Proposed Exemptions; Financial Institutions Retirement Fund, et al.

Federal RegisterJan 30, 1995

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-09469, et al.]

Proposed Exemptions; Financial Institutions Retirement Fund, et

al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, within 45 days from the

date of publication of this Federal Register Notice. Comments and

request for a hearing should state: (1) The name, address, and

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

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

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

include a general description of the evidence to be presented at the

hearing.

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

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

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

Department of Labor, 200 Constitution Avenue NW., 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 NW., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

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.

Financial Institutions Retirement Fund (the Fund) and Financial

Institutions Thrift Plan (the Thrift Plan) Located in White Plains, New

York

[Application No. D-09469]

Proposed Exemption

Section I. Covered Transactions

The Department is considering granting an exemption under the

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

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

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

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

(b)(2) of the Act and the sanctions resulting from the application of

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

(E) of the Code, shall not apply to the provision of certain services,

and the receipt of compensation for such services, by Pentegra

Services, Inc. (Pentegra), a wholly-owned, for-profit subsidiary

corporation of the Fund, to employee benefit plans (the Plans) and to

their sponsoring employers (the Employers) that participate in the Fund

and the Thrift Plan; provided that the following conditions are met:

[[Page 5701]]

(a) A qualified, independent fiduciary of the Fund determines that

the services provided by Pentegra are in the best interests of the Fund

and are protective of the rights of the participants and beneficiaries

of the Fund;

(b) At the time the transactions are entered into, the terms of the

transactions are not less favorable to Pentegra than the terms

generally available in comparable arm's-length transactions between

unrelated parties;

its services, as determined by the independent fiduciary;

(d) Prior to the offering of services, the independent fiduciary

will initially review the services to be provided by Pentegra and will

determine that such services are reasonable and appropriate for

Pentegra, taking into account such factors as: whether Pentegra has the

capability to perform such services, whether the fees to be charged

reflect arm's length terms, whether Pentegra personnel have the

qualifications to provide such services, and whether such arrangements

are reasonable based upon a comparison with similarly qualified firms

in the same or similar locales in which Pentegra proposes to operate;

(e) No services will be provided by Pentegra without the prior

review and approval of the independent fiduciary;

(f) Not less frequently than quarterly, the independent fiduciary

will perform periodic reviews to ensure that the services offered by

Pentegra remain appropriate for Pentegra and that the fees charged by

Pentegra represent reasonable compensation for such services;

(g) Not less frequently than annually, Pentegra will provide a

written report to the board of directors of the Fund describing in

detail the services it provided to employee benefit plans and/or their

sponsoring employers that participated in the Fund and the Thrift Plan,

a detailed accounting of the fees received for such services, and an

estimate of the fees Pentegra anticipates it will receive during the

following year from such plans and their sponsoring employers;

(h) Not less frequently than annually, the independent fiduciary

will conduct a detailed review of approximately 10 percent of all

completed transactions, which will include a reasonable cross-section

of all services performed; such transactions will be reviewed for

compliance with the terms and conditions of this exemption;

(i) Pentegra's financial statements will be audited each year by an

independent certified public accountant, and such audited statements

will be reviewed by the independent fiduciary;

(j) The independent fiduciary shall have the authority to prohibit

Pentegra from performing services that such fiduciary deems

inappropriate and not in the best interests of Pentegra and the Fund;

and

(k) Each Pentegra contract with a Fund or Thrift Plan employer, or

a plan of such employer, will be subject to termination without penalty

by Pentegra for any reason upon not more than 90 days written notice to

such employer or plan.

Section II. Recordkeeping

(1). The independent fiduciary and the Fund will maintain, or cause

to be maintained, for a period of 6 years, the records necessary to

enable the persons described in paragraph (2) of this Section II to

determine whether the conditions of this exemption have been met,

except that (a) a prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of the independent

fiduciary and the Fund or their agents, the records are lost or

destroyed before the end of the six year period, and (b) no party in

interest other than the independent fiduciary and the Board of

Directors of the Fund shall be subject to the civil penalty that may be

assessed under section 502(i) of the Act, or to the taxes imposed by

section 4975 (a) and (b) of the Code, if the records are not

maintained, or are not available for examination as required by

paragraph (2) below.

(2)(a). Except as provided in section (b) of this paragraph and

notwithstanding any provisions of subsections (a)(2) and (b) of section

504 of the Act, the records referred to in paragraph (1) of this

Section II shall be unconditionally available at their customary

location during normal business hours by:

(1) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

(2) Any employer participating in the Fund or any duly authorized

employee or representative of such employer; and

(3) Any participant or beneficiary of the Fund or any duly

authorized representative of such participant or beneficiary.

(b) None of the persons described above in subparagraphs (a)(2) and

(a)(3) of this paragraph (2) shall be authorized to examine trade

secrets of the independent fiduciary, the Fund, or their affiliates, or

commercial or financial information which is privileged or

confidential.

(3) For purposes of this Section II, references to the Fund shall

also include Pentegra.

Summary of Facts and Representations

1. The Fund is a multiple employer, defined benefit pension plan

which is intended to meet the requirements for qualification under

section 401(a) of the Code and as an employee pension benefit plan

within the meaning of section 3(2) of the Act. The applicant further

represents that because all of the assets of the Fund are available to

pay all benefits accrued under its retirement program, the Fund is

considered to be a single plan under the Code and regulations

thereunder.

The Fund was established in 1943 to provide a means by which the

Federal Home Loan Banks and various financial institutions could

cooperate in providing retirement benefits for their employees. The

applicant represents that the Fund is currently the largest provider of

pension benefits in the thrift industry with 12 Federal Home Loan

Banks, hundreds of individual thrift institutions, and various other

companies which directly service the thrift industry that have chosen

to participate in the Fund. As of March 31, 1994, the Fund had total

assets of approximately $1.36 billion, 355 participating employers, and

36,714 individual plan participants. As of July 1, 1993, the applicant

represents that the fair market value of the assets of the Fund exceed

its liabilities for projected accrued benefits by approximately $420

million.

The named fiduciaries of the Fund and the Thrift Plan are their

respective boards of directors. The President of both the Fund and

Thrift Plan is also, for both the Fund and Thrift Plan, the chief

administrative officer, a member ex officio of the board of directors,

and pursuant to the Act, the ``plan administrator''. The Fund has

another 13 individuals that are members of its board of directors, most

of whom are presidents of various employers that participate in the

Fund, and one individual who is the Regional Director for the Northeast

Region of the Office of Thrift Supervision.

The Thrift Plan is a multiple employer, defined contribution plan

that was established in 1970. As of March 31, 1994, the Thrift Plan had

total assets of $315,845,510, 196 participating employers, and 16,897

individual plan participants. It was created to encourage employers

participating in the Fund to continue their participation by providing

them with the convenience of a defined contribution plan which is

administered [[Page 5702]] by the same personnel at the same facilities

as the Fund. The Thrift Plan has a board of directors which, in

addition to the President of the Thrift Plan, consists of 6 individuals

who are presidents of various employers that participate in the Thrift

Plan.

2. The Fund proposes to create a wholly-owned, for-profit

subsidiary corporation designated as Pentegra Services, Inc.

(Pentegra), a Delaware corporation, in order to externalize the

services the Fund performs for employee benefit plans (the Plans) and

their sponsoring employers (the Employers) in a way that will enhance

the value of the assets of the Fund. The applicant represents that

research indicates that, if the Fund does not expand its employee

benefit services to gain new clients, it is facing the problem of

increased costs of plan administration on a per participant basis

because of the consolidation and contraction of many companies which

occurred in recent years in the thrift industry. The intention of the

Fund is to have Pentegra, on a cost effective basis, expand its current

services and activities by providing various ministerial or fiduciary

services to Plans and their Employers, which may or may not participate

in the Fund or in the Thrift Plan. The applicant represents that the

creation of Pentegra will enable the Fund to develop new products and

services for employers outside of the banking industry that not only

will enhance revenues but will increase significantly the experience

and resources of the Fund and enable the Fund to attract and retain a

highly qualified staff of employees.

The applicant represents that Pentegra will report not less

frequently than annually to the board of directors of the Fund, a

detailed description of the services it provided to employee benefit

plans and/or to their sponsoring employers that participate in the Fund

and the Thrift Plan. Also, the report by Pentegra will give a detailed

account of the fees received for such services and will estimate the

amount of fees it anticipates receiving in the following year from the

plans and/or their sponsoring employers. Further, Pentegra's financial

statements will be audited annually by an independent certified public

accountant and such audited statements will be reviewed by Pentegra's

independent fiduciary (see below).

The services that Pentegra is proposing to provide to tax-qualified

defined benefit and defined contribution plans and to their sponsoring

employers include:

(a) Preparation of plan documents and summary plan descriptions.

(b) Procurement of favorable determination letters with respect to

the tax qualification of the plans from the Internal Revenue Service.

disclosing, among other things, accrued benefits and account balances.

(d) Performance of plan administration functions involving

preparation of employee statements, calculation and payment of

benefits, preparation of investment performance data, top-heavy

testing, and administration of plan participant loans and hardship

withdrawals.

(e) Performance of functions necessary for maintaining compliance

with applicable provisions of the Code; such as, the special

nondiscrimination testing, testing for compliance with the annual

limitations on contributions and benefits, and testing for compliance

with minimum coverage and participation requirements.

(f) Assist in the preparation of annual reports and participant

benefit statements as required by the Act and Code.

(g) Provide consulting services to its clients, including employers

participating in the Fund or Thrift Plan, with respect to tax-qualified

retirement plans.

Pentegra is represented by the applicant to have intentions of

offering similar services with regard to nonqualified compensation

plans or arrangements as will be offered with regard to tax-qualified

retirement plans. The nonqualified plans will be excess benefit plans,

supplemental executive retirement plans, salary continuation plans,

elective deferred compensation plans, and various types of equity-based

compensation arrangements, such as stock options, stock appreciation

rights, and phantom stock.

Accordingly, with respect to such nonqualified plans and

arrangements, Pentegra intends to perform for its clients, including

employers participating in the Fund or the Thrift Plan, the following

enumerated services:

(a) Preparation of appropriate plan documents and, as applicable,

summary plan descriptions.

(b) Assist employers in obtaining various rulings from governmental

authorities; e.g., IRS private letter rulings.

participant in the plan.

(d) Performance of various administration functions, such as

benefit calculations, testing for compliance with tax withholding

requirements, and making determinations of eligibility for benefits and

payment options.

(e) Assist in preparation of annual reports of plans and

participant benefit statements.

(f) Provide consulting services to clients, including Fund and

Thrift Plan sponsoring employers, with respect to nonqualified plans.

3. The Fund is contracting with Ernst & Young, a New York

partnership, to employ its division of Actuarial, Benefits, and

Compensation Consulting Services (ABC) to be the independent fiduciary

with respect to the services Pentegra will render to Employers that

participate in the Fund or the Thrift Plan and to the Plans sponsored

by the Employers.

Ernst & Young represents that it is an international professional

services firm performing as independent auditors and business advisers

to a broad range of companies engaged in various business activities,

including companies engaged in regulated industries, such as banking,

insurance, and utilities. Its clientele includes companies required to

comply with the Act. In addition, Ernst & Young states that as

auditors, it has numerous policies, practices, and systems in place to

ensure that it remains independent from its clients.1 Ernst &

Young has 600 locations worldwide with 20,000 employees that generated

domestic revenues for fiscal 1993 of $2.3 billion and global revenues

that exceeded $5 billion. They further represent that including its

undertaking as independent fiduciary for the Fund, it will not receive

revenues from the Fund and the Thrift Plan that exceed one percent of

its gross receipts from all sources for any fiscal year.

\1\Since Ernst & Young is serving as independent fiduciary for

Pentegra, Ernst & Young will not be engaged as Pentegra's

independent certified public accountant.

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The practice of ABC provides a variety of services related to

qualified and nonqualified retirement programs, including defined

benefit and defined contribution arrangements, and welfare benefit and

executive compensation programs. It also deals with benefits, tax, and

regulatory issues, actuarial matters, and employee communications. ABC

has more than 350 professionals located nationwide, comprised of

attorneys, accountants, actuaries, plan administrators, and

consultants. ABC is familiar with the types of services that Pentegra

proposes to provide to both qualified and nonqualified plans because of

its having performed all of those services for its own clients. ABC

[[Page 5703]] has also performed surveys that are regularly used to

advise employers and their employee benefit plans on implementing and

improving their recordkeeping procedures, benefit valuations, and

compliance systems. Ernst & Young concludes that the past experience of

ABC will enable it to discern which services that may be performed by

Pentegra are appropriate and in the best interests of the Fund and

whether or not the fees for the services constitute reasonable

compensation.

Following the initial review of the services to be provided by

Pentegra, ABC will perform periodic reviews (at fixed intervals, at

least quarterly as well as spot checks) to ensure that the services

offered remain appropriate for the Fund. ABC not only will determine

whether the services are beneficial for the Fund, but will also

determine whether the fees charged by Pentegra represent reasonable

compensation. ABC will use its own service and pricing structure

experience as well as comparisons to similarly qualified firms in

similar locales to determine if fees charged by Pentegra are those that

would be charged in arm's-length transactions. Pentegra will establish

written schedules for fees for different services it will provide that

will be subject to review and approval or disapproval by ABC. An annual

detailed review of approximately 10 percent of all completed service

transactions undertaken by Pentegra will be made by ABC, selecting a

reasonable cross-section of all the different services performed.

Ernst & Young represents that ABC will take an active role in

determining whether the services performed by Pentegra are economically

pragmatic for the Fund and whether the services are in the best

interests of the Fund and its participants and beneficiaries. ABC also

will determine whether the services performed by Pentegra will enhance

the services and product availability as well as afford economies of

scale for the Fund and its respective programs.

An initial review by ABC of the services to be performed by

Pentegra and the fees to be charged will involve an in-depth analysis

of each service proposed by Pentegra and the fees to be charged to

determine whether such services are reasonable and appropriate for

Pentegra to perform and whether the fees represent reasonable

compensation. ABC will review the qualifications of the personnel who

will perform the services, interview selected individuals, review

documentation and processes to assess administrative practices,

systems, and controls employed by Pentegra as well as evaluate the

overall capabilities of Pentegra to deliver the proposed services. ABC

will also assess the proposed pricing structure of Pentegra for

reasonableness in relation to the market. No services will be rendered

by Pentegra without prior review and approval by ABC.

As part of the initial review, ABC will explore with Pentegra the

standardization of certain services by Pentegra to determine whether

the services could have uniform pricing and marketing. If such

standardization of services and fees by Pentegra are reasonable and

competitive, then ABC would not need to approve every transaction

involving such previously approved standardized service.

ABC will maintain for a period of 6 years records that document its

determinations as to the services to be rendered and fees charged by

Pentegra, and records of the process and rationale used by ABC to make

its determinations. Such records will include the initial

determinations as well as ABC's periodic and annual reviews and

decisions for approving and disapproving the services and fees of

Pentegra.

Ernst & Young further represents that ABC will take action to

prohibit Pentegra from performing services that ABC deems inappropriate

and not in the best interests of the Fund and its participants and

beneficiaries. When ABC undertakes to prohibit Pentegra from offering a

service, it will inform the President and Senior Vice President--Legal

& Secretary of the Fund by facsimile and overnight mail to cease

providing the service. Should such service continue, overnight letters

containing ABC's findings and orders will be sent to each member of

Pentegra's and the Fund's board of directors.

4. The applicant represents that the proposed transactions will

permit Pentegra to operate in a for-profit environment and to develop

new products and services which will inevitably inure to the benefit of

Fund and its Employers by way of enhanced services and the attainment

of greater expertise by the staff. Also, the applicant foresees that

the proposed provision of services by Pentegra will expand the economic

value of the Fund's plan administration services and create significant

increased returns for such services. The applicant further represents

that the potential returns to be derived from the use of the

administration services provided by Pentegra will serve to maintain the

present positive economies of scale available under the Fund, and thus

facilitate both significant Employer participation in the Fund and its

continuing viability as a retirement benefit program, and thereby

provide substantial benefits to individual participants and their

beneficiaries.

Under the proposed transactions, the applicant represents that the

rights of the participants and beneficiaries of the Fund will be

protected. The staff of the Fund, in conjunction with a market research

firm, has made a study of the current and projected market in which the

Fund operates, and the staff performed an analysis of its services and

the feasibility of offering its services to third-party employers. A

special committee of the board of directors of the Fund reviewed in

detail the findings of the staff of the Fund and an independent

financial advisor (the Deloitte & Touche Valuation Group) provided an

opinion as to the fairness of the proposed transactions from a

financial perspective.

With respect to the setting of compensation for Fund and Pentegra

employees, the applicant represents that on an annual basis the

President and the human resources officer of the Fund draft a proposed

salary budget for the Fund (including Pentegra), taking into account

input from various management levels, and also, making an analysis of

each described position, determining the relative worth and fair market

value of each position, and reviewing the performance of each employee.

The proposed annual salary budget is then presented by the

President of the Fund to the personnel committee of the board of

directors of the Fund, which reports directly to the board of directors

of the Fund on major personnel policies, including compensation

matters. The personnel committee typically enters into executive

session (without the President of the Fund in attendance) when it

deliberates over the proposed salary budget and presents its

recommendations to the board of directors of the Fund. The board of

directors then makes the final decision regarding salary levels.

The personnel committee consists of 5 presidents of different

financial institutions that participate in the Fund. No employees or

officers of the Fund, Pentegra, or the Thrift Plan are members of the

personnel committee. The applicant represents that, as a result of the

make-up of the committee and the board of directors, there is assurance

that compensation levels are appropriate and in accordance with the

board of directors duty as fiduciaries of the Fund to act in the best

interests of the participants and beneficiaries of the Fund.

[[Page 5704]]

In addition, the applicant represents that if an employer

participating in the Fund and/or the Thrift Plan is considering

retaining Pentegra to provide services and an officer of such employer

is also a member of either the board of directors of the Fund, the

Thrift Plan, or Pentegra, such individual shall refrain from any

discussions or considerations by such board of directors with respect

to the provision of services by Pentegra.

The applicant represents that in the event a situation arises which

could lead to a conclusion that there may be a conflict of interest or

the appearance of a conflict of interest in the context described above

involving a person who is a member of the Board of the Fund, the Thrift

Plan, or Pentegra, the following procedures will be followed:

(a) The person shall disclose the facts of the situation to the

Chairperson of the Board of which the person is a member;

(b) The person shall not participate in any formal or informal

discussion of, or participate in any decision, or vote on the specific

contract, relationship, person, or organization with respect to which

the conflict or appearance of conflict may arise. However, such person

may be counted to establish a quorum for meetings;

members to engage in a free and frank discussion regarding the

contract, relationship, individual, or organization with respect to

which the conflict or appearance of conflict may arise and not return

to the meeting until called by the Chairperson of the Board; and

(d) The minutes of the affected Board shall record the absence of

the person from the discussions, deliberations, and decisions of the

Board with respect to the contract, relationship, individual, or

organization in question. If a vote is taken, the person affected will

not vote, and the minutes of the meeting will record that fact.

The applicant represents that the terms of any transactions between

Pentegra and employers who participate in the Fund or Thrift Plan will

be at least as favorable to Pentegra as the terms available in arm's-

length transactions between Pentegra and employers who do not

participate in the Fund or the Thrift Plan. It is represented by the

applicant that all arrangements between Pentegra and a Fund or Thrift

Plan employer, or its plan, for the provision of services, will be in

writing and will be terminable by Pentegra without penalty to Pentegra

upon not more than 90 days written notice to such an employer or its

plan. Further, such plans and employers may terminate their contracts

with Pentegra without penalty upon not more than 90 days written notice

to Pentegra.

The applicant represents that Pentegra will report not less than

annually to the board of directors of the Fund a detailed description

of the services it provided to employee benefit plans and/or to their

sponsoring employers that participate in the Fund and the Thrift Plan.

Also, the report by Pentegra will give a detailed account of the fees

received for such services and will estimate the amount of fees it

anticipates receiving in the following year from the such plans and/or

their sponsoring employers.

5. In summary, the applicant represent that the proposed

transactions will satisfy the criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because (a) the terms for the proposed

services between Pentegra and employers that participate in the Fund or

the Thrift Plan will be as favorable to Pentegra as are the terms

available in arm's-length transactions between Pentegra and employers

which do not participate in the Fund or the Thrift Plan; (b) Pentegra

will be able to terminate without penalty its services to plans

sponsored by employers which participate in the Fund or the Thrift Plan

on reasonably short notice under the particular circumstances; (c) an

independent fiduciary will determine that Pentegra receives reasonable

compensation for the provision of its services; and (d) the independent

fiduciary has the authority to prohibit Pentegra from performing

services that such fiduciary deems inappropriate and not in the best

interests of the Fund.

FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver of the Department,

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

Mellon Bank, N.A., Located in Pittsburgh, Pennsylvania

[Application No. D-09523]

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).

Section I--Exemption for In-Kind Transfer of CIF Assets

If the exemption is granted, the restrictions of sections 406(a)

and 406(b) 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 (F) of the Code, shall not apply, as of November 5, 1993, to

the in-kind transfer of assets of plans for which Mellon Bank, N.A. or

any of its affiliates (Mellon) acts as a fiduciary (the Client Plans),

other than plans established or maintained by Mellon, that are held in

certain collective investment funds maintained by Mellon (CIFs), in

exchange for shares of the Laurel Funds [a/k/a Dreyfus or Premier

Funds] (the Funds),\2\ open-end investment companies registered under

the Investment Company Act of 1940 (the 1940 Act), in situations where

Mellon acts as investment advisor for the Fund as well as custodian,

dividend disbursing agent, shareholder servicing agent, transfer agent,

and/or Fund accountant, or provides some other ``secondary service'' to

the Funds as defined in Section V(h), in connection with the

termination or partial termination of such CIFs, provided that the

following conditions and the general conditions of Section IV are met:

\2\The applicant represents that effective October 1994, the

Laurel Funds changed their name to either ``Dreyfus'' or ``Premier''

as a result of Mellon's acquisition of the Dreyfus Corporation, the

sponsor of the Dreyfus Funds.

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(a) No sales commissions or other fees are paid by the Client Plans

in connection with the purchase of Fund shares through the in-kind

transfer of CIF assets and no redemption fees are paid in connection

with the sale of such shares by the Client Plans to the Funds.

(b) Each Client Plan receives shares of a Fund which have a total

net asset value that is equal to the value of the Client Plan's pro

rata share of the assets of the CIF on the date of the in-kind

transfer, based on the current market value of the CIF's assets as

determined in a single valuation performed in the same manner at the

close of the same business day using independent sources in accordance

with Rule 17a-7 of the Securities and Exchange Commission under the

1940 Act (see 17 CFR 270.17a-7) and the procedures established by the

Funds pursuant to Rule 17a-7 for the valuation of such assets. Such

procedures must require that all securities for which a current market

price cannot be obtained by reference to the last sale price for

transactions reported on a recognized securities exchange or NASDAQ be

valued based on an average of the highest current independent bid and

lowest current independent offer, as of the close of business on the

Friday preceding the weekend of the CIF transfers (or, in the case of

any weekday CIF transfers, the day of the transfer), determined on the

basis of reasonable inquiry from at least three sources that are

broker-dealers or pricing services independent of Mellon.

[[Page 5705]]

in a CIF are transferred in-kind to the Funds in exchange for shares of

such Funds.

(d) A second fiduciary which is independent of and unrelated to

Mellon (the Second Fiduciary) receives advance written notice of the

in-kind transfer of assets of the CIFs and full written disclosure of

information concerning the Funds (including a current prospectus for

each of the Funds and a statement describing the fee structure) and, on

the basis of such information, authorizes in writing the in-kind

transfer of the Client Plan's assets to a corresponding Fund in

exchange for shares of the Fund.

(e) For all transfers of CIF assets to a Fund following the

publication of this proposed exemption in the Federal Register, Mellon

sends by regular mail to each affected Client Plan the following

information:

(1) Within 30 days after completion of the transaction, a written

confirmation containing:

(i) The identity of each security that was valued for purposes of

the transaction in accordance with Rule 17a-7(b)(4);

(ii) The price of each such security involved in the transaction;

(iii) The identity of each pricing service or market maker

consulted in determining the value of such securities; and

(2) Within 90 days after completion of each transfer, a written

confirmation that contains:

(i) The number of CIF units held by the Client Plan immediately

before the transfer, the related per unit value, and the total dollar

amount of such CIF units; and

(ii) The number of shares in the Funds that are held by the Client

Plan immediately following the transfer, the related per share net

asset value, and the total dollar amount of such shares.

(f) The conditions set forth in paragraphs (e), (f) and (n) of

Section II below are satisfied.

Section II--Exemption for Receipt of Fees

If the exemption is granted, the restrictions of section 406(a) and

406(b) 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

(F) of the Code, shall not apply, as of November 5, 1993, to the

receipt of fees by Mellon from the Funds for acting as an investment

advisor for the Funds as well as for providing other services to the

Funds which are ``secondary services'' as defined in Section V(h), in

connection with the investment by the Client Plans in shares of the

Funds, provided that the following conditions and the general

conditions of Section IV are met:

(a) Each Client Plan receives a cash credit of such Plan's

proportionate share of all fees charged to the Funds by Mellon for

investment advisory services and ``secondary services'', including any

investment advisory fees paid by Mellon to third party sub-advisers, no

later than the same day as the receipt of such fees by Mellon. The

crediting of all such fees to the Client Plans by Mellon is audited by

an independent accounting firm on at least an annual basis to verify

the proper crediting of the fees to each Client Plan.

(b) The price paid or received by a Client Plan for shares in a

Fund is the net asset value per share at the time of the transaction,

as defined in Section V(e), and is the same price which would have been

paid or received for the shares by any other investor at that time.

director of Mellon, purchases or sells shares of the Funds from or to

any Client Plan.

(d) No sales commissions are paid by the Client Plans in connection

with the purchase or sale of shares of the Funds and no redemption fees

are paid in connection with the sale of shares by the Client Plans to

the Funds.

(e) The combined total of all fees received by Mellon for the

provision of services to a Client Plan, and in connection with the

provision of services to the Funds in which the Client Plan may invest,

are not in excess of ``reasonable compensation'' within the meaning of

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

(f) Mellon does not receive any fees payable pursuant to Rule 12b-1

under the 1940 Act in connection with the transactions.

(g) The Client Plans are not employee benefit plans sponsored or

maintained by Mellon.

(h) The Second Fiduciary receives full and detailed written

disclosure of information concerning the Funds (including a current

prospectus for each of the Funds and a statement describing the fee

structure) in advance of any investment by the Client Plan in a Fund.

(i) On the basis of the information described above in paragraph

(h), the Second Fiduciary authorizes in writing the investment of

assets of the Client Plan in each particular Fund and the fees to be

paid by such Funds to Mellon.

(j) All authorizations made by a Second Fiduciary regarding

investments in a Fund and the fees paid to Mellon are subject to an

annual reauthorization wherein any such prior authorization referred to

in paragraph (i) shall be terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by Mellon of written

notice of termination. A form expressly providing an election to

terminate the authorization described in paragraph (i) above (the

Termination Form) with instructions on the use of the form must be

supplied to the Second Fiduciary no less than annually. The

instructions for the Termination Form must include the following

information:

(1) The authorization is terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by Mellon of written

notice from the Second Fiduciary; and

(2) Failure to return the Termination Form will result in continued

authorization of Mellon to engage in the transactions described in

paragraph (i) on behalf of the Client Plan.

(k) The Second Fiduciary of each Client Plan invested in a

particular Fund receives full written disclosure in a Fund prospectus

or otherwise of any increases in the rates of fees charged by Mellon to

the Funds for investment advisory services or other services (i.e.

``secondary services'') even though such fees will be credited to the

Client Plan as required by paragraph (a) above.

(l) On an annual basis, Mellon provides the Second Fiduciary of a

Client Plan investing in the Funds with:

(1) A copy of the current prospectus for the Funds and, upon such

fiduciary's request, a copy of the Statement of Additional Information

for such Funds which contains a description of all fees paid by the

Funds to Mellon;

(2) A copy of the annual financial disclosure report prepared by

Mellon which includes information about the Fund portfolios as well as

audit findings of an independent auditor within 60 days of the

preparation of the report; and

(3) Oral or written responses to inquiries of the Second Fiduciary

as they arise.

(m) With respect to each of the Funds in which a Client Plan

invests, in the event such Fund places brokerage transactions with

Mellon or an affiliate, Mellon will provide the Second Fiduciary of

such Client Plan at least annually with a statement specifying:

(1) The total, expressed in dollars, brokerage commissions of each

Fund's portfolio that are paid to Mellon or an affiliate by such Fund;

(2) The total, expressed in dollars, of brokerage commissions of

each Fund's portfolio that are paid by such Fund to brokerage firms

unrelated to Mellon; [[Page 5706]]

(3) The average brokerage commissions per share, expressed as cents

per share, paid to Mellon or an affiliate by each Fund portfolio; and

(4) The average brokerage commissions per share, expressed as cents

per share, paid by each Fund portfolio to brokerage firms unrelated to

Mellon.

(n) All dealings between the Client Plans and the Funds are on a

basis no less favorable to the Client Plans than dealings with other

shareholders of the Funds.

Section III--Exemption for Transfers of Client Plan Securities from

Individual Portfolios

The restrictions of sections 406(a) and 406(b) 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 (F) of the Code, shall not

apply to an exchange (the Exchange) by a Client Plan of securities for

shares of the Funds (other than an exchange covered by Section I

above), and to the receipt of fees by Mellon from the Funds for acting

as investment adviser for the Funds as well as providing other services

to the Funds which are ``secondary services'' as defined in Section

V(h), in connection with such an investment by a Client Plan in the

Funds, provided that the following conditions and the general

conditions in Section IV are met:

(a) The terms of the transaction are at least as favorable to the

Client Plan as those obtainable in an arm's-length transaction between

unrelated parties.

(b) Each Exchange is a one-time transaction between a Client Plan

and the Fund.

by Mellon in an investment account or portfolio that is selected by the

Second Fiduciary of such Client Plan for an Exchange are transferred

in-kind to the Funds in exchange for shares of such Funds.

(d) No sales commission or dealer mark-up is paid by the Client

Plan in connection with the transaction.

(e) The Exchange meets the requirements of the particular Fund for

an in-kind purchase of shares of the Fund.

(f) One of the following conditions is met:

(1) The Client Plan receives a cash credit of such Plan's

proportionate share of all fees (including all investment advisory fees

and all secondary service fees) charged to the Funds by Mellon, less

any fees paid by Mellon to parties unrelated to Mellon for services

other than investment advisory services provided to the Funds, no later

than the same day as the receipt of such fees by Mellon;

(2) The assets of the Client Plan invested in the Funds are

excluded from the assets on which the investment management fees paid

by the Client Plan to Mellon are determined; or

(3) The Client Plan pays an investment management fee to Mellon

based on total Plan assets from which a credit is subtracted

representing only the Client Plan's pro rata share of the investment

advisory fees paid by the Funds to Mellon.

(g) For purposes of the Exchange, the price of securities is

established as of the close of business on the date for the Exchange

specified in the written authorization by the Second Fiduciary, as

follows:

(1) If the security is described in subparagraphs (b) (1) through

(3) of Rule 17a-7 under the 1940 Act (see 17 CFR 270. 17a-7(b) (1)-

(3)), in accordance with the valuation procedures described in those

paragraphs; or

(2) If the security is not described in paragraph (g)(1) above, by

the recognized, independent pricing service or services disclosed to

the Second Fiduciary described in paragraph (j) below prior to its

written authorization of the Exchange. If no price is available from a

recognized, independent pricing service for such date, or from a

sufficient number of pricing services if more than one is to be used,

Mellon will determine the price by averaging the mean of the closing

bid and asked quotation for each of two or more recognized, independent

market markers and/or pricing services for such securities on that

date.

(h) For purposes of the Exchange, the price paid or received by a

Client Plan for Fund shares is the net asset value per share at the

time of the transaction, as defined in Section V(e), and Mellon

determines the value of the securities exchanged and the net asset

value of the Funds as of the close of business on the same day.

(i) Within 30 days after the authorization of the Exchange, the

Second Fiduciary receives a written confirmation that reflects the

price of each of the securities involved in the Exchange. For those

securities described in paragraph (g)(2) above, the confirmation will

include a written disclosure of the identity of the pricing service or

market markers consulted in determining the value of the securities.

(j) The Second Fiduciary acting for the Client Plan--

(1) Receives advance written disclosure of information concerning

the Funds (including current prospectuses for the Funds and a statement

describing the fee structure to be used to comply with paragraph (f)

above) and, prior to the Exchange, receives in writing (A) the reasons

why Mellon may consider such Exchanges to be appropriate for the Client

Plan and a list of the securities held by the Client Plan that would be

accepted by one or more Funds with respect to the Exchange, (B) the

date the Exchange is to occur, and (C) an explanation of the procedures

that would be followed for valuing the securities for purposes of the

Exchange, including the identity of the recognized, independent pricing

service or services that will value any of the securities described in

paragraph (g)(2) above; and

(2) On the basis of such information, authorizes in writing the

investment of assets of the Client Plan in the Funds through the

Exchange and the fees to be paid by the Funds to Mellon.

(k) The authorization referred to in paragraph (j) is terminable at

will by the Client Plan, without penalty to the Client Plan, upon

receipt by Mellon of written notice of termination. A Termination Form

expressly providing an election to terminate the authorization

described in paragraph (j) with instructions on the use of the form

must be supplied to the Second Fiduciary no less than annually. The

instructions for the Termination Form must include the following

information:

(1) The authorization is terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by Mellon of written

notice from the Second Fiduciary; and

(2) Failure to return the form will result in continued

authorization of the investment by the Client Plan in the Funds and the

payment of fees by the Funds to Mellon.

(l) If the fee structure described in paragraph (f)(2) or (f)(3)

above is followed, the Second Fiduciary is notified of any change in

any of the rates of the fees payable to Mellon for investment advisory

services or secondary services, that had been disclosed to the Second

Fiduciary as described in paragraph (j) above, at least 30 days prior

to the effective date of such change, and approves in writing the

continued holding of any Fund shares acquired by the Client Plan prior

to such change which are still held by the Plan. Such approval may be

limited solely to the investment advisory and other fees paid by the

Funds in relation to the fees paid by the Client Plan and need not

relate to any other aspect of such investment.

(m) The conditions set forth in paragraphs (c), (e), (f), (g), (l),

(m), and (n) of Section II above are satisfied. [[Page 5707]]

Section IV--General Conditions

(a) Mellon maintains for a period of six years the records

necessary to enable the persons described below in paragraph (b) to

determine whether the conditions of this exemption have been met,

except that (1) A prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of Mellon, the

records are lost or destroyed prior to the end of the six-year period,

and (2) no party in interest other than Mellon shall be subject to the

civil penalty that may be assessed under section 502(i) of the Act or

to the taxes imposed by section 4975 (a) and (b) of the Code if the

records are not maintained or are not available for examination as

required by paragraph (b) below.

(b) (1) Except as provided below in paragraph (b)(2) and

notwithstanding any provisions of section 504(a)(2) of the Act, the

records referred to in paragraph (a) are unconditionally available at

their customary location for examination during normal business hours

by--

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

(ii) Any fiduciary of the Client Plans who has authority to acquire

or dispose of shares of the Funds owned by the Client Plans, or any

duly authorized employee or representative of such fiduciary, and

(iii) Any participant or beneficiary of the Client Plans or duly

authorized employee or representative of such participant or

beneficiary;

(2) None of the persons described in paragraph (b)(1) (ii) and

(iii) shall be authorized to examine trade secrets of Mellon, or

commercial or financial information which is privileged or

confidential.

Section V--Definitions

For purposes of this proposed exemption:

(a) The term ``Mellon'' means the Mellon Bank, N.A. and any

affiliate thereof as defined below in paragraph (b) of this section.

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

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

intermediaries, controlling, controlled by, or under common control

with the person;

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

such person; and

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

officer, director, partner, or employee.

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

individual.

(d) The term ``Fund'' or ``Funds'' shall include the Laurel Funds,

Inc. [a/k/a the Dreyfus Funds or the Premier Funds], or any other

diversified open-end investment company or companies registered under

the 1940 Act for which Mellon serves as an investment adviser and may

also serve as a custodian, dividend disbursing agent, shareholder

servicing agent, transfer agent, Fund accountant, or provide some other

``secondary service'' (as defined below in paragraph (h) of this

Section) which has been approved by such Funds.

(e) The term ``net asset value'' means the amount for purposes of

pricing all purchases and sales calculated by dividing the value of all

securities, determined by a method as set forth in the Fund's

prospectus and statement of additional information, and other assets

belonging to the Fund or portfolio of the Fund, less the liabilities

charged to each such portfolio or Fund, by the number of outstanding

shares.

(f) The term ``relative'' means a ``relative'' as that term is

defined in section 3(15) of the Act (or a ``member of the family'' as

that term is defined in section 4975(e)(6) of the Code), or a brother,

a sister, or a spouse of a brother or a sister.

(g) The term ``Second Fiduciary'' means a fiduciary of a Client

Plan who is independent of and unrelated to Mellon. For purposes of

this exemption, the Second Fiduciary will not be deemed to be

independent of and unrelated to Mellon if:

(1) Such fiduciary directly or indirectly controls, is controlled

by, or is under common control with Mellon;

(2) Such fiduciary, or any officer, director, partner, employee, or

relative of the fiduciary is an officer, director, partner or employee

of Mellon (or is a relative of such persons);

(3) Such fiduciary directly or indirectly receives any compensation

or other consideration for his or her own personal account in

connection with any transaction described in this exemption.

If an officer, director, partner or employee of Mellon (or relative

of such persons), is a director of such Second Fiduciary, and if her or

she abstains from participation in (i) the choice of the Client Plan's

investment adviser, (ii) the approval of any such purchase or sale

between the Client Plan and the Funds, and (iii) the approval of any

change in fees charged to or paid by the Client Plan in connection with

any of the transactions described in Sections I and II above, then

paragraph (g)(2) of this section shall not apply.

(h) The term ``secondary service'' means a service other than an

investment management, investment advisory, or similar service, which

is provided by Mellon to the Funds. However, for purposes of this

exemption, the term ``secondary service'' will not include any

brokerage services provided to the Funds by Mellon for the execution of

securities transactions engaged in by the Funds.

(i) The term ``Termination Form'' means the form supplied to the

Second Fiduciary which expressly provides an election to the Second

Fiduciary to terminate on behalf of a Client Plan the authorization

described in paragraph (j) of Section II. Such Termination Form may be

used at will by the Second Fiduciary to terminate an authorization

without penalty to the Client Plan and to notify Mellon in writing to

effect a termination by selling the shares of the Funds held by the

Client Plan requesting such termination within one business day

following receipt by Mellon of the form; provided that if, due to

circumstances beyond the control of Mellon, the sale cannot be executed

within one business day, Mellon shall have one additional business day

to complete such sale.

Effective Date: If the proposed exemption is granted, the exemption

will be effective November 5, 1993, for those transactions described in

Sections I and II above.

Summary of Facts and Representations

1. Mellon Bank, N.A. (Mellon Bank) is a national banking

association with its principal offices located in Pittsburgh,

Pennsylvania, and is a subsidiary of Mellon Bank Corporation (referred

to herein together with its affiliates as ``Mellon''). As of December

31, 1992, Mellon Bank provided trust services for approximately 3,642

employee benefit plans, and had total assets under management of

approximately $41 billion. As of that same date, Mellon Bank had, in

combination with other subsidiaries of Mellon Bank Corporation, total

assets of approximately $31.6 billion.

Mellon acts as a trustee, directed trustee, investment manager,

and/or custodian for the Client Plans. The Client Plans include various

pension, profit sharing, and stock bonus plans as well as voluntary

employees' beneficiary associations, supplemental unemployment benefit

plans, simplified employee benefit plans, retirement plans for self-

employed individuals (i.e. Keogh Plans) and individual retirement

accounts (IRAs). Mellon's status as a [[Page 5708]] fiduciary with

investment discretion for a Client Plan arises out of its relationship

as a trustee or investment manager, but not from the rendering of any

investment advice to a third party that has investment discretion under

the Plan. Mellon, in its capacity as a fiduciary of the Client Plans,

may exercise investment discretion for all or a portion of the assets

of such Client Plans. As a custodian or directed trustee of a Client

Plan, Mellon has custody of Plan assets, collects all income, performs

bookkeeping and accounting services, generates periodic statements of

account activity and other reports, and makes payments or distributions

from the account as directed. However, Mellon has no duty as a

custodian or directed trustee to review investments or make

recommendations, acting only as directed by an authorized Second

Fiduciary.

2. Mellon is in the process of making a series of mutual fund

portfolios within the Laurel Funds, Inc. [a/k/a Dreyfus Funds or

Premier Funds] (i.e. the Funds) available to some of the Client Plans

as alternatives to or in place of some of its collective funds (i.e.

the CIFs). Mellon requests an exemption for investments in a Fund which

occur through an in-kind transfer of a Client Plan's pro rata share of

assets from either a terminating or partially terminating CIF to a

corresponding Fund in exchange for shares of such Fund. Mellon also

requests an exemption for the receipt of fees from the Funds in

connection with the investment of assets of a Client Plan (including

any assets of a Client Plan which were held in a terminating or

partially terminating CIF) for which it acts as a trustee, directed

trustee, investment manager, or custodian, in shares of the Funds in

instances where Mellon is an investment adviser for the Funds as well

as a custodian, dividend disbursing agent, shareholder servicing agent,

transfer agent, and/or Fund accountant, or provides some other

secondary service to the Funds. Finally, Mellon seeks exemptive relief

to be able to transfer securities in-kind, rather than in cash, from a

Client Plan's individual investment portfolio (which is not a CIF) to a

Fund in exchange for shares of the Fund to avoid the additional

transaction costs involved in disposing of and re-acquiring the

securities on the open market.

To avoid charging existing Client Plans any additional fees in

connection with investments in the Funds, primarily as a result of the

in-kind transfers of CIF assets, Mellon has implemented a fee structure

under which the Client Plans do not bear any part of the fees charged

by Mellon to the Funds (as discussed further below). Under this

arrangement, Mellon charges its negotiated fees to the Client Plans and

also charges the Funds for investment advisory services as well as

secondary services. Mellon then credits as cash to each Client Plan its

proportionate share of all fees paid by the Funds to Mellon, no later

than the same day as the payment of the fees to Mellon. Therefore,

Mellon retains only the Plan-level fees for services to the Client

Plans. However, as noted in Paragraph 11 below, a Client Plan may have

an alternative fee structure for investments made into a Fund through

an in-kind transfer of securities from an individual portfolio. Under

these arrangements, Mellon would retain fees received from the Fund for

secondary services and would either credit to each Client Plan the fees

received from the Funds for investment advisory services or would not

charge the Client Plan a Plan-level investment management fee for those

assets invested in the Fund. In such instances, the Second Fiduciary's

choice of whether to obtain either a full or partial credit of Fund

fees paid by the Funds to Mellon shall be made in writing prior to any

in-kind transfer of securities into a Fund following full disclosure of

all relevant information concerning the various fee structures.

3. The Funds are a Maryland corporation organized as open-end

investment companies registered under the 1940 Act. The Funds consist

of a series of investment portfolios (each a ``Fund'') representing

distinct investment vehicles, which have their own prospectuses or

joint prospectuses with one or more other Funds. The shares of each

Fund represent a proportionate interest in the assets of that Fund.

The Funds involved in the initial transfer transactions were: (i)

The Laurel Intermediate Income Portfolio; (ii) The Laurel Stock

Portfolio; (iii) The Laurel Prime Money Market I Portfolio; and (iv)

The Laurel Short-Term Bond Portfolio. Additional Funds that were

available for investment in connection with the transactions described

herein following the initial transfer transactions included: (i) The

Laurel Midcap Stock Portfolio; (ii) The Laurel Bond Market Index

Portfolio; and (iii) The Laurel S&P 500 Index Portfolio.

The applicant states that Mellon subsequently acquired The Dreyfus

Corporation (Dreyfus), the sponsor of the Dreyfus family of mutual

funds, in August 1994. Thus, Dreyfus is now an affiliate of Mellon. As

a result of this acquisition, changes have been made to the names of

the Laurel Funds and the parties providing services to the Funds.

Effective October 1994, the Laurel Funds have changed their names to

include ``Dreyfus'' or ``Premier'' (another name used by Dreyfus). Some

of the Funds retain ``Laurel'' as part of their names so as not to

confuse them with existing Dreyfus Funds.

Shares of all Funds are offered to trust account customers of

Mellon, including the Client Plans, as a means of acquiring an interest

in a diversified portfolio of investments. Mellon states that each

series of Fund shares are offered to the Client Plans under terms and

conditions which are at least as favorable to the Plans as the terms

and conditions available to other shareholders of the Fund. Mellon

states further that additional Funds may be created in the future that

will receive assets from CIFs or otherwise be used for investment by

Client Plans.

4. Mellon served as the investment adviser to each Fund until the

acquisition of Dreyfus. Dreyfus, as Mellon's affiliate, is now the

investment adviser to the Funds and receives investment advisory fees

from each Fund that may vary between 0.20% and 1.50% of the Fund's

average net assets on an annual basis, depending on the particular

Fund. As noted above, Mellon also previously served as the custodian,

dividend disbursing agent, shareholder servicing agent, transfer agent,

and fund accountant, for which it was entitled to receive fees from the

Funds.3 Mellon continues to provide such ``secondary services'' to

the Funds. However, since the acquisition of Dreyfus, the new transfer

agent is The Shareholder Services Group, Inc., an independent party.

\3\ The Funds may use broker-dealers that are affiliates of

Mellon to provide brokerage services to the Funds. The applicant

states that such brokerage services would be provided in accordance

with section 17(e) of the 1940 Act, as amended, and Rule 17e-1

thereunder. Rule 17e-1 requires, among other things, that the

commissions, fees or other remuneration for any brokerage services

provided by an affiliate of an investment company's investment

advisor must be reasonable and fair compared to what other brokers

receive for comparable transactions involving similar securities.

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

Until Mellon's acquisition of Dreyfus, the Funds' administrator and

distributor were Frank Russell Investment Management Company and

Russell Fund Distributors, Inc. (collectively, the Russell Companies).

The applicant states that the Russell Companies were independent of and

unaffiliated with Mellon. The new administrator and distributor is

Premier Mutual Fund Services, Inc. (Premier Services). Mellon

represents that Premier Services is also independent of Mellon and its

affiliates. [[Page 5709]]

The Fund administrator receives annual fees of $500,000 plus an

asset-based component, which is 0.01% of the aggregate assets of the

Funds up to $10 billion and 0.005% of assets over $10 billion. The

asset-based fee is payable monthly, charged pro rata to each Fund on

its average daily net assets for the month. The administrator is also

entitled to receive reimbursement from the Funds for the start-up costs

of certain new Funds. Under the current arrangement, the Fund

distributor is reimbursed for certain of its Fund distribution fees and

expenses by Mellon. The Client Plans are not charged sales commissions,

redemption fees, or distribution expenses on their transactions or

investments in Fund shares.4

\4\ Mellon represents that all Funds have adopted a Distribution

and Service Plan pursuant to Rule 12b-1 under the 1940 Act. Prior to

July 28, 1992, the Funds paid the fees and expenses payable to the

distributor under such plan. However, since that date, the

distributor has waived its rights to these fees and expenses in

exchange for Mellon paying them, as described in the prospectus for

each Fund. Mellon states that these fees may be charged to the Funds

again in the future, but will not be charged to a class of Fund

shares in which the Client Plans have invested. In addition, Mellon

does not and will not receive fees payable pursuant to Rule 12b-1 in

connection with transactions involving any shares of the Funds.

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In-Kind Transfers of CIF Assets

5. Mellon is offering the Funds as alternatives or replacements for

a number of the CIFs currently used by Client Plans. In connection with

making these Funds available to a Client Plan, Mellon is transferring

in-kind the Plan's assets currently invested in a particular CIF to a

corresponding Fund with substantially similar investment objectives, if

a Second Fiduciary for the Client Plan provides prior written

authorization for the transfer following receipt of full and detailed

written disclosures regarding the particular Fund and related fees.

Mellon represents that a principal reason for offering Client Plans

the opportunity to transfer their CIF investments to the Funds is that

in many cases the interests of such Plans would be better served by the

use of mutual funds and Mellon's customers have expressed an interest

in having mutual funds available as investment vehicles. In this

regard, mutual funds are valued on a daily basis, whereas most of the

CIFs are valued weekly or monthly. The daily valuation permits (i)

immediate investment of Plan contributions in varied types of

investments; (ii) greater flexibility in transferring assets from one

type of investment to another; and (iii) daily redemption of

investments for purposes of making distributions. In addition,

information concerning the investment performance of mutual funds will

be available on a daily basis in newspapers of general circulation,

which will allow Client Plan sponsors and participants to monitor the

performance of their investments on a daily basis. Furthermore, unlike

CIF units, mutual fund shares can be given to participants in plan

distributions, thus avoiding the expense and delay of liquidating plan

investments and facilitating roll-overs into IRAs.

6. Prior to investing any Client Plan's assets in a Fund, Mellon

obtains written approval from the Second Fiduciary for the Client Plan,

who generally is either the Client Plan's named fiduciary, trustee (if

other than Mellon), or the sponsoring employer. Mellon provides the

Second Fiduciary with a current prospectus for that Fund and a written

statement giving full disclosure of the structure under which Mellon's

investment advisory and other fees will be credited back to the Client

Plan. The disclosure statement describes why Mellon believes the

investment of assets of the Client Plan in the Funds may be

appropriate. The disclosure statement also describes any limitations on

Mellon regarding which plan assets may be invested in shares of the

Funds and the nature of such limitations.

On the basis of such information, the Second Fiduciary authorizes

Mellon to invest the Client Plan's assets in the Fund(s) and to receive

fees from the Fund(s). In connection with the asset transfers from the

CIFs, if the Second Fiduciary has not provided Mellon with its approval

of investment in a corresponding Fund by the deadline established for

approvals of transfers from a CIF, the Client Plan continues to be

invested in that CIF. However, if the CIF is terminated, the Client

Plan receives a distribution from the CIF which is then invested in an

appropriate investment vehicle other than the Funds, in accordance with

the terms of the Client Plan.

Any authorization for investment by a Client Plan in shares of a

Fund and the fees paid to Mellon is terminable at will by the Second

Fiduciary, without penalty to the Client Plan, upon receipt by Mellon

of written notice of termination. A Termination Form expressly

providing an election to terminate the authorization with instructions

on the use of the form is supplied to the Second Fiduciary no less than

annually. The Termination Form instructs the Second Fiduciary that the

authorization is terminable at will by the Client Plan, without penalty

to the Client Plan, upon receipt by Mellon of written notice from the

Second Fiduciary (through the return of such form), and that failure to

return the Termination Form results in continued authorization of

Mellon to engage in the subject transactions on behalf of the Client

Plan.

Mellon states that the Termination Form may be used to notify

Mellon in writing to effect a termination by selling the shares of the

Funds held by the Client Plan requesting such termination within one

business day following receipt by Mellon of the form; provided that if,

due to circumstances beyond the control of Mellon, the sale cannot be

executed within one business day, Mellon shall have one additional

business day to complete such sale.

The Second Fiduciary will receive notice of any increases in the

rates of fees charged by Mellon to the Funds for investment advisory

services as well as for secondary services, through an updated

prospectus or otherwise. However, such notice will not be accompanied

by an additional Termination Form since all increases in investment

advisory fees and secondary fees will be credited by Mellon to the

Client Plans and will be subject to an annual reauthorization as

described above.

Mellon states that the Second Fiduciary receives an updated

prospectus for each Fund at least annually and either annual or semi-

annual reports for each Fund. Mellon also provides monthly or quarterly

reports to the Second Fiduciary of all transactions engaged in by the

Client Plans, including purchases and sales of the Fund shares.

The Funds may use broker-dealers that are affiliates of Mellon to

provide brokerage services to the Funds. As noted in Footnote 2 above,

such brokerage services would be provided in accordance with section

17(e) of the 1940 Act and Rule 17e-1 thereunder. Mellon represents that

it will provide at least annually to the Second Fiduciary of any Client

Plan that invests in the Funds written disclosures indicating the

following: (i) The total, expressed in dollars, brokerage commissions

of each Fund's portfolio that are paid to Mellon or an affiliate by

such Fund; (ii) the total, expressed in dollars, of brokerage

commissions of each Fund's portfolio that are paid by such Fund to

brokerage firms unrelated to Mellon; (iii) the average brokerage

commissions per share, expressed as cents per share, paid to Mellon or

an affiliate by each Fund portfolio; and (iv) the average brokerage

commissions per share, expressed as cents per share, paid by each Fund

[[Page 5710]] portfolio to brokerage firms unrelated to Mellon.

7. Prior to November 5, 1993, Mellon generally invested assets of

Client Plans for which it acted as a trustee with investment discretion

in a series of CIFs. In addition, certain Client Plans where investment

decisions were directed by a Second Fiduciary generally used a CIF as

an investment option for individual accounts in the Client Plans.

However, on Friday, November 5, 1993, Mellon terminated several of its

CIFs (as noted below) and transferred in-kind the assets that were in

these CIFs to various corresponding Funds. Mellon represents that the

initial acquisition of shares in the Funds by Client Plans invested in

the CIFs was accomplished by distributing the CIF assets to the Client

Plans, and then transferring these assets from the Client Plans to the

corresponding Funds.

Mellon anticipates that there will be additional in-kind transfers

of CIF assets to the Funds in the future. Such transfers will normally

take place over a weekend. The steps involved in transferring the

assets of a CIF attributable to a Client Plan's investment to a

corresponding Fund are as follows:

(a) Prior to the transfer, the assets of the CIF are reviewed to

determine whether they are appropriate investments for the

corresponding Fund, consistent with the Fund's investment objectives

and policies as well as the applicable requirements under the 1940 Act

and the Code. Mellon determines whether the assets are capable of being

divided between the CIF and the Fund (or among the Client Plans

receiving distributions, if the CIF is terminating). Assets that are

not appropriate investments for the corresponding Fund or are not

capable of being divided are liquidated prior to the transfer date.\5\

\5\Mellon states that such assets are sold in the open market

and are not sold through any brokerage firm affiliated with Mellon.

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(b) For purposes of the transfer, the values of the CIF assets are

determined based on market value as of the close of business on the

Friday preceding the transfer. Values are determined in a single

valuation in accordance with the valuation procedures described in Rule

17a-7(b) under the 1940 Act, 17 CFR 270.17a-7(b).\6\ As noted below in

paragraph (e), the valuation of the securities is performed in the same

manner for both the CIF's assets and the corresponding Fund's assets at

the close of the same business day using independent market sources.

\6\Rule 17a-7 permits transactions between investment funds that

use the same investment adviser, subject to certain conditions. Rule

17a-7 requires, among other things, that such transactions be

effected at the ``independent current market price'' for each

security, involve only securities for which market quotations are

readily available, involve no brokerage commissions or other

remuneration, and comply with valuation procedures adopted by the

board of directors of the investment company to ensure that all

requirements of the Rule are satisfied.

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accounting unit determines the value of each Client Plan's investment

in the CIF. If the Client Plan is transferring its investment, or if

the CIF is terminating, the Plan's pro rata share of each investment is

distributed to the Client Plan, either in kind if all the CIF assets

are securities, or partly in kind and partly in cash if part of the CIF

assets consist of cash. Thus, each Client Plan receives a pro rata

share of each security and any cash. The CIF, if not terminating,

retains the securities and cash representing the pro rata shares of the

Client Plans that are not transferring their investments to the

Funds.\7\

\7\Such distributions are made in compliance with 12 CFR

9.18(b)(6), which requires that distributions in kind from CIFs must

be made ``ratably''. The Client Plans withdrawing from the CIF and

the Client Plans remaining invested in the CIF each receive their

pro rata portions of each CIF asset and the CIF cash, so that both

groups of Plans retain the same asset quality and liquidity

following the transfers.

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(d) If the Second Fiduciary provides written approval of the

transfer of its CIF investments to the Fund by the deadline set for

such approval, the assets and cash received by the Client Plan from the

CIF are contributed to the corresponding Fund to purchase shares of

that Fund through an exchange of securities or investment of cash.

Exchanges are conducted in accordance with the procedures described in

the Fund prospectus, which provide that the securities being exchanged

need to meet the receiving Fund's investment objectives, policies and

limitations, have a readily ascertainable market value, be liquid, and

not be subject to resale restrictions.

(e) The securities received by the Fund are valued by the Fund for

purposes of the in-kind transfer transaction in the same manner as of

the same business day as the assets were valued by the corresponding

CIF and the per-share value of the Fund shares issued are based on the

Fund's then-current net asset value as of such date. Therefore, the

value of a Client Plan's investment in a Fund as of the start of

business the following Monday, based on the Client Plan's pro rata

share of the underlying market value of the securities transferred to

the Funds, is the same as the value of its investment in the

corresponding CIF as of the close of business the previous Friday.

The CIFs involved in the initial series of transfers and their

corresponding Funds are as follows:

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

Mellon CIF Laurel fund

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

Portfolio8

EB Intermediate Bond............... Intermediate Income

EB Stock........................... Stock

EB Special Stock................... Midcap Stock

EB Composite Bond Index............ Bond Market Index

EB Composite Bond.................. Bond Market Index

EB Stock Index..................... S&P 500 Stock Index

EB Equity Market................... S&P 500 Stock Index

EB Savings......................... Prime Money Market I

EB Enhanced Temporary Investment... Short-Term Bond

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

8As of October 1994, these Funds were renamed as follows: (i) Premier

Limited Term Income; (ii) Dreyfus Disciplined Stock; (iii) Dreyfus

Disciplined Midcap Stock; (iv) Dreyfus Bond Market Index; (v) Dreyfus

S&P 500 Stock Index; (vi) Dreyfus/Laurel Prime Money Market; and (vii)

Dreyfus/Laurel Short-Term Bond.

Mellon states that because of the relatively small number of Client

Plans approving the transfer of assets from the EB Intermediate Bond

Fund, the EB Composite Bond Index Fund and the EB Composite Bond Fund,

and because of the nature of the assets in these CIFs, the transfers

from these CIFs were made totally in cash rather than in kind. The

Client Plans investing in these CIFs that had approved the transfer

received a distribution of the cash value of their CIF units, and that

cash was then used to acquire shares of the corresponding Funds.

Therefore, no exemptive relief is requested for the in-kind transfer of

assets from these three CIFs.

Each Client Plan that approved the CIF asset transfers to the Funds

received account statements describing the asset transfers either in

mid-December 1993, if such Plans were on a monthly account statement

schedule, or mid-January 1994, if such Plans were on a quarterly

account statement schedule. The statements showed the disposition of

the CIF units from the Client Plan account and the acquisition by the

account of Fund shares, both posted as of Monday, November 23,

1992.9 This [[Page 5711]] information provided the affected Client

Plans with written confirmation of the number of CIF units held by the

Client Plan immediately before the transfer, the related per unit value

and the total dollar amount of such CIF units as well as the number of

shares of the Funds held by the Client Plan following the transfer, the

related per share net asset value, and the total dollar amount of such

shares.

\9\The following example illustrates the contents of such a

statement: Assume a Client Plan held 12,506 units of the Mellon

Employee Benefit Stock Fund prior to the asset transfers. The

account statement showed a disposition of 12,506 units of Mellon

Employee Benefit Stock Fund, at a value of $72.08 per unit, on

November 23, 1992, with total proceeds of $901,432.18. The statement

also showed a purchase on that same date of 90,143.218 shares of the

Laurel Stock Fund, the Fund corresponding to the Mellon Employee

Benefit Stock Fund, at $10 per share, at a total cost of

$901,432.18, the same amount as the proceeds of the disposition from

the Mellon Employee Benefit Stock Fund.

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For all subsequent in-kind transfers of CIF assets to a Fund

following publication of this proposed exemption in the Federal

a written confirmation, not later than 30 days after completion of the

transaction, containing the following information:

(1) The identity of each security that was valued for purposes of

the transaction in accordance with Rule 17a-7(b)(4);

(2) The price of each such security involved in the transaction;

and

(3) The identity of each pricing service or market maker consulted

in determining the value of such securities. Securities which are

valued in accordance with Rule 17a-7(b)(4) are securities for which the

current market price cannot be obtained by reference to the last sale

price for transactions reported on a recognized securities exchange or

the NASDAQ system. Mellon states that such securities are valued based

on an average of the highest current independent bid and lowest current

independent offer, as of the close of business on the Friday preceding

the weekend of the CIF transfers, determined on the basis of reasonable

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

services independent of Mellon.

In addition, for all in-kind transfers of CIF assets to a Fund that

occur after the date this proposed exemption is published in the

Federal Register, Mellon will send by regular mail to the Second

Fiduciary no later than 90 days after completion of each transfer a

written confirmation that contains the following information:

(1) The number of CIF units held by the Client Plan immediately

before the transfer, the related per unit value, and the total dollar

amount of such CIF units; and

(2) The number of shares in the Funds that are held by the Client

Plan immediately following the transfer, the related per share net

asset value, and the total dollar amount of such shares.

Mellon anticipates that additional CIFs will be converted or

``partially converted'' to the Funds so that the Client Plan investors

in those CIFs will be given the opportunity to transfer their

investments in-kind from the CIFs to corresponding Funds, or

alternatively to continue investing in the CIFs until such CIFs are

terminated. Mellon states that such transfers will follow the same

procedures as the initial transfers, including valuations in accordance

with Rule 17a-7(b), and will comply with the conditions of this

proposed exemption. In the case of partial CIF terminations, the

transfers will involve a smaller amount of assets and may occur on a

weekday rather than a weekend. In all cases, such transfers will use

the closing market prices for that particular day in valuing the Client

Plan assets to be transferred and the net asset value of the Fund.

8. Mellon or an affiliate (i.e. Dreyfus) charges investment

advisory fees to the Funds in accordance with the investment advisory

agreements between Mellon and the Funds. These agreements have been

approved by the independent members of the Board of Directors of the

Funds (the Directors), in accordance with the applicable provisions of

the 1940 Act. Any future changes in the fees paid to Mellon must be

approved by the Directors. These fees are payable monthly by the Funds.

Mellon uses a fee structure that is designed to preserve the

negotiated fee rates of the Client Plans that transfer investments from

the CIFs to the Funds, so as to minimize the impact of the change to

the Funds on a Client Plan's fees. At the beginning of each month, and

in no event later than the same day as the payment of the investment

advisory and other fees by the Funds to Mellon for the previous month,

Mellon credits to each Client Plan in cash its proportionate share of

all investment advisory fees charged by Mellon to the Funds for the

previous month.

To assure that Client Plans pay no additional fees as a result of

investing in the Funds rather than the CIFs, and to otherwise preserve

the negotiated fee rates of the Client Plans, Mellon also credits to

the Client Plans participating in the transfers their pro rata shares

of any fees paid by the Funds to Mellon for services other than

investment advisory services. However, Mellon does retain amounts

necessary to account for its direct expenses in providing such

secondary services. These credits are made at the same time and in the

same manner as the advisory fee credits.

In addition, Mellon has credited to the Client Plans participating

in the transfers from the CIFs to the Funds their pro rata shares of

fees paid by the Funds or Mellon to Fund service providers other than

Mellon, so that the Client Plans effectively receive a credit of all

charges assessed upon their investments in the Funds. Mellon retains

the flexibility to cease crediting these third-party fees and, in such

instances, provides further disclosure to and obtains express approval

from any Client Plan before terminating the credit of the third-party

fees for the Client Plan. However, Mellon states that all investment

advisory fees charged to the Funds by third party sub-advisers, or paid

by Mellon to such third party sub-advisers, will continue to be

credited to the Client Plans.

9. Mellon maintains a system of internal accounting controls for

the crediting of all fees to the Client Plans. In addition, Mellon

retains the services of KPMG Peat Marwick (the Auditor), an independent

accounting firm, to audit annually the crediting of fees to the Client

Plans under this program. Such audits provide independent verification

of the proper crediting to the Client Plans.

In its annual audit of the credit program, the Auditor will: (i)

Review and test compliance with the specific operational controls and

procedures established by Mellon for making the credits; (ii) verify on

a test basis the monthly credit factors transmitted to Mellon by the

Funds; (iii) verify on a test basis the proper assignment of

identification fields to the Client Plans; (iv) verify on a test basis

the credits paid in total to the sum of all credits paid to each Client

Plan; (v) recompute, on a test basis, the amount of the credit

determined for selected Client Plans and verify that the credit was

made to the proper Client Plan account.

In the event either the internal audit by Mellon or the independent

audit by the Auditor identifies an error made in the crediting of fees

to the Client Plans, Mellon will correct the error. With respect to any

shortfall in credited fees to a Client Plan, Mellon will make a cash

payment to the Client Plan equal to the amount of the error plus

interest paid at money market rates offered by Mellon for the period

involved. Any excess credits made to a Client Plan will be corrected by

an appropriate deduction from the Client Plan account or reallocation

of cash during the next payment period after discovery of the error to

reflect accurately the amount of total credits due to the Client Plan

for the period involved.

10. Mellon also uses the credit procedure described above (referred

to hereafter as ``the Alternative Credit Method'') for investments by

Client [[Page 5712]] Plans other than through the asset transfer

transactions. In addition, Mellon may use a fee offset method that

complies with Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732,

April 8, 1977).10 Mellon states that Client Plans that use the

Alternative Credit Method have the option to change to an offset method

that complies with PTE 77-4.

\10\PTE 77-4, in pertinent part, permits the purchase and sale

by an employee benefit plan of shares of a registered, open-end

investment company when a fiduciary with respect to the plan is also

the investment adviser for the investment company, provided that,

among other things, the plan does not pay an investment management,

investment advisory or similar fee with respect to the plan assets

invested in such shares for the entire period of such investment.

Section II(c) of PTE 77-4 states that this condition does not

preclude the payment of investment advisory fees by the investment

company under the terms of an investment advisory agreement adopted

in accordance with section 15 of the Investment Company Act of 1940.

Section II(c) states further that this condition does not preclude

payment of an investment advisory fee by the plan based on total

plan assets from which a credit has been subtracted representing the

plan's pro rata share of investment advisory fees paid by the

investment company.

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

However, Mellon represents that the Alternative Credit Method

offers several advantages to a Client Plan. These advantages include

the following:

(a) Plan Sponsor Paying Fees: With many Client Plans, the Plan

sponsor pays the Plan-level fees. In such instances, if the offset

method described in PTE 77-4 is used, the Client Plan pays all Fund-

level fees in connection with the investments in the Funds. By

contrast, under the Alternative Credit Method, the sponsor pays the

entire Plan-level fee and the Client Plan does not pay any Fund-level

fees. Thus, where the Plan sponsor pays the Client Plan's fees, the

Client Plan's rate of return on its investments in the Funds is higher

under the Alternative Credit Method.

(b) Timing of Credit: Plan-level trustee fees will generally be

paid to Mellon quarterly, whereas Fund-level investment advisory fees

are paid monthly. Consequently, the crediting may not occur for up to

three months under PTE 77-4 credit method, so that Mellon receives the

use of the amounts to be credited for the time period between the

payment dates. In contrast, there is no such time delay under the

Alternative Credit Method.

Fund advisory fees may exceed the amount of its Plan-level fees,

depending on the relative fee rates. Under the PTE 77-4 credit method,

it is not clear how an investment adviser should handle the amount of a

credit that exceeds the Plan-level fee. The problem of excess credits

does not arise under the Alternative Credit Method since the credit is

made directly to the Client Plan, rather than as an offset against the

Plan-level fees.

Mellon states that the Alternative Credit Method allows it to

maintain without modification its fiduciary fee schedules for its

services to the Client Plans, which is more efficient and less costly

than a system which employs credits against such fiduciary fees. In

addition, use of the Alternative Credit Method permits Mellon's

existing Client Plans to retain their negotiated fiduciary fee

structures despite the change to a new investment vehicle.

Mellon states further that where Client Plans are withdrawing

assets from the CIFs and investing in the corresponding Funds, the CIFs

and Funds would be forced to incur large transaction costs if the CIF

assets could not be transferred via the Client Plan accounts to the

Funds. The asset transfer transactions permit the CIFs and the Funds to

avoid incurring any such transaction costs in connection with

liquidating CIF investments and making investments for the Funds,

enhancing the investment return of the Client Plans.

In-Kind Transfers of Securities From Individual Portfolios

11. Mellon represents that certain Client Plans may desire in the

future to transfer securities from their individual portfolios to the

Funds in exchange for shares of the Funds (i.e. an Exchange), as

discussed in Section III above. The Exchange would involve assets as to

which Mellon is a fiduciary which are not distributed from a CIF. All

or a pro rata portion of the assets of a Client Plan held by Mellon in

an investment account or portfolio that is selected by the Second

Fiduciary of such Client Plan for an Exchange would be transferred in-

kind to the Funds in exchange for shares of such Funds. Such Exchanges

may occur when a Second Fiduciary of a Client Plan trusteed by Mellon

selects Mellon to manage the Client Plan's assets on a collective

rather than individual portfolio basis in order to achieve certain

economies of scale and diversification. Mellon states that in such

cases it may be less expensive for the Client Plan to exchange its

existing investments in securities directly for Fund shares rather than

liquidating the securities and investing the proceeds in the shares.

The Exchange would avoid transaction costs, such as commissions and

dealer mark-ups, as well as any adverse market impact from a sale of

the securities at the time of the transaction.

The Exchange would have to comply with the requirements for an

``in-kind'' exchange of securities as stated in the Fund prospectus.

Specifically, the securities to be exchanged must meet the investment

objectives, policies and limitations of the particular Fund portfolio,

must have a readily ascertainable market value, must be liquid and must

not be subject to resale restrictions. Securities accepted by a Fund

would be valued in the same manner as the Fund values its assets, and

the number of Fund shares issued would depend on the relative net asset

value of the shares purchased and securities exchanged.11 The

Fund's procedures will protect any existing Fund shareholders while

assuring that fair value is given to the Client Plan exchanging the

securities. The Second Fiduciary would receive disclosures regarding

the relevant Funds and their fees, including each Fund's prospectus and

additional information regarding the fee structures which may be used

to avoid duplicative investment advisory fees being paid to Mellon (see

Section III(f) above). In such instances, Mellon represents that one of

the following fee structures will be used: (i) The Client Plan will

receive a cash credit of such Plan's proportionate share of all fees

(including all investment advisory fees and all secondary service fees)

charged to the Funds by Mellon, less any fees paid by Mellon to parties

unrelated to Mellon for services other than investment advisory

services provided to the Funds, no later than the same day as the

receipt of such fees by Mellon; (ii) the assets of the Client Plan

invested in the Funds will be excluded from the assets on which the

investment management fees paid by the Client Plan to Mellon are

determined; or (iii) the Client Plan will pay an investment management

fee to Mellon based on total Plan assets from which a credit is

subtracted representing only the Client Plan's pro rata share of the

investment advisory fees paid by the Funds to Mellon.

\11\In this regard, the Department assumes that the securities

which are transferred to a Fund will have the same value at the time

the securities become part of the Fund's portfolio as the value that

was determined for the securities in the individual Client Plan

portfolios, in accordance with procedures described in Rule 17a-7

under the 1940 Act, for purposes of the Exchange.

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

Prior to the Exchange, the Second Fiduciary would receive in

writing (i) the reasons why Mellon may consider the Exchange to be

appropriate for the Client Plan and a list of the securities held by

the Client Plan that would be accepted by one or more Funds in the

Exchange, (ii) the date the Exchange is [[Page 5713]] to occur, and

(iii) an explanation of the procedures that would be followed for

valuing the securities for purposes of the Exchange, including the

identity of the independent pricing service or services that would be

used to value the securities. In addition, within 30 days after the

Exchange, the Second Fiduciary would receive written confirmation that

reflects the price of each security involved in the Exchange and, for

securities which are valued in accordance with Rule 17a-7(b)(4), a

written disclosure of the identity of the pricing services or broker-

dealers consulted in determining the value of the securities.

12. In summary, the subject transactions satisfy the statutory

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

Code for the following reasons:

(a) The Funds provide many of the Client Plans with a more

effective investment vehicle than the CIFs currently maintained by

Mellon, without any increase in fees paid by the Client Plans to

Mellon;

(b) Mellon requires annual audits by an independent accounting firm

to verify that the Client Plans receive proper credits for the fees

paid to Mellon by the Funds;

frequent reports of Fund performance than are available for plan assets

invested in the CIFs, which enables such fiduciaries or participants to

make more informed decisions regarding their investments;

(d) Client Plan investments in the Funds and the payment of any

fees by the Funds to Mellon in connection with such investments require

an advance authorization in writing by an independent fiduciary (i.e.

the Second Fiduciary) after full written disclosure, including current

prospectuses for the Funds and a statement describing the Alternative

Credit Method;

(e) Any authorization made by the Second Fiduciary is terminable at

will by that fiduciary, without penalty, upon receipt by Mellon of

written notice of termination from the Second Fiduciary on a form

expressly providing an election to terminate the authorization (i.e.

the Termination Form), which is supplied to the Second Fiduciary no

less than annually;

(f) No sales commissions or other fees are paid by the Client Plans

in connection with any acquisition of Fund shares (either by an in-kind

transfer of CIF assets, a cash purchase, or an in-kind transfer of

securities from a Client Plan's individual investment portfolio) and no

redemption fees are paid in connection with the sale of Fund shares;

(g) All dealings among the Client Plans, the Funds, and Mellon are

on a basis no less favorable to the Client Plans than such dealings

with the other shareholders of the Funds;

(h) The in-kind transfers of CIF assets into the Funds are done

with the prior written approval of independent fiduciaries (i.e. the

Second Fiduciary) following full and detailed written disclosure

concerning the Funds;

(i) Each Client Plan receives shares of a Fund which have a total

net asset value that is equal to the value of the Client Plan's pro

rata share of the assets of the CIF on the date of the in-kind

transfer, based on the current market value of the CIF's assets as

determined in a single valuation performed in the same manner at the

close of the same business day in accordance with independent sources

and the procedures established by the Funds for the valuation of such

assets; and

(j) With respect to any transfer of securities from an individual

portfolio of a Client Plan in exchange for Fund shares (i.e. an

Exchange), the Second Fiduciary receives written disclosures regarding

the relevant Funds and their fees (including the Fund prospectus,

additional information regarding the fee structure to be used to avoid

duplicative advisory fees, and the valuation procedures to be used for

the securities involved in the Exchange) as well as written

confirmations that reflect the price of each security involved in the

Exchange and, for securities valued in accordance with Rule 17a-

7(b)(4), the identity of the pricing service or broker-dealers

consulted in the valuation of such securities.

Notice to Interested Persons

Notice of the proposed exemption shall be given to all Second

Fiduciaries of Client Plans described herein that had investments in a

terminating CIF and from whom approval was sought, or will be sought

prior to the granting of this proposed exemption, for a transfer of a

Client Plan's CIF assets to a Fund. In addition, interested persons

shall include the Second Fiduciaries of all Client Plans that are

currently invested in the Funds, as of the date the notice of the

proposed exemption is published in the Federal Register, where Mellon

provides services to the Funds and receives fees which would be covered

by the exemption, if granted. Notice to interested persons shall be

provided by first class mail within fifteen (15) days following the

publication of the proposed exemption in the Federal Register. Such

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 all interested persons of their right

to comment on and/or request a hearing with respect to the proposed

exemption. Comments and requests for a public hearing are due within

forty-five (45) days following the publication of the proposed

exemption in the Federal Register.

For Further Information Contact:

Mr. E.F. Williams of the Department, telephone (202) 219-8194. (This is

not a toll-free number.)

Bank South, N.A. (the Bank) Located in Atlanta, Georgia

[Application No. D-09626]

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).

Section I--Exemption for In-Kind Transfer of Assets

If the exemption is granted, the restrictions of sections 406(a)

and 406(b) 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

(F) of the Code, shall not apply as of February 11, 1994, to the in-

kind transfer of assets of plans for which the Bank serves as a

fiduciary (the Client Plans), other than plans established and

maintained by the Bank, that are held in certain collective investment

funds maintained by the Bank (the CIFs), in exchange for shares of the

Peachtree Funds (the Funds), an open-end investment company registered

under the Investment Company Act of 1940 (the 1940 Act) for which the

Bank acts as investment adviser, in connection with the termination of

such CIFs, provided that the following conditions and the general

conditions of Section III below are met:

(a) No sales commissions or other fees are paid by the Client Plans

in connection with the purchase of Fund shares through the in-kind

transfer of CIF assets and no redemption fees are paid in connection

with the sale of such shares by the Client Plans to the Funds.

(b) Each Client Plan receives shares of a Fund which have a total

net asset value that is equal to the value of the Client Plan's pro

rata share of the assets of the CIF on the date of the transfer, based

on the current market value of the CIF's assets, as determined in a

single [[Page 5714]] valuation performed in the same manner at the

close of the same business day using independent sources in accordance

with Rule 17a-7(b) of the Securities and Exchange Commission under the

1940 Act and the procedures established by the Funds pursuant to Rule

17a-7 for the valuation of such assets. Such procedures must require

that all securities for which a current market price cannot be obtained

by reference to the last sale price for transactions reported on a

recognized securities exchange or NASDAQ be valued based on an average

of the highest current independent bid and lowest current independent

offer, as of the close of business on the Friday preceding the weekend

of the CIF transfers, determined on the basis of reasonable inquiry

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

independent of the Bank.

Bank (the Independent Fiduciary) receives advance written notice of the

in-kind transfer of assets of the CIFs and full written disclosure of

information concerning the Funds (including a current prospectus for

each of the Funds and a statement describing the fee structure) and, on

the basis of such information, authorizes in writing the in-kind

transfer of the Client Plan's CIF assets to a corresponding Fund in

exchange for shares of the Fund.

(d) For all transfers of CIF assets to a Fund following the

publication of this proposed exemption in the Federal Register, the

Bank sends by regular mail to each affected Client Plan the following

information:

(1) Within 30 days after completion of the transaction, a written

confirmation containing:

(i) The identity of each security that was valued for purposes of

the transaction in accordance with Rule 17a-7(b)(4);

(ii) The price of each such security involved in the transaction;

(iii) The identity of each pricing service or market maker

consulted in determining the value of such securities; and

(2) Within 90 days after completion of each transfer, a written

confirmation that contains:

(i) The number of CIF units held by the Client Plan immediately

before the transfer, the related per unit value, and the total dollar

amount of such CIF units; and

(ii) The number of shares in the Funds that are held by the Client

Plan following the transfer, the related per share net asset value, and

the total dollar amount of such shares.

(e) The conditions set forth in paragraphs (e), (f) and (m) of

Section II below are satisfied.

Section II--Exemption for Receipt of Fees

If the exemption is granted, the restrictions of sections 406(a)

and 406(b) 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

(F) of the Code, shall not apply as of February 11, 1994, to the

receipt of fees by the Bank from the Funds for acting as investment

adviser to the Funds in connection with the investment in the Funds by

Client Plans for which the Bank acts as a fiduciary, including any

Client Plan invested in a CIF which transfers its assets to a Fund,

provided that the following conditions and the general conditions of

Section III are met:

(a) No sales commissions, loads, charges or similar fees are paid

by the Client Plans for the purchase or sale of shares of the Funds and

no redemption fees are paid for the sale of shares by the Client Plans

to the Funds.

(b) The price paid or received by a Client Plan for shares in a

Fund is the net asset value per share at the time of the transaction,

as defined in Section IV(e), and is the same price which would have

been paid or received for the shares by any other investor at that

time.

director of the Bank, purchases or sells shares of the Funds from or to

any Client Plan.

(d) The Client Plans do not pay any plan-level investment

management fees, investment advisory fees, or similar fees to the Bank

with respect to any of the assets of such Client Plans which are

invested in shares of any of the Funds. This condition does not

preclude the payment of investment advisory fees or similar fees by the

Funds to the Bank under the terms of an investment advisory agreement

adopted in accordance with section 15 of the 1940 Act or any other

agreement between the Bank and the Funds which is in compliance with

the 1940 Act.

(e) The combined total of all fees received by the Bank for the

provision of services to a Client Plan, and in connection with the

provision of services to the Funds in which the Client Plan may invest,

are not in excess of ``reasonable compensation'' within the meaning of

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

(f) The Bank does not receive any fees payable pursuant to Rule

12b-1 under the 1940 Act in connection with the transactions.

(g) The Client Plans are not employee benefit plans sponsored or

maintained by the Bank.

(h) The Independent Fiduciary receives, in advance of any

investment by the Client Plan in a Fund, full and detailed written

disclosure of information concerning the Funds, including, but not

limited to:

(1) A current prospectus for each Fund in which a Client Plan is

considering investing;

(2) A statement describing the fees for investment advisory or

similar services, as well as all other fees to be charged to or paid by

the Client Plan and by the Funds, including the nature and extent of

any differential between the rates of such fees;

(3) The reasons why the Bank may consider such investment to be

appropriate for the Client Plan;

(4) A statement describing whether there are any limitations

applicable to the Bank with respect to which assets of a Client Plan

may be invested in the Funds, and if so, the nature of such

limitations; and

(5) Upon request of the Independent Fiduciary, a copy of the

proposed exemption and/or a copy of the final exemption, if granted,

once such documents become available.

(i) On the basis of the information described above in paragraph

(h) of this Section II, the Independent Fiduciary authorizes in writing

the investment of assets of the Client Plan in each Fund, and the fees

to be paid by such Funds to the Bank.

(j) All authorizations made by an Independent Fiduciary regarding

investments in a Fund and the fees paid to the Bank are subject to an

annual reauthorization wherein any such prior authorization referred to

in paragraph (i) of Section II shall be terminable at will by the

Client Plan, without penalty to the Client Plan, upon receipt by the

Bank of written notice of termination. A form expressly providing an

election to terminate the authorization described in paragraph (i) of

Section II above (the Termination Form) with instructions on the use of

the form must be supplied to the Independent Fiduciary no less than

annually. The instructions for the Termination Form must include the

following information:

(1) The authorization is terminable at will by the Client Plan,

without penalty to the Plan, upon receipt by the Bank of written notice

from the Independent Fiduciary; and

(2) Failure to return the Termination Form will constitute

continued authorization of the Bank to engage in [[Page 5715]] the

transactions described in paragraph (i) of Section II on behalf of the

Client Plan.

(k) In the event of an increase in the rate of any fees paid by the

Funds to the Bank regarding any investment management services,

investment advisory services, or fees for similar services that the

Bank provides to the Funds over an existing rate for such services that

had been authorized by an Independent Fiduciary, in accordance with

paragraph (i) of this Section II, the Bank will, at least thirty (30)

days in advance of the implementation of such increase, provide a

written notice (which may take the form of a proxy statement, letter,

or similar communication that is separate from the prospectus of the

Fund and which explains the nature and amount of the increase in fees)

to the Independent Fiduciary of each of the Client Plans invested in a

Fund which is increasing such fees. Such notice shall be accompanied by

a Termination Form. However, if the Termination Form has been provided

to the Independent Fiduciary pursuant to this paragraph, then the

Termination Form need not be provided again for an annual

reauthorization pursuant to paragraph (j) above unless at least six

months has elapsed since the form was provided in connection with the

fee increase.

(l) On an annual basis, the Bank provides the Independent Fiduciary

of a Client Plan investing in the Funds with:

(1) A copy of the current prospectus for the Funds and, upon such

fiduciary's request, a copy of the Statement of Additional Information

for such Funds which contains a description of all fees paid by the

Funds to the Bank; and

(2) Upon the request of such Independent Fiduciary, a report or

statement (which may take the form of the most recent financial report,

the current Statement of Additional Information for the Fund, or some

other written statement) that contains a description of all fees paid

by the Fund to the Bank.

(m) All dealings between the Client Plans and the Funds are on a

basis no less favorable to the Client Plans than dealings with other

shareholders of the Funds.

Section III--General Conditions

(a) The Bank maintains for a period of six years the records

necessary to enable the persons described below in paragraph (b) of

Section III to determine whether the conditions of this exemption have

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

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

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

six-year period, and (2) no party in interest other than the Bank shall

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

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

of the Code if the records are not maintained or are not available for

examination as required by paragraph (b) below.

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

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

referred to in paragraph (a) of Section III are unconditionally

available at their customary location for examination during normal

business hours by--

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

(ii) Any fiduciary of the Client Plans who has authority to acquire

or dispose of shares of the Funds owned by the Client Plans, or any

duly authorized employee or representative of such fiduciary, and

(iii) Any participant or beneficiary of the Client Plans or duly

authorized employee or representative of such participant or

beneficiary;

(2) None of the persons described in paragraph (b)(1) (ii) and

(iii) shall be authorized to examine trade secrets of the Bank, or

commercial or financial information which is privileged or

confidential.

Section IV--Definitions

For purposes of this proposed exemption:

(a) The term ``Bank'' means the Bank South, N.A. and any affiliate

thereof as defined below in paragraph (b) of this Section IV.

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

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

intermediaries, controlling, controlled by, or under common control

with the person;

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

such person; and

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

officer, director, partner, or employee.

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

individual.

(d) The term ``Fund'' or ``Funds'' shall include the Peachtree

Funds, Inc., or any other diversified open-end investment company

registered under the 1940 Act for which the Bank serves as an

investment adviser.

(e) The term ``net asset value'' means the amount for purposes of

pricing all purchases and sales calculated by dividing the value of all

securities, determined by a method as set forth in the Fund's

prospectus and statement of additional information, and other assets

belonging to the Fund or portfolio of the Fund, less the liabilities

charged to each such portfolio or Fund, by the number of outstanding

shares.

(f) The term ``relative'' means a ``relative'' as that term is

defined in section 3(15) of the Act (or a ``member of the family'' as

that term is defined in section 4975(e)(6) of the Code), or a brother,

a sister, or a spouse of a brother or a sister.

(g) The term ``Independent Fiduciary'' means a fiduciary of a

Client Plan who is independent of and unrelated to the Bank. For

purposes of this exemption, the Independent Fiduciary will not be

deemed to be independent of and unrelated to the Bank if:

(1) Such fiduciary directly or indirectly controls, is controlled

by, or is under common control with the Bank;

(2) Such fiduciary, or any officer, director, partner, employee, or

relative of the fiduciary is an officer, director, partner, employee or

affiliate of the Bank (or is a relative of such persons);

(3) Such fiduciary directly or indirectly receives any compensation

or other consideration for his or her own personal account in

connection with any transaction described in this exemption.

If an officer, director, partner, affiliate or employee of the Bank

(or relative of such persons), is a director of such Independent

Fiduciary, and if he or she abstains from participation in (i) the

choice of the Client Plan's investment adviser, (ii) the approval of

any such purchase or sale between the Client Plan and the Funds, and

(iii) the approval of any change in fees charged to or paid by the

Client Plan in connection with any of the transactions described in

Sections I and II above, then paragraph (g)(2) of this Section IV shall

not apply.

(h) The term ``Termination Form'' means the form supplied to the

Independent Fiduciary which expressly provides an election to the

Independent Fiduciary to terminate on behalf of a Client Plan the

authorization described in paragraph (j) of Section II. The Termination

Form shall be used at will by the Independent Fiduciary to terminate an

authorization without penalty to the Client Plan and to notify the Bank

in writing to effect a termination by selling the shares of the Funds

held by the Client Plan requesting such termination within one business

day following receipt by the [[Page 5716]] Bank of the form; provided

that if, due to circumstances beyond the control of the Bank, the sale

cannot be executed within one business day, the Bank shall have one

additional business day to complete such sale.

Effective Date: If the proposed exemption is granted, the exemption

will be effective February 11, 1994.

Summary of Facts and Representations

1. The Bank is a Georgia corporation with its principal offices

located at 55 Marietta Street, N.W., Atlanta, Georgia, and is a wholly-

owned subsidiary of Bank South Corporation, a bank holding company. The

Bank provides trust services to approximately 128 employee benefit

plans with total assets of approximately $132 million, as of November

1, 1993. The Bank has total assets under management of approximately $1

billion.

The Bank serves as a discretionary trustee, investment manager,

directed trustee, or custodian for the Client Plans. The Client Plans

include various pension, profit sharing, and stock bonus plans as well

as voluntary employees' beneficiary associations, supplemental

unemployment benefit plans, simplified employee benefit plans,

retirement plans for self-employed individuals (i.e. Keogh plans), and

individual retirement accounts (IRAs).

The Bank represents that its status as a fiduciary with investment

discretion for a Client Plan arises out of its relationship as a

trustee or investment manager for such Plan. The Bank may exercise

investment discretion for all or a portion of the assets of a Client

Plan. As a custodian or directed trustee of a Client Plan, the Bank has

custody of Plan assets, collects all income, performs bookkeeping and

accounting services, generates periodic statements of account activity

and other reports, and makes payments or distributions from the account

as directed. However, the Bank has no duty as a custodian or directed

trustee to review investments or make recommendations, acting only as

directed by an authorized Independent Fiduciary.

2. The Bank requests an exemption for investments in a Fund which

occur through an in-kind transfer of a Client Plan's pro rata share of

assets of a terminating CIF to a corresponding Fund in exchange for

shares of such Fund.12 The Bank also requests an exemption for the

receipt of fees from the Funds in connection with the investment of

assets of a Client Plan (including any Client Plan invested in a CIF

which transfers its assets to a Fund), for which it acts as a trustee,

directed trustee, investment manager, or custodian in shares of the

Funds in situations where the Bank acts as an investment adviser to the

Funds. The exemption for the receipt of fees would include Client Plans

for which the Bank exercises investment discretion as well as Client

Plans where investment decisions are directed by an Independent

Fiduciary.13

\12\The Bank is not requesting an exemption for any investment

in the Funds by employee benefit plans sponsored and maintained by

the Bank (the Bank Plans). The Bank represents that the Bank Plans

may acquire or sell shares of the Funds pursuant to Prohibited

Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734, April 8, 1977).

PTE 77-3 permits the acquisition or sale of shares of a registered,

open-end investment company by an employee benefit plan covering

only employees of such investment company, employees of the

investment adviser or principal underwriter for such investment

company, or employees of any affiliated person (as defined therein)

of such investment adviser or principal underwriter, provided

certain conditions are met. The Department is expressing no opinion

in this proposed exemption regarding whether any transactions with

the Funds by the Bank Plans would be covered by PTE 77-3.

\13\The transactions with the Funds involving Client Plans for

which the Bank acts as a nondiscretionary trustee may be covered by

Prohibited Transaction Exemption 84-24 (PTE 84-24, 49 FR 13206,

April 3, 1984). PTE 84-24 provides, among other things, an exemption

for the purchase by a plan of securities issued by an investment

company from, or the sale of such securities to, an investment

company or an investment company principal underwriter, when the

investment company, principal underwriter, or investment company

investment adviser is a fiduciary or service provider to the plan

solely by reason of the sponsorship of a master or prototype plan or

the provision of nondiscretionary trust services to the plan, or

both, if the conditions discussed therein are met (see Section

III(f) and Section IV of PTE 84-24). However, the applicant states

that it is unclear whether PTE 84-24 would cover either: (i) The

``conversion'' transaction, pursuant to which Plan interests in the

CIFs are exchanged for equivalent interests in the Funds; (ii) the

``fee offset'' mechanism, pursuant to which the Bank ensures that

Plans are not charged investment advisory fees at both the Plan-

level and the Fund-level; and (iii) the ``negative consent''

mechanism, pursuant to which future Fund-level fee modifications are

deemed approved unless the Plan submits an ``investment termination

form'' after receiving notice of the fee modification, as discussed

herein. The Department expresses no opinion in this proposed

exemption regarding whether such transactions would be covered by

PTE 84-24.

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3. The Funds are a Massachusetts business trust organized as an

open-end investment company registered under the 1940 Act. The Funds

currently consist of five Funds or ``portfolios'', each having a

separate prospectus and representing a distinct investment vehicle. The

shares of each Fund represent a proportionate interest in the assets of

that Fund. The existing Funds include the Peachtree Government Money

Market Fund, the Peachtree Prime Money Market Fund, the Peachtree Bond

Fund, the Peachtree Equity Fund, and the Peachtree Georgia Tax-Free

Fund.14 The Bank states that additional Funds may be established

in the future. Shares of the Funds are offered and sold to eligible

investors, including the Client Plans and other trust clients of the

Bank, as a means of acquiring an interest in a diversified portfolio of

investments. The Bank states that the Fund shares are offered to the

Bank's trust customers, including the Client Plans, under terms and

conditions which are at least as favorable to such customers as the

terms and conditions offered to any other customers of the Bank.

\14\The Bank does not anticipate that the Client Plans will

invest in the Peachtree Georgia Tax-Free Fund, since the Plans are

not subject generally to Federal or State income taxes and would not

need to seek tax-free income.

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Investments of Client Plan assets in the Funds occur either through

a transfer of assets from a terminating CIF, the direct purchase of

shares of the Funds for a Client Plan by the Bank, the transfer by the

Bank of Client Plan assets from one Fund to another Fund, or a daily

automated sweep of uninvested cash of a Client Plan by the Bank into

one or more Funds previously designated by the Client Plan for sweeping

such cash. All such investments for the Client Plans are made pursuant

to the Independent Fiduciary's prior written authorization and annual

reauthorization to the Bank.

4. Federated Securities Corporation (FSC) is the principal

distributor for all shares of the Funds including shares which are sold

to the Client Plans. There are no fees for distribution expenses,

pursuant to Rule 12b-1 under the 1940 Act, paid by the Client Plans or

other trust clients of the Bank to FSC for any shares of the Funds. In

addition, the Bank does not and will not receive fees payable pursuant

to Rule 12b-1 in connection with transactions involving any shares of

the Funds. However, such shareholders are charged for certain

administrative expenses of the Funds. FSC is a subsidiary of Federated

Investors (Federated) which, through other subsidiaries, acts as the

transfer and dividend disbursing agent for the Funds and provides

certain personnel and administrative services for the Funds. Federated

and its subsidiaries are unrelated to the Bank. The Bank of New York is

the custodian for the securities and cash of the Funds.

5. The Bank serves as the investment adviser for the Funds pursuant

to investment advisory agreements with the Funds (the Agreements) which

allow the Bank to receive monthly investment advisory fees based on a

certain percentage (i.e., between .33% [[Page 5717]] and .75%) of the

average daily net assets of each of the Funds.15 The Bank is

currently the sole investment adviser to the Funds' existing portfolios

and presently contemplates no change for such portfolios. However, the

Bank states that it may utilize third party sub-advisers in the future

to enhance the investment alternatives and the investment advisory

services available to the Funds for certain new portfolios. The

Agreements and the fees received by the Bank are approved by the Board

of Directors of the Funds (the Funds' Directors), in accordance with

the applicable provisions of the 1940 Act. Any changes in the fees or

services for the Funds are approved by the Funds' Directors, a majority

of whom must be independent of the Bank.

\15\The Bank states that it will not perform any services for

the Funds other than investment advisory services. Thus, the Bank

will not act as the custodian, transfer agent, or shareholder

servicing agent for a Fund or provide any other secondary services

to the Funds. The Bank also will not provide portfolio execution

services for the Funds. Therefore, all securities transactions for a

Fund's portfolio will be executed by broker-dealers unrelated to the

Bank and will not generate commissions or other fees to the Bank.

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6. Prior to February 11, 1994, the Bank generally invested assets

of Client Plans for which it acted as a trustee with investment

discretion in a series of CIFs. In addition, certain Client Plans where

investment decisions are directed by an Independent Fiduciary generally

used a Bank CIF as an investment option for the Client Plans. However,

on Friday, February 11, 1994, the Bank terminated two of its CIFs--the

BankSouth Fixed Income CIF and the BankSouth Equity CIF. The assets in

these CIFs were transferred to the Peachtree Bond Fund and the

Peachtree Equity Fund, respectively. Each CIF transferred its assets to

the corresponding Fund in exchange for shares of that Fund at the then

current market value of the CIF assets, in accordance with Rule 17a-7

under the 1940 Act (as discussed below).16 The CIFs were then

liquidated and the Fund shares were distributed to the Client Plans,

subject to the prior written consent of the Independent Fiduciary for

the Client Plan. Any Client Plan that had not provided prior written

approval for the transfer of its CIF assets to the Funds by the

deadline set for such approvals received a cash distribution of its pro

rata share of the CIF assets no later than Friday, February 11, 1994,

preceding the transfers.

\16\Rule 17a-7 permits transactions between investment funds

that use the same investment adviser, subject to certain conditions.

Rule 17a-7 requires, among other things, that such transactions be

effected at the ``independent current market price'' for each

security, involve only securities for which market quotations are

readily available, involve no brokerage commissions or other

remuneration, and comply with valuation procedures adopted by the

board of directors of the investment company to ensure that all

requirements of the Rule are satisfied.

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The assets of the CIFs were reviewed by the Bank as investment

adviser to the Funds, in coordination with Federated Administrative

Services (FAS), the Funds' third party administrator, to determine that

the assets were appropriate investments for the corresponding Funds.

FAS created a portfolio accounting system to track the securities to be

acquired by the Funds. Prior to the transfer of CIF assets to the

Funds, the Funds did not hold any securities or other assets.

The transfer transactions occurred using market values as of the

close of business on Friday, February 11, 1994. The securities

transferred from the CIFs were the same as the securities received by

the Funds. The applicant states that the value of the securities was

determined in a single valuation by the Bank as investment adviser for

the Funds, in accordance with the requirement of Rule 17a-7(b) that

transactions be effected at the ``independent current market price'' of

the securities. The valuation of the securities was performed in the

same manner for both the CIF and the corresponding Fund at the close of

the same business day. Specifically, as required by the Rule,

securities listed on exchanges were valued at their closing prices on

Friday, February 11, and unlisted securities were valued based on the

average of bid and ask quotations at the close of the market on Friday,

February 11, obtained from three brokers independent of the Bank. Any

fees charged by the independent brokers for the bid and ask prices were

paid by the Bank.

Each Client Plan that approved the CIF asset transfers to the Funds

received account statements describing the asset transfers on or before

March 31, 1994. The statements showed the disposition of the CIF units

from the Client Plan account and the acquisition by the account of Fund

shares, both posted as of Monday, February 14, 1994.17 This

information provided the affected Client Plans with written

confirmation of the number of CIF units held by the Client Plan

immediately before the transfer, the related per unit value and the

total dollar amount of such CIF units as well as the number of shares

of the Funds held by the Client Plan following the transfer, the

related per share net asset value, and the total dollar amount of such

shares.

\17\The following example illustrates the information provided

by the statements: Assume a Client Plan held 12,506 units of the

BankSouth Equity CIF prior to the asset transfers. The account

statement showed a disposition of 12,506 units of the BankSouth

Equity CIF, at a value of $72.08 per unit, on February 14, 1994 with

total proceeds of $901,432.18. The statement also showed a purchase

on that same date of 90,143.218 shares of the Peachtree Equity Fund,

the Fund corresponding to the BankSouth Equity CIF, at $10 per

share, at a total cost of $901,432.18, the same amount as the

proceeds of the disposition from the BankSouth Equity CIF.

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Thus, the applicant represents that as of February 14, 1994, Client

Plans that were formerly invested in the terminated CIFs held shares of

the corresponding Funds which were of the same value, based on the

Client Plans' pro rata share of the underlying market value of the

securities transferred to the Funds, as their assets in the CIF as of

the close of business on Friday, February 11, 1994. The Bank represents

that the other CIFs may be terminated in the future and that all such

terminations and subsequent transfers of CIF assets for shares of the

Funds will comply with Rule 17a-7 as described above and the conditions

of this proposed exemption.

For all transfers of CIF assets to a Fund following publication of

this proposed exemption in the Federal Register, the Bank sends by

regular mail to each affected Client Plan a written confirmation, not

later than 30 days after completion of the transaction, containing the

following information:

(1) The identity of each security that was valued for purposes of

the transaction in accordance with Rule 17a-7(b)(4);

(2) The price of each such security involved in the transaction;

and

(3) The identity of each pricing service or market maker consulted

in determining the value of such securities. Securities which are

valued in accordance with Rule 17a-7(b)(4) are securities for which the

current market price cannot be obtained by reference to the last sale

price for transactions reported on a recognized securities exchange or

the NASDAQ system. The Bank states that such securities are valued

based on an average of the highest current independent bid and lowest

current independent offer, as of the close of business on the Friday

preceding the weekend of the CIF transfers, determined on the basis of

reasonable inquiry from at least three sources that are broker-dealers

or pricing services independent of the Bank.

In addition, for all in-kind transfers of CIF assets to a Fund that

occur after the date this proposed exemption is published in the

Federal Register, the Bank will send by regular mail to the Independent

Fiduciary no later than 90 [[Page 5718]] days after completion of each

transfer a written confirmation that contains the following

information:

(1) The number of CIF units held by the Client Plan immediately

before the transfer, the related per unit value, and the total dollar

amount of such CIF units; and

(2) The number of shares in the Funds that are held by the Client

Plan following the transfer, the related per share net asset value, and

the total dollar amount of such shares.

The Bank believes that the interests of the Client Plans are better

served by the collective investment of assets of the Client Plans in

the Funds rather than in the CIFs. The Funds are valued on a daily

basis, whereas the majority of the CIFs are valued monthly. The daily

valuation permits (i) immediate investment of Client Plan contributions

in various types of investments; (ii) greater flexibility in

transferring assets from one type of investment to another; and (iii)

daily redemption of investments for purposes of making distributions.

In addition, information concerning the investment performance of the

Funds will be available on a daily basis in newspapers of general

circulation which will allow Client Plan fiduciaries to monitor the

performance of investments on a daily basis and make more informed

investment decisions.

7. For investments in the Funds on behalf of Client Plans, the Bank

currently offsets its investment management or advisory fees for assets

invested in the Funds in accordance with one of the methods for

offsetting double investment advisory fees described in Prohibited

Transaction Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8,

1977).18 Consequently, the Bank represents that the fee structure

for these investments complies with the fee structure under PTE 77-4,

and that the other conditions of PTE 77-4 are met.19

\18\PTE 77-4, in pertinent part, permits the purchase and sale