment advisory services

relating to a wide variety of securities, including but not limited to

the following: Exchange-listed, over-the-counter and foreign

securities; rights and warrants; securities options and futures;

corporate and governmental debt securities; commodities futures,

contracts and options; bankers' acceptances; and mutual fund shares.

PaineWebber is joined in requesting the exemption by two of its wholly-

owned subsidiaries: (a) Mitchell Hutchins Asset Management Inc. (MHAM),

located in New York, is an investment management services provider

which has sponsored and offers interests in a number of limited

partnerships and offshore funds; and (b) Mitchell Hutchins

Institutional Investors Inc. (MHII), located in New York, provides

discretionary investment management services and non-discretionary

investment advisory services. MHII provides investment advice relating

to privately-placed alternative asset investment vehicles, including

funds specializing in venture capital, distressed debt, leveraged

buyouts and restructurings, and privately-placed securities.

The Applicants represent that the clientele served by the

operations of PaineWebber and its subsidiaries, especially MHAM and

MHII, include substantial numbers of large employee benefit plans

subject to the Act. The applicants maintain that, given the size and

number of the plans which the Applicants represent, the large number of

financial service providers engaged by such plans, the breadth of the

definition of ``party in interest'' under the Act, and the wide array

of services offered by the Applicants, it would not be uncommon for an

Applicant to propose a transaction involving a party in interest with

respect to a plan for which the Applicant is acting in a fiduciary

capacity. The Applicants represent that the proposing of such

transactions is occasionally necessary to offer plan clients adequate

investment diversification opportunities, and that such opportunities

will be missed if the Applicants are not permitted to function as QPAMs

pursuant to PTCE 84-14.

2. PaineWebber represents that prior to October 17, 1994, G.E. did

not have any ownership interests in any of the Applicants. On October

17, 1994, an agreement was executed (the Agreement) between P.G.I.,

G.E. and G.E.'s wholly-owned subsidiary Kidder Peabody Group Inc.

(Kidder). Pursuant to the Agreement, P.G.I. acquired certain assets of

Kidder, and G.E. acquired 21,500,00 shares of P.G.I. common stock,

which is the sole outstanding class of P.G.I. securities entitled to

vote in the election of P.G.I. directors. The Agreement also resulted

in G.E.'s receipt of 2,500,000 shares of redeemable preferred P.G.I.

stock, which does not confer the right to vote for directors or any

right to convert to shares of common stock, and 1,000,000 shares of

convertible preferred P.G.I. stock, which does not confer any right to

vote for directors. G.E. has the right, subject to approval of the

shareholders of P.G.I., to convert its shares of convertible preferred

stock into P.G.I. common stock, and G.E. submitted a proposal at

[[Page 33869]]

the May 1995 annual P.G.I. shareholders meeting to enable the

conversion of G.E.'s convertible preferred stock into common stock. The

Applicants represent that it is estimated that G.E. would acquire an

additional 5,521,811 shares of P.G.I. common stock through the

conversion of the convertible preferred stock, resulting in G.E.'s

ownership in the aggregate of approximately 27,021,811 shares, or

approximately 26.4 percent of the outstanding shares, of P.G.I. common

stock.

3. On three occasions from 1986 through 1992, G.E. pled guilty or

was convicted of felonies relating to the government contract

activities of G.E. and its subsidiaries (the G.E. Felonies). The

Applicants represent that the G.E. Felonies did not in any way relate

to any employee benefit plan or any person's authority with respect to

an employee benefit plan. The Applicants describe the G.E. Felonies

more specifically as follows:

(a) On May 13, 1986, G.E. pled guilty to four counts of filing

false claims with the United States Air Force and 104 counts of filing

false statements with the United States Air Force in connection with

work performed in 1980 by G.E.'s Re- Entry Systems Operation. The

Applicants represent that these counts primarily related to individual

time cards that were improperly charged to certain government

contracts.

(b) On February 2, 1990, G.E. was convicted of mail fraud and

violations of the False Claims Act relating to the conduct in 1983 of

two contract employees of a G.E. subsidiary, Management and Technical

Services Co., involving failure to notify the United States Army that

subcontractors had agreed to prices lower than those contained in

projections for the project. The Applicants represent that neither G.E.

nor any officer or employee of G.E. was accused of having knowledge of

the discrepancy and withholding it from the United States Army.

(c) On July 22, 1992 G.E. pled guilty to violations of 18 U.S.C.

287 (submitting false claims against the United States), 18 U.S.C. 1957

(engaging in monetary transactions in criminally derived property), 15

U.S.C. 78m(b)(2)(A) and 78ff(a) (inaccurate books and records), and 18

U.S.C. 371 (conspiracy to defraud and commit offenses against the

United States). The Applicants represent that these violations related

to a series of events between 1984 and 1990, involving false statements

made by employees of G.E. Aircraft Engines Division to a foreign

government that led such foreign government to submit false claims to

the United States relating to the purchase of weapons.

4. The Applicants represent that the G.E. Felonies did not relate

in any way to the conduct or business of PaineWebber, any PaineWebber

securities broker or dealer, investment adviser, bank, insurance

company or fiduciary. The Applicants maintain, however, that although

none of the unlawful conduct involved the Applicants' investment

management activities or any plans covered by the Act, the criminal

activities described above could preclude each component of

PaineWebber, as an affiliate of G.E., from serving as a ``qualified

professional asset manager'' (QPAM), due to the provisions of sections

I(g) and V(d) of PTCE 84-14. Section I(g) of PTCE 84-14 precludes a

person who otherwise qualifies as a QPAM from serving as a QPAM if such

person or an affiliate thereof has within the 10 years immediately

preceding the transaction been either convicted or released from

imprisonment as a result of certain criminal activity, including any

crime described in section 411 of the Act. Because the G.E. Felonies

involved crimes described in section 411 of the Act and monies

transferred to or claimed by G.E., the Applicants represent that they

may be barred from qualifying as QPAMs.

5. Accordingly, the Applicants request an exemption to enable

PaineWebber and its components and subsidiaries to function as QPAMs

despite their failure to satisfy section I(g) of PTCE 84-14 solely

because of the G.E. Felonies and the Applicants' affiliation with G.E.

The Applicants request that the exemption also apply to wholly-owned

PaineWebber subsidiaries that are created or acquired in the future.

The transactions covered by the proposed exemption would include the

full range of transactions that can be executed by investment managers

who qualify as QPAMs pursuant to PTCE 84-14. If granted, the exemption

will enable PaineWebber and its direct and indirect wholly-owned

subsidiaries to qualify as QPAMs by satisfying all conditions of PTCE

84-14, except that G.E.'s convictions and guilty pleas in connection

with the G.E. Felonies shall not prevent satisfaction of the condition

stated in section I(g) of PTCE 84-14 because of affiliation with G.E.

The exemption, if granted, will relate only to the Applicants'

affiliation with G.E. and not to their affiliation with any other

persons or entities.\10\

\10\ For example, any affiliation of the Applicants with any

company or individual convicted of any of the felonies described in

section 411 of the Act, other than G.E. with respect to the G.E.

Felonies described herein, is not within the scope of the exemption

proposed herein. Furthermore, any future convictions of or guilty

pleas by G.E. for felonies described in part I(g) of PTCE 84-14 are

not within the scope of the exemption proposed herein.

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

6. The Applicants maintain that because of restrictions on G.E.'s

ability to influence the management or policies of the Applicants,

there is no cause for concern that the affiliation with G.E. will in

any way affect the suitability of any of the Applicants to act as a

QPAM. The Applicants represent that the Agreement contains the

following restrictions and prohibitions which effectively preclude G.E.

from controlling the Applicants: (a) At the annual meeting of P.G.I.'s

shareholders, G.E. is required to present its shares to establish a

quorum and may only vote its shares either as directed by P.G.I.'s

board of directors or in proportion as all other shares are voted on a

matter; (b) G.E. has only one representative on P.G.I.'s board of

directors, comprised of 15 persons, and no representative on P.G.I.'s

executive committee; (c) G.E. is given no right, power or privilege to

be consulted on decisions of P.G.I. or to be involved in the day-to-day

management of P.G.I.; (d) G.E. has not been given any veto power over

any corporate action by P.G.I.; and (e) G.E. is prohibited from

soliciting proxies or otherwise obtaining proxies in opposition to the

P.G.I. board of directors. The Applicants emphasize that G.E.'s

acquisition of an ownership interesting P.G.I. did not result in any

integration of the separate businesses of G.E. and the Applicants. To

the contrary, the Applicants represent that G.E. merely became a

shareholder of P.G.I., and the Applicants' businesses remain entirely

separate from G.E.'s business.

Furthermore, the Applicants state that they are committed to a

strong legal compliance program, involving their own policies and

procedures to promote compliance with applicable laws including the

Act. In this regard, the Applicants represent that their internal

compliance procedures currently are undergoing revision and updating,

including an expansion of the materials relating to fiduciary

responsibilities and prohibited transactions under the Act, in order to

prevent illegal activity in the conduct of their business. The

Applicants state that such expanded discussion of the Act will be

reflected in newly-promulgated revisions to P.G.I.'s sales practice

policy manual and the branch office managers' supervisory manual, each

of which will feature updated legal developments and illustrative

examples to make sales staff

[[Page 33870]]

aware of the restrictions involved in dealing with employee benefit

plans.

7. In summary, the Applicants represent that the criteria of

section 408(a) of the Act are satisfied for the following reasons: (a)

The G.E. Felonies occurred prior to any affiliation between G.E. and

the Applicants, and did not involve any conduct on the part of the

Applicants; (b) G.E. does not have control or influence over the

operations of the Applicants; (c) The Applicants are undertaking reform

and revision of their policies and procedures to prevent illegal

activity; and (d) The exemption will permit the Applicants to engage in

a broader variety of investments and services on behalf of client

employee benefit plans which demand diverse investment opportunities.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

LEGENT Retirement Security Plan (the Plan) Located in Pittsburgh, PA

[Application No. D-10015]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

the Act and the sanctions resulting from the application of section

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

the Code, shall not apply to the proposed cash sale by the Plan of a

limited partnership interest in BPT Union City Associates, Inc. (the

BPT Interest) to LEGENT Corporation (LEGENT), a party in interest with

respect to the Plan.

This proposed exemption is conditioned upon the following

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

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

transaction with an unrelated party; (2) the sale is a one-time

transaction for cash; (3) the Plan is not required to pay any

commissions, costs or other expenses in connection with the sale; and

(4) the Plan receives a sales price which is not less than the greater

of: (a) The fair market value of the BPT Interest as determined by a

qualified, independent appraiser, or (b) the total acquisition cost

plus opportunity costs attributable to the BPT Interest.

Summary of Facts and Representations

1. The Plan is a defined contribution plan sponsored by LEGENT, a

publicly-held Pennsylvania corporation engaged in supplying systems

management solutions to large users of computer technology. As of

September 30, 1993, the Plan had net assets available for benefits that

totaled $49,202,389 and 1,890 participants.

Prior to September 1, 1993, Mellon Bank (Mellon Bank) served as the

Plan trustee. Effective September 1, 1993, Fidelity Investments became

the trustee of all of the Plan's assets with the exception of certain

limited partnership interests (the Interests). Although Mellon Bank

continues to serve as Plan trustee with respect these Interests, which

the Plan holds as general assets, effective 1989, the Plan has

permitted each participant to direct the investments held in his or her

individual account among several funds selected by LEGENT.

2. On July 1, 1977, Morino Inc. (Morino), a Delaware corporation

engaged in supplying systems management solutions to users of computer

technology, adopted the Morino Associates, Inc. Money Purchase Pension

Plan (Morino Pension Plan) and the Morino Associates, Inc. Profit

Sharing Plan (Morino Profit Sharing Plan; collectively, the Morino

Plans). On October 1, 1989, Morino merged with Duquesne Systems, Inc.

(Duquesne) and formed LEGENT. Effective October 1, 1989, the Morino

Pension Plan merged into the Duquesne Systems, Inc. Pension Plan and

the Morino Profit Sharing Plan merged into the Duquesne Systems, Inc.

Profit Sharing Plan. The resulting merged plans were amended and

restated effective October 1, 1989 as the LEGENT Corporation Pension

Plan and the LEGENT Corporation Savings Plan, respectively.

Subsequently on October 1, 1992, the LEGENT Corporation Savings Plan

was amended and restated as the Plan to reflect the merging of the

LEGENT Corporation Pension Plan and the Goal Systems International,

Inc. Profit Sharing Plan into the LEGENT Corporation Savings Plan due

to the merger of Goal Systems International, Inc. into LEGENT.

3. Among the assets of the Plan is a 6 percent limited partnership

interest in BPT, a Tennessee limited partnership that was organized to

acquire, own, operate and sell a strip shopping center located in Union

City, Tennessee. BPT is an unrelated party. In a private offering

memorandum dated June 5, 1985, BPT made an aggregate offering to

investors of $1,548,680. In accordance with the terms of the

memorandum, BPT offered to sell 35 limited partnership units for a per

unit purchase price of $25,677 and 35 participation notes for an

issuance price per note of $18,571. The participation notes consist of

second deeds of trust on real property and they mature on July 31,

1995.

The Morino Pension Plan and the Morino Profit Sharing Plan acquired

two and three participation notes, respectively, from unrelated parties

on August 30, 1985 for a total purchase price of $92,855. The

acquisition of the BPT Interest was made at the direction of Morino.

Although the Plan received income totaling $20,341 from BPT for the

years 1990 and 1991, no further income payments were made to the Plan

after 1991.

To the extent known, none of the obligors of the notes are parties

in interest with respect to the Plan. In addition, the general partners

of BPT and the investors in such limited partnership are not related to

the Plan or its predecessors. Further, it is represented that LEGENT

has never invested in BPT.

4. When Morino was merged with Duquesne, the existing Plan accounts

invested in the BPT Interest were not intially frozen. Because the

former Morino Plans did not offer individual participant investment

elections, the Plan has held the BPT Interest as a general asset with a

portion of such Interest being allocated to all participants in the

Morino Plans. As these participants terminated their employment with

Duquesne, their allocable portion of the BPT Interest was purchased by

the Plan using the cash generated from such Interest. The remaining

portions of the participant accounts that were invested in the BPT

Interest were frozen when Mellon Bank determined that the BPT Interest

had no value and there was insufficient cash to purchase any additional

portions from terminating employees. Accordingly, LEGENT froze the

remaining accounts invested in the BPT Interest. As of January 13,

1995, the BPT Interest was allocated to the accounts of eighty-six

former Morino employees.

5. LEGENT represents that the BPT Interest is a highly illiquid

investment for which there is a very limited secondary market.\11\

Mellon Bank represents, in a letter dated November 29, 1993, that it

has made every effort to sell the BPT Interest to unrelated parties.

However, due to the insufficient secondary market, no purchaser has

[[Page 33871]]

been found. Accordingly, LEGENT requests an administrative exemption

from the Department in order to purchase the BPT Interest from the

Plan.

\11\ The Department expresses no opinion, in this proposed

exemption, on whether Plan fiduciaries violated any of the fiduciary

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

acquiring and holding the BPT Interest.

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6. Mellon Bank proposes to sell the BPT Interest to LEGENT for not

less than the greater of: (a) The fair market value of the BPT Interest

as determined by a qualified, independent appraiser, or (b) the total

acquisition cost and opportunity costs attributable to the BPT

Interest. The proposed sale will be a one-time transaction for cash. In

addition, the Plan will not be required to pay any fees, commissions or

expenses in connection with the sale. Mellon Bank represents that it

will determine, prior to the sale, whether such transaction is

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

its participants and beneficiaries.

7. In an appraisal report dated October 20, 1994, G. Dan Poag,

President of Bright, Poag & Thompson, Inc., the general partner of BPT,

states that the BPT Interest has no fair market value. Mr. Poag

explains that the investor notes are subordinate to the first mortgage

and have not been serviced in some time. In an addendum to his

appraisal report of April 17, 1995, Mr. Poag again confirms that the

BPT Interest has a current fair market value of zero as of that date.

8. Because the fair market value of the BPT Interest is less than

its acquisition cost, LEGENT will purchase the BPT Interest from the

Plan for the latter amount. In addition, LEGENT represents that because

the Plan did not receive an adequate rate of return on the BPT

Interest, it will pay $18,922 to make up for the Plan's lost

opportunity costs.12

12 LEGENT represents that the average rates of return for the

remaining assets that were held each year by its predecessor Plans

is a fair measure of the Plan's lost opportunity costs. Therefore,

LEGENT has calculated interest on the amount invested in the BPT

Interest for the Plan Years beginning after September 30, 1991 since

BPT paid dividends to the Plan through 1991. Using this method of

calculation, LEGENT represents that the BPT Interest would have

earned aggregate opportunity costs of $18,922.

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Accordingly, LEGENT will purchase the BPT Interest from the Plan

for an aggregate purchase price of $111,777.13

13 The applicant represents that the amount by which the

purchase price for the BPT Interest exceeds its fair market value,

if treated as an employer contribution to the Plan, when added to

the balance of the annual additions to such Plan, will not exceed

the limitation prescribed by section 415 of the Code.

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

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

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

because: (a) All terms and conditions of the sale will be at least as

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

transaction with an unrelated party; (b) the sale will be a one-time

transaction for cash; (c) the Plan will not be required to pay any

commissions, costs or other expenses in connection with the sale; (d)

the Plan will receive a sales price not less than the greater of: (1)

The fair market value of the BPT Interest as determined by a qualified,

independent appraiser, or (2) the total acquisition cost plus

opportunity costs that are attributable to the BPT Interest; and (e)

Mellon Bank will determine that the sale is appropriate transaction for

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

beneficiaries.

Tax Consequences of Transaction

The Department of the Treasury has determined that if a transaction

between a qualified employee benefit plan and its sponsoring employer

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

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

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

must be examined under applicable provisions of the Code, including

sections 401(a)(4), 404 and 415.

Notice to Interested Persons

Notice of the proposed exemption will be given to all interested

persons by first-class mail within 30 days of the date of publication

of the notice of pendency in the Federal Register. Such notice will

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 on and/or to request a hearing. Comments with respect to the

notice of proposed exemption are due within 60 days after the date of

publication of this proposed exemption in the Federal Register.

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

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

KeyCorp 401(k) Savings Plan (the Plan) Located in Cleveland, Ohio

[Application No. D-10023]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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 to the proposed loan of funds (the

Loan) to the Plan by KeyCorp (the Employer), the sponsor of the Plan,

with respect to Guaranteed Investment Contract No. 62149 (the GIC)

issued by Confederation Life Insurance Company of Canada

(Confederation), and the potential repayment by the Plan of the Loan

upon receipt of payments under the GIC; provided the following

conditions are satisfied: (a) No interest and/or other expenses are

paid by the Plan in connection with the Loan; (b) All of the terms and

conditions of the proposed Loan are no less favorable to the Plan than

those which the Plan could obtain in an arm's-length transaction with

an unrelated party; (c) The Loan will be no less than the amount

described in this Notice of Proposed Exemption; (d) The repayment of

the Loan will not exceed the total amount of the Loan; (e) The

repayment of the Loan by the Plan will be restricted to funds paid to

the Plan under the GIC by Confederation or other responsible third

parties with respect to the GIC; and (f) The repayment of the Loan will

be waived to the extent the amount of the Loan exceeds the proceeds the

Plan receives from the GIC.

Summary of Facts and Representatives

1. The Employer is a financial service holding company

headquartered in Cleveland, Ohio, and registered under the Federal Bank

Holding Company Act of 1956. The Key Trust Company of Ohio (Key Bank)

is a wholly owned subsidiary of the Employer. Society Corporation

merged with and into KeyCorp effective March 1, 1994, with Society

Corporation becoming the legal successor-in-interest. Also on March 1,

1994, Society Corporation changed its name to KeyCorp. The Society

National Bank, formerly a subsidiary of Society Corporation, is now Key

Bank.

2. The Plan is a defined contribution profit sharing plan with a

cash or deferred arrangement as provided in section 401(k) of the Code,

and an employee stock ownership plan as provided in section 4975(e)(7)

of the Code. Participants are permitted to direct the investment of

their individual accounts among five investment funds, the Equity Fund,

the Money Market Fund, the Balanced Fund, the Bond Fund, and the

Corporation Stock Fund. Key Bank is the trustee for four of the five

investment funds, and Wachovia Bank of North Carolina is the Trustee of

the Plan's Corporation Stock Fund. Approximately 21,000 employees of

the

[[Page 33872]]

Employer and its affiliates participate in the Plan. The Plan had

assets of $80.8 million as of April 24, 1995.

3. On April 19, 1990, Society National Bank (now, Key Bank) as

trustee for the Society Corporation Employee Stock Purchase and Savings

Plan (now, the Plan) entered into an agreement with Confederation's

Atlanta, Georgia office to purchase the GIC. Under the terms of the

GIC, the Plan deposited $1 million at a guaranteed interest rate of

9.4% for 5 years. Pursuant to the terms of the GIC, interest of $94,000

was to be paid on April 16 of each year until the expiration date of

the GIC on April 16, 1995. On April 16, 1995 a final payment of

$1,094,000 was due to the Plan. In accordance with the terms of the

GIC, all interest due was paid to the Plan through April 1994.

On August 11, 1994, the Canadian operations of Confederation were

placed in conservatorship and rehabilitation by Canadian regulators.

The next day, August 12, 1994, the Michigan Insurance Commission

similarly placed Confederation's United States operations into

conservatorship and rehabilitation.14 Consequently, on April 16,

1995, the final payment of $1,094,000 due the Plan under the GIC was

not paid. In addition, the applicant represents that it is uncertain as

to what portion of the defaulted interest and principal will be paid to

the Plan and what timeframe and payment terms will be forthcoming as

part of the rehabilitation proceedings.

14 The Department notes that the decisions to acquire and

hold the GIC 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 GIC by the Plan.

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4. In order to prevent any loss to the Plan, the Employer wishes to

make the Loan under the terms described herein. The amount of the Loan

will be the final payment due the Plan under the GIC ($1,094,000) plus

interest on such amount from April 16, 1995, at the rate of interest

earned by the Plan's Bond Fund to the date of the Loan.

The applicant represents that the Bond Fund is primarily invested

in the Victory Limited Term Income Fund which is an open-end mutual

fund (the Mutual Fund). The Mutual Fund prospectus states that the

Mutual Fund invests in high grade fixed income securities with an

average maturity of between two and five years. In addition, the Bond

Fund holds a second GIC which is not the subject of this proposed

exemption. For the three month period ended March 31, 1995, the Bond

Fund had a return of 2.87%.

5. No interest or other expenses will be paid by the Plan pursuant

to the transaction. Repayment of the Loan is limited to the amounts

received by the Plan from Confederation or any other responsible third

parties making payment on behalf of Confederation. The Employer will

have no recourse against the Plan or any participants or beneficiaries

for additional funds to repay the Loan. To the extent the amounts

received from Confederation and responsible third parties are

insufficient to repay the Loan, repayment will be waived. In no event

will the repayment exceed the amount of the Loan.

6. In summary, the applicant represents that the proposed

transaction will satisfy the criteria of section 408(a) of the Act

because: (a) The Plan will receive the full amount due under the GIC

plus interest from the GIC's maturity date to the date of the Loan; (b)

no interest or other expenses will be paid by the Plan; (c) the

repayment of the Loan is restricted to amounts received from

Confederation and other responsible third parties with respect to the

GIC; (d) the repayment will not exceed the amount of the Loan; and (e)

repayment will be waived to the extent that the proceeds received with

respect to the GIC are less than the amount of the Loan.

NOTICE TO INTERESTED PERSONS: Notice to interested persons will be

provided within 30 days of the publication of this Notice in the

Federal Register.

Comments and requests for a hearing are due 60 days from the date of

publication of this Notice in the Federal Register.FOR FURTHER

INFORMATION CONTACT: Charles S. Edelstein of the Department, telephone

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

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 26th day of June, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 95-16063 Filed 6-28-95; 8:45 am]

BILLING CODE 4510-29-P