Proposed Exemptions; Prudential Property Investment Separate Account (PRISA) and Prudential Property Investment Separate Account II (PRISA II)

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-09845 and D-09846, et al.]

Proposed Exemptions; Prudential Property Investment Separate

Account (PRISA) and Prudential Property Investment Separate Account II

(PRISA II)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

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

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

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

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

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

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

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

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

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

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

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

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

Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.

20210. Attention: Application No. stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

Prudential Property Investment Separate Account (PRISA) and Prudential

Property Investment Separate Account II (PRISA II) Located in Newark,

NJ

[Application Nos. D-09845 and D-09846]

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 C.F.R. Part

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

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

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

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

(E) of the Code,1 shall not apply, effective December 31, 1995, to

the advanced commitment to provide an enhanced return and the payment

of such return by the Prudential Insurance Company of America

(Prudential) to various employee benefit plans (the Plan or Plans) on

the assets of such Plans which are invested either in PRISA and/or

PRISA II (the Account or Accounts), as of April 1, 1994, and which

remain invested for all or any portion of a twenty-one (21) month

period, beginning April 1, 1994, and ending December 31, 1995, (the

Investment Period), provided that the following conditions are met:

1 For purposes of this exemption, references to specific

provisions of Title I of the Act, unless otherwise specified, refer

also to the corresponding provisions of the Code.

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(1) The decision to invest funds in either or both of the Accounts

for all or a portion of the Investment Period has

[[Page 47594]]

been and will be made by fiduciaries of the Plans independent of

Prudential;

(2) The amount of the enhanced return payment with respect to the

assets of the Plans that are invested in either or both of the Accounts

for only a portion of the Investment Period will be calculated in the

same manner as the amount of the enhanced return payment with respect

to the assets of the Plans that remain invested in either or both of

the Accounts for the entire Investment Period;

(3) The enhanced return will be derived by comparing the cumulative

total return for the Investment Period reported by the expanded

Russell-NCREIF Property Index (the Index) with the cumulative total

return of PRISA or PRISA II for the same period;

(4) The Plans will obtain an enhanced rate of return (but not more

than 200 basis points) for amounts invested in one or both of the

Accounts during all or any portion of the Investment Period, if the

cumulative total investment return of such Account for such Investment

Period is less than that reported for the Index;

(5) The payments, if any, of enhanced return will be made by

Prudential to investors in the Accounts not later than thirty (30) days

following the final determination of the amounts owed;

(6) Every property held by the Accounts is individually valued at

least once during the Investment Period and thereafter will be valued

at least once in each calendar year by an independent qualified

appraiser;

(7) A valuation policy committee (the Valuation Policy Committee),

consisting of representatives from an valuation management firm (the

Valuation Management Firm), Prudential Real Estate Investors (PREI),

the interim and permanent advisory councils (the Advisory Council or

Advisory Councils) composed of investors in PRISA and PRISA II and

their consultants, and other clients of PREI, will meet at least

quarterly and set valuation policy for the Accounts;

(8) The Valuation Management Firm, an independent third party, will

be responsible for retaining (and terminating) all appraisal firms

which value the properties in the Accounts; reviewing all appraisals

generated by such appraisal firms; and collecting, reviewing, and

distributing any information needed by such appraisal firms to appraise

the properties in the Accounts;

(9) The Plans invested in the Accounts who receive the enhanced

return will incur no additional cost or risk in connection with the

transaction;

(10) In connection with the determination of enhanced return

payments, no upward adjustment will be made by Prudential to the value

reported by an external independent appraiser of any Property in PRISA

and PRISA II without the concurrence of the Valuation Management Firm;

(11) Any required state insurance regulatory approvals are obtained

for the transaction; and

(12) The Plans will receive the same treatment and proportional

payment under the enhanced return as any other investor in PRISA and

PRISA II.

Summary of Facts and Representations

1. Prudential is a mutual life insurance company organized under

the laws of the State of New Jersey and subject to the supervision and

examination by the Insurance Commissioner of the State of New Jersey.

It is represented that Prudential is the largest life insurance company

in the United States, with total consolidated assets, as of December

31, 1993, of approximately $218 billion.

Among the variety of insurance products and services it offers,

Prudential provides funding, asset management and other services for

thousands of employee benefit plans subject to the provisions of Title

I of the Act. In this regard, Prudential maintains separate accounts in

which pension, profit-sharing, and thrift plans participate. Prudential

also manages the assets of such plans held in single customer separate

accounts and advisory accounts.

2. PRISA and PRISA II are both open-end pooled separate accounts

created by Prudential in 1970 and 1980, respectively. The Accounts were

designed as funding vehicles for tax-qualified employee pension benefit

plans to invest in real estate on a commingled basis. It is represented

that the establishment and operation of PRISA and PRISA II have been

approved by the New Jersey Insurance Commissioner.

As of June 30, 1994, PRISA had total net assets of approximately

$2.25 billion, including interests in 124 properties located in 22

states and the District of Columbia. The investors in PRISA, as of June

30, 1994, consisted of 190 employee pension benefit plans, including

171 plans covered under the Act and 19 governmental plans that are

exempt from coverage under the Act.

As of June 30, 1994, PRISA II had total net assets of approximately

$575.6 million, including interests in 18 properties located in 12

states and the District of Columbia. The 38 investors in PRISA II, as

of June 30, 1994, consisted of 28 plans covered under the Act and 10

governmental plans that are exempt from coverage under the Act.

The assets of the Accounts consist primarily of real property, and

may also include mortgage loans, interests in companies, including

partnerships, which acquire, develop or manage real property, and cash

or cash equivalents. Interests in the Accounts are expressed in terms

of units of participation, the value of which is determined

periodically, based upon the net value of each of the Accounts (i.e.

the market value of the real property and other assets held in an

Account, less the amount of liability for indebtedness and expenses).

It is represented that every property held by the Accounts is valued at

least once in each calendar year by an independent qualified appraiser.

As separate accounts, PRISA and PRISA II hold assets which are

segregated from all other assets held or managed by Prudential. In this

regard, it is represented that the assets of each of the Accounts may

be charged only with liabilities arising from the operation of that

Account and may not be charged with liabilities arising from other

business conducted by Prudential.

3. The assets of PRISA and PRISA II are managed by PREI. PREI is a

division of the Prudential Investment Corporation which is a direct

subsidiary of Prudential. It is represented that PREI is a full-service

real estate investment advisor whose sole function is to provide real

estate investment advisory and portfolio and asset management services

to institutional investors. In addition to PRISA and PRISA II, PREI

manages several other pooled separate accounts maintained by Prudential

and also manages various single customer separate accounts and advisory

accounts. It is represented that PREI currently manages real estate

assets of approximately $4.6 billion.

4. The Plans which invest in PRISA and PRISA II consist of defined

benefit plans and defined contribution plans. Investment in PRISA by

defined contribution plans, where a unit value account is maintained

for each individual plan participant, is limited to no more than 33

percent (33%) of the investment fund for which such unit value is

determined. It is represented that PRISA II does not have this

restriction on the extent of participation by defined contribution

plans. The Retirement System for U.S. Employees and Special Agents, a

defined benefit plan sponsored by Prudential has invested in PRISA and

PRISA II since 1970 and 1980, respectively. It is represented that, as

of June 30, 1994, approximately 4 percent (4%) of the

[[Page 47595]]

assets of this plan were in the aggregate invested in the Accounts.

The Plans participate in the Accounts, in accordance with the

provisions of group pension annuity contracts offered by Prudential.

Pursuant to the terms of such group pension annuity contracts,

Prudential is appointed as an investment manager to each of the Plans,

with discretion to delegate to one or more of its direct or indirect

wholly-owned subsidiaries all or part of its authority under such

contract. It is represented that for the performance of its duties as

investment manager of each of the Accounts, Prudential charges a

quarterly fee of a percentage of the value of the assets in each

Account.\2\ In this regard, Prudential acknowledges that it is a

fiduciary and party in interest, pursuant to section 3(14) of the Act,

with respect to each Plan, to the extent of the assets of such Plans

which are invested in either or both Accounts, pursuant to the terms of

such group pension annuity contracts.

\2\ It is represented that Prudential and its affiliates rely

upon the statutory exemption, as set forth in section 408(b)(2) of

the Act, for the receipt of fees for investment management services

provided with respect to PRISA and PRISA II. The Department, herein,

expresses no opinion as to whether the provision of services by

Prudential and its affiliates to PRISA and PRISA II and the

compensation received therefore satisfy the terms and conditions, as

set forth in section 408(b)(2) of the Act.

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5. It is represented that allegations of improprieties by

Prudential in connection with the overvaluation of properties in the

PRISA and PRISA II portfolios arose in November 1993, as part of a suit

brought against Prudential by a former employee. In addition, such

allegations were the subject of an investigation by the Department of

Labor.\3\ It is represented that Prudential hired an outside counsel,

Sonnenschein Nath & Rosenthal (Sonnenschein), and an independent

accounting firm, Kenneth Leventhal & Company (Leventhal), to conduct

independent reviews of various aspects of these allegations. In this

regard, Prudential made available to investors in PRISA and PRISA II on

April 27, 1994, and to the Department on April 25 and June 26, 1994,

the results of such independent reviews conducted by Sonnenschein and

Leventhal.

\3\ Prudential represents that, by letter dated March 21, 1995,

it was advised that the Department had concluded its investigation,

and that no further action was contemplated at that time.

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As a result of these investigations and conclusions made by

Sonnenschein and Leventhal, Prudential determined to taken certain

steps to improve the operation and management of the Accounts. These

efforts include: (a) Changing certain of the personnel responsible for

the management of the Accounts; (b) establishing the Advisory Councils

for each of the Accounts; (c) transferring responsibility for the

valuation of properties from PREI to Prudential's Department of the

Comptroller (the Comptroller); (d) retaining the services of the

independent Valuation Management Firm; (e) creating the Valuation

Policy Committee; (e) implementing a fiduciary education program for

associates of Prudential; and (f) making financial remediation to

investors in PRISA and PRISA II in order to restore each investor to

his financial position, absent any overvaluation of PRISA and PRISA II

properties.

6. In order to make the Accounts more attractive investments for

the Plans and in addition to the other efforts taken by Prudential, as

described above, Prudential proposes to provide an enhanced return and

to pay such return to the Plans on the assets of such Plans which are

invested in either or both Accounts, as of April 1, 1994, and which

remain invested for all or any portion of the twenty-one (21) month

Investment Period; provided any required state insurance regulatory

approvals are obtained and the proposed exemption is granted.\4\ In

this regard, Prudential has requested exemptive relief from the

prohibited transaction provision, set forth in section 406(a) of the

Act, because it believes that its obligation to make the enhanced

return payments could be viewed as an implicit or indirect extension of

credit by the Plans to Prudential which will remain outstanding until

such time as Prudential satisfies its obligation by payment of the

enhanced return.

\4\ By letter dated April 11, 1995, Prudential was advised that

the New Jersey Insurance Department has approved the proposed

enhanced return payment, as described herein.

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Further, in Prudential's view, the proposed enhanced return could

give rise to a conflict of interest between Prudential and the Plans

that invest in the Accounts in violation of section 406(b)(1) and

(b)(2) of the Act. In this regard, the amount of each Account's

cumulative total return for the Investment Period will be affected in

part by Prudential's exercise of its fiduciary authority, control, and

responsibility with respect to the operation and management of the

Accounts, including the valuation of assets of the Accounts.

Accordingly, it could appear that Prudential has an interest in

maximizing the cumulative total return of the Accounts, as determined

for the Investment Period, April 1, 1994 through December 31, 1995,

thereby reducing the amount of, or entirely eliminating, Prudential's

obligation to make the enhanced return payment.

7. With certain limitations, as more fully described below, the

amount of enhanced return Prudential proposes to pay to the Plans

invested in one or both of the Accounts will be derived by comparing

the cumulative total return for the Investment Period reported by a

preselected Index with the cumulative total return of PRISA or PRISA II

for the same period.

The Index is an index of returns (before deduction of management

fees) on real property investments in the United States. The Index is

produced in partnership between Russell Real Estate Consulting (a

division of the Frank Russell Company, an investment consulting firm)

and the National Council of Real Estate Investment Fiduciaries

(NCREIF). NCREIF is a non-profit association of institutional real

estate investment professionals, including investment managers, plan

sponsors, academicians, consultants, appraisers, CPAs, and other

service providers who have significant involvement in pension fund real

estate investments.

It is represented that all events giving rise to Prudential's

payment obligation on the enhanced return will have occurred by

December 31, 1995. However, Prudential expects that the information

necessary to compare the cumulative total returns of PRISA and PRISA II

to that of the Index for the Investment Period, April 1, 1994, through

December 31, 1995, will not be available before the end of the second

quarter of 1996. It is contemplated that the payments, if any, of

enhanced return will be made by Prudential to investors in the Accounts

not later than thirty (30) days following the final determination of

the amounts owed.

Specifically, the maximum enhanced return shall be equal to the

product of (i) one-seventh (1/7th), multiplied by (ii) the difference

(but not more than 200 basis points) between the cumulative total

return for the entire Investment Period reported by the Index and the

cumulative total return of PRISA or PRISA II, prior to reduction for

Prudential's management fees, for such entire period, multiplied by

(iii) the number of complete calendar quarters that the amounts remain

invested in PRISA or PRISA II during the Investment Period.

For example, in the case of an amount that is invested in an

Account as of April 1, 1994, and is withdrawn on June 30, 1995, the

enhanced return will be

[[Page 47596]]

equal to the difference between the cumulative total return for such

period reported by the Index and the cumulative total return of the

Account, prior to reduction for Prudential's management fees, for the

same period, but not more than the enhanced return (not in excess of

200 basis points) determined with respect to the entire period April 1,

1994 through December 31, 1995, multiplied by five-sevenths (5/7ths).

9. Prudential represents that the exemption is administratively

feasible in that the proposed transaction is narrowly circumscribed and

of limited duration. In this regard, the proposed transaction involves

a one-time determination of comparative investment returns based upon a

recognized real estate industry index that can be readily reviewed and

monitored for compliance in all applicable requirements. In addition,

it is represented that the comparative return calculation involves a

relatively simple and objective comparison of readily available return

information, which can be easily confirmed by the fiduciaries of the

Plans invested in the Accounts and by the Department. Further, it is

represented that the Plans invested in the Accounts who receive the

enhanced return will incur no additional cost or risk in connection

with the proposed payment, and that Prudential will bear the cost of

the exemption application and of notifying interested persons.

10. It is represented that the exemption is in the interest of the

Plans and their participants and beneficiaries in that the Plan will

obtain an enhanced rate of return (but not more than 200 basis points)

for amounts invested in one or both of the Accounts during all or any

portion of the Investment Period, if the cumulative total investment

return of such Account for such Investment Period is less than that

reported for the Index. In addition, Prudential expects that its

commitment to provide the enhanced return will reduce requests from

investors in one or both Accounts for withdrawal, and will thereby

avoid the negative impact on the performance of such Accounts that

would likely result from forced liquidation of the properties in the

Accounts in order to obtain the cash necessary to satisfy withdrawal

requests.

11. It is represented that the proposed exemption contains

safeguards which protect the interests of the Plans and the rights of

participants and beneficiaries. In this regard, the decision to invest

funds in either or both of the Accounts for all or a portion of the

Investment Period has been and will be made by fiduciaries of Plans

independent of Prudential. In this regard, disclosure of Prudential's

proposal to make enhanced return payments was first made to investors

in the Accounts by correspondence, dated April 27, 1994. In addition,

it is represented that the investors in the Accounts have been kept

apprised of related developments in the Accounts, such as state

insurance regulatory approvals and the filing of the exemption

application. Further, it is represented that an additional level of

independent oversight of the proposed transaction will occur through

the review of the operations and returns of the Accounts conducted by

interim and permanent Advisory Councils for PRISA and PRISA II.

It is represented that the interim Advisory Councils were created

by Prudential to be in place through year-end 1994 or until the

transition to the permanent Advisory Councils. The responsibilities of

the interim Advisory Councils were: (a) To review and comment upon the

composition, structure, responsibilities, frequency of meetings,

selection of members, and other procedures to be followed by the

permanent Advisory Councils; (b) to review and comment on suggested

structural changes to the Accounts, including valuation and appraisal

policy, dividend policy, and fees; and (c) prior to appointment of the

permanent Advisory Councils, to satisfy all the responsibilities

pertaining to the duties of such permanent Advisory Councils, as listed

in the paragraph below.

The permanent Advisory Council for each Account will be composed of

from seven to eleven (preferably nine) investors in the Accounts or

their consultants or other representatives who have in-depth knowledge

of real estate investment and management. Members of the Advisory

Councils will be elected by investors on an investment weighted basis

and will serve for a minimum of two (2) years. It is represented that

formal meetings of the Advisory Councils will be held quarterly

approximately thirty (30) days following the end of each quarter, with

additional meetings to be held at the discretion of the Advisory

Councils. It is represented that the Advisory Councils do not have veto

authority. The role of the Advisory Councils is to monitor, review,

comment, and advise. For each of the Accounts, the responsibilities of

the permanent Advisory Council are: (a) To review Account investment

strategy and philosophy, including diversification strategy; (b) to

review the annual business plan for each Account, including the

criteria for acquisitions, dispositions, capital expenditures and

budgets, and to review quarterly variations to the business plan; (c)

to review property and portfolio leverage strategy; (d) to review

PREI's plans for paying out redemption requests; (e) to review data and

reports sent to all clients; (f) to review and comment on acquisitions

and dispositions; and (g) to make suggestions and to comment on all

information presented at quarterly meetings.

It is represented that Prudential will calculate the enhanced

return payments and will disclose such calculations in the open forum

of the Advisory Councils with full disclosure (through distribution of

the minutes of Advisory Council meetings) to all investors in the

Accounts. Further, PREI will review the returns for each Account with

the Advisory Councils for each Account. It is represented that the

comparative return calculation for determining the amount of the

enhanced return payments involves a relatively simple and objective

comparison of readily available information, which can easily be

confirmed by the Advisory Council and the account investors.

With respect to the valuation process, it is represented that all

the properties in the Accounts will be individually valued at least

once during the Investment Period and thereafter will be appraised by

external, independent, qualified MAI appraisers at least annually. In

this regard, it is represented that external appraisals are performed

as of the last day of a calendar quarter. The current Prudential policy

is for properties with market values in excess of $50 million to be

externally appraised twice each year and properties with values below

such amount to be externally appraised once each calendar year. In

addition, it is represented that certain events (e.g., significant

property or market changes, or internal adjustment of value over a

certain threshold) can trigger additional external valuations.

Prudential proposes to strengthen the independence of the valuation

process through the appointment of the Valuation Management Firm and

the creation of the Valuation Policy Committee. In addition, Prudential

has limited the role of PREI in the valuation process to the provision

of property, tenant, and market information and participation on the

Valuation Policy Committee.

The Valuation Policy Committee will consist of representatives from

the Valuation Management Firm, PREI, the PRISA Advisory Council, and

other clients of PREI. The Valuation Policy Committee will be chaired

by an MAI

[[Page 47597]]

appraiser employed by Prudential (the Prudential Valuation Reviewer).

It is represented that Phyllis A. Cummins (Ms. Cummins), Vice President

and Chief Appraiser of Prudential and a member of the Comptroller's

Department, is currently serving as the Prudential Valuation Reviewer.

It is represented that Ms. Cummins is qualified to serve as the

Prudential Valuation Reviewer in that she has been employed by

Prudential for over twenty (20) years and in that time has had

significant experience in valuations, development, assets management,

acquisitions, sales, and mortgages of all property types. In addition

to being an MAI appraiser since 1983, Ms. Cummins holds the Counselor

of Real Estate (CRE), the Certified Property Manager (CPM), and the

Certified Shopping Center Manager (CSM) designations. Further, Ms.

Cummins is certified in New Jersey as a General Appraiser and licensed

as a Broker-Salesperson. Ms. Cummins is a graduate of The Ohio State

University and received her MBA from the University of North Florida.

It is represented that the Valuation Policy Committee will meet at

least quarterly and set valuation policy, including such items as the

minimum qualifications for appraisal firms, fee schedules for such

firms, rotation of appraisal firms, and valuation methodology.

Prudential represents that it will bear the costs of the Valuation

Policy Committee.

Prudential represents that, pursuant to guidelines established by

the Valuation Policy Committee, it will retain for a non-renewable

fixed term an experienced and qualified, independent third party to

serve as the Valuation Management Firm. It is represented that the

Valuation Management Firm will report to the Valuation Policy

Committee. The Valuation Management Firm will be responsible for: (a)

Retaining (and terminating) all appraisal firms which value the

properties in the Accounts; (b) reviewing all appraisals generated by

such appraisal firms for conformance to certain standards, including

those established by the Valuation Policy Committee; and (c)

collecting, reviewing, and distributing any information from PREI

portfolio managers, asset managers, market intelligence coordinators,

and third party property managers needed by such appraisal firms to

appraise the properties in the Accounts. It is represented that Price

Waterhouse is currently serving as the Valuation Management Firm.

It is represented that the costs of the appraisal firms and the

Valuation Management Firm are currently paid by Prudential. However,

after significant discussions with the PRISA and PRISA II Advisory

Councils and investors in the Accounts, Prudential has proposed a

revised fee schedule which includes passing on the costs of third party

appraisers and the Valuation Management Firm to the Accounts.

Prudential believes that this practice is customary in the industry. A

proposal to revise the fee schedule is currently being reviewed by the

appropriate state insurance departments. Subject to the necessary

regulatory approval, Prudential has notified the investors in the

Accounts (as required by contract) that it intends to implement this

new fee schedule on March 31, 1997.5 In the interim, it is

represented that investors in the Accounts will be charged the lower of

the two schedules until the new schedule goes into effect.

5 Prudential has not requested relief for the institution

of the revised fee schedule which proposes to pass on the costs of

third party appraisers and the Valuation Management Firm to the

Accounts.

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The Prudential Valuation Reviewer will serve as the Valuation

Management Firm's contact at Prudential. In this regard, it is

anticipated that the Valuation Management Firm will report the values

of the properties in the Accounts to the Prudential Valuation Reviewer

who will have final approval authority. In addition, the Prudential

Valuation Reviewer may order additional external appraisals; or, as

necessary, may adjust property values, based on tenant, property, or

market information provided by PREI or otherwise made available, in

calendar quarters when no independent appraisals have been performed.

Prudential anticipates that the Prudential Valuation Reviewer will

adjust a value estimate provided by an external appraisal only in rare

circumstances and extremely infrequently. In this regard, since April

1, 1994, the Prudential Valuation Reviewer has modified the estimate of

value of a property in an Account provided by an external appraiser in

only one circumstance and where both the Prudential Valuation Reviewer

and the Valuation Management Firm believed the external appraiser's

estimate of value was overstated. It is represented that this

adjustment in the value of a property was disclosed to the investors in

the Account in the PRISA Quarter 1995 Report and in minutes of the May

3, 1995 Advisory Council meeting. It is represented that any such

similar occurrences in the future will be disclosed in a like manner.

Further, it is represented that no upward adjustment will be made to

the value reported by an external appraiser of any property in the

Accounts without the Valuation Management Firm's concurrence to such

increase in value. It is represented that the Prudential Valuation

Reviewer will document any such changes and will report all property

values to Prudential's Comptroller, rather than to the PREI business

unit.

It is represented that Prudential's Comptroller will be responsible

for presenting values on financial statements (after adjusting any

property not held in fee for the Account's applicable ownership

interest). In addition, Prudential's Comptroller will calculate and

present the unit values and returns for the Accounts.

12. In summary, the applicant represents that the proposed

transaction meets the statutory criteria of section 408(a) of the Act

because:

(1) The decision to leave funds invested in either or both of the

Accounts for all or a portion of the Investment Period has been and

will be made by fiduciaries of the Plans independent of Prudential;

(2) The amount of the enhanced return payment with respect to the

assets of the Plans that are invested in either or both of the Accounts

for only a portion of the Investment Period will be calculated in the

same manner as the amount of the enhanced return payment with respect

to the assets of the Plans that remain invested in either or both of

the Accounts for the entire Investment Period;

(3) The enhanced return will be derived by comparing the cumulative

total return for the Investment Period reported by the Index with the

cumulative total return of PRISA or PRISA II for the same period;

(4) The Plans will obtain an enhanced rate of return (but not more

than 200 basis points) for amounts invested in one or both of the

Accounts during all or any portion of the Investment Period, if the

cumulative total investment return of such Account for such Investment

Period is less than that reported for the Index;

(5) The payments, if any, of enhanced return will be made by

Prudential to investors in the Accounts not later than thirty (30) days

following the final determination of the amounts owed;

(6) Every property held by the Accounts is individually valued at

least once during the Investment Period and thereafter will be valued

at least once in each calendar year by an independent qualified

appraiser;

(7) Independent oversight of the proposed transaction will occur

through

[[Page 47598]]

the review of the operations and returns of the Accounts conducted by

interim and permanent Advisory Councils for PRISA and PRISA II;

(8) The Valuation Policy Committee will meet at least quarterly and

set valuation policy for the Accounts;

(9) The Valuation Management Firm will be responsible for retaining

(and terminating) all appraisal firms which value the properties in the

Accounts; reviewing all appraisals generated by such appraisal firms;

and collecting, reviewing, and distributing any information needed by

such appraisal firms to appraise the properties in the Accounts;

(10) In connection with the determination of enhanced return

payments, no upward adjustment will be made by Prudential to the value

reported by an external independent appraiser of any Property in PRISA

and PRISA II without the concurrence of the Valuation Management Firm;

(11) The Plans invested in the Accounts who receive the enhanced

return will incur no additional cost or risk in connection with the

transaction;

(12) The transaction is subject to state insurance regulatory

approvals;

(13) The calculation of the enhanced return involves a one-time

determination of comparative investment returns based upon a recognized

real estate industry index that can be readily reviewed and monitored

for compliance in all applicable requirements;

(14) The comparative return calculation involves a relatively

simple and objective comparison of readily available return

information, which can be easily confirmed by the fiduciaries of the

Plans invested in the Accounts and by the Department; and

(15) The Plans will receive the same treatment and proportional

payment under the enhanced return as any other investor in PRISA and

PRISA II.

Notice to Interested Persons

Those persons who may be interested in the pendency of the proposed

exemption include fiduciaries, participants and beneficiaries of the

Plans that are invested in one or both of the Accounts. However, it is

represented that there are hundreds of thousands of participants in the

Plans that invest in one or both of the Accounts. Because of the

impracticality of providing notice to all such persons, Prudential

proposes to give notice to interested persons by distributing the

Notice of Proposed Exemption, as published in the Federal Register,

together with a supplemental statement in the form set forth in the

Department's regulations under 29 C.F.R. 2570.43(b)(2), to the

contractholder on behalf of each of the Plans that was invested in

PRISA or PRISA II, as of April 1, 1994. It is represented that these

contractholders are generally the sponsors of the Plans or the trustees

or administrators of the Plans. Distribution of notice will be effected

by first-class mail, postage pre-paid, within fifteen (15) days of the

date of publication of the Notice of Proposed Exemption in the Federal

Register.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

Department, telephone (202) 219-8883 (This is not a toll-free number.)

First Hawaiian Bank Located Honolulu, HI

[Application No. D-09877]

Proposed Exemption

Based on the facts and representations set forth in the

application, 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).6

6 For purposes of this exemption, reference to provisions of

Title I of the Act, unless otherwise specified, refer also to

corresponding provisions of the Code.

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Section I. Exemption for In-Kind Transfer of Assets

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

section 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 the in-kind

transfer to any open-end investment company (the Fund or Funds)

registered under the Investment Company Act of 1940 (the '40 Act) to

which First Hawaiian Bank or any of its affiliates (collectively, the

Bank) serves as investment adviser and may provide other services, of

the assets of various employee benefit plans (the Plan or Plans) that

are held in certain collective investment funds (the CIF or CIFs)

maintained by the Bank or otherwise held by the Bank as trustee,

investment manager, or in any other capacity as fiduciary on behalf of

the Plans, in exchange for shares of such Funds, provided the following

conditions are met:

(a) A fiduciary (the Second Fiduciary) who is acting on behalf of

each affected Plan and who is independent of and unrelated to the Bank,

as defined in paragraph (g) of Section III below, receives advance

written notice of the in-kind transfer of assets of the Plans or the

CIFs in exchange for shares of the Fund and the disclosures described

in paragraph (g) of Section II below.

(b) On the basis of the information described in paragraph (g) of

Section II below, the Second Fiduciary authorizes in writing the in-

kind transfer of assets of the Plans in exchange for shares of the

Funds, the investment of such assets in corresponding portfolios of the

Funds, and the fees received by the Bank in connection with its

services to the Fund. Such authorization by the Second Fiduciary to be

consistent with the responsibilities, obligations, and duties imposed

on fiduciaries by Part 4 of Title I of the Act.

(c) No sales commissions are paid by the Plans in connection with

the in-kind transfers of asset of the Plans or the CIFs in exchange for

shares of the Funds.

(d) All or a pro rata portion of the assets of the Plans held in

the CIFs or all or a pro rata portion of the assets of the Plans held

by the Bank in any capacities as fiduciary on behalf of such Plans are

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

(e) The Plans or the CIFs receive shares of the Funds that have a

total net asset value equal in value to the assets of the Plans or the

CIFs exchanged for such shares on the date of transfer.

(f) The current market value of the assets of the Plans or the CIFs

to be transferred in-kind in exchange for shares is determined in a

single valuation performed in the same manner and at the close of

business on the same day, using independent sources in accordance with

the procedures set forth in Rule 17a-7b (Rule 17a-7) under the '40 Act,

as amended from time to time or any successor rule, regulation, or

similar pronouncement 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

last business day preceding the date of the Plan or 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.

(g) Not later than 30 business days after completion of each in-

kind transfer of assets of the Plans or the CIFs in

[[Page 47599]]

exchange for shares of the Funds, the Bank sends by regular mail to the

Second Fiduciary, who is acting on behalf of each affected Plan and who

is independent of and unrelated to the Bank, as defined in paragraph

(g) of Section III below, a written confirmation that contains the

following information:

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

of the transaction in accordance with Rule 17a-7(b)(4) under the '40

Act;

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

and

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

in determining the value of such assets; and

(h) No later than 90 days after completion of each in-kind transfer

of assets of the Plans or the CIFs in exchange for shares of the Funds,

the Bank sends by regular mail to the Second Fiduciary, who is acting

on behalf of each affected Plan and who is independent of and unrelated

to the Bank, as defined in paragraph (g) of Section III below, a

written confirmation that contains the following information:

(1) The number of CIF units held by each affected Plan immediately

before the conversion (and the related per unit value and the aggregate

dollar value of the units transferred); and

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

affected Plan following the conversion (and the related per share net

asset value and the aggregate dollar value of the shares received).

(i) The conditions set forth in paragraphs (d), (e), (f), (o), (p),

(q) and (r) of Section II below are satisfied.

Section II. Exemption for Receipt of Fees From Funds

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

section 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)(D) through (F) of the Code shall not apply to the proposed

receipt of fees by the Bank from the Funds for acting as the investment

adviser, custodian, sub-administrator, and other service provider for

the Funds in connection with the investment in the Funds by the Plans

for which the Bank acts as a fiduciary provided that:

(a) No sales commissions are paid by the Plans in connection with

purchases or sales of shares of the Funds and no redemption fees are

paid in connection with the sale of such shares by the Plans to the

Funds.

(b) The price paid or received by the Plans for shares in the Funds

is the net asset value per share, as defined in paragraph (e) of

Section III, at the time of the transaction and is the same price which

would have been paid or received for the shares by any other investor

at that time.

(c) Neither the Bank nor an affiliate, including any officer or

director purchases from or sells to any of the Plans shares of any of

the Funds.

(d) As to each individual Plan, the combined total of all fees

received by the Bank for the provision of services to the Plan, and in

connection with the provision of services to any of the Funds in which

the Plan may invest, is not in excess of ``reasonable compensation''

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

(e) The Bank does not receive any fees payable, pursuant to Rule

12b-1 under the '40 Act (the 12b-1 Fees) in connection with the

transactions.

(f) The Plans are not sponsored by the Bank.

(g) A Second Fiduciary who is acting on behalf of each Plan and who

is independent of and unrelated to the Bank, as defined in paragraph

(g) of Section III below, receives in advance of the investment by the

Plan in any of the Funds a full and detailed written disclosure of

information concerning such Fund (including, but not limited to, a

current prospectus for each portfolio of each of the Funds in which

such Plan is considering investing and a statement describing the fee

structure).

(h) On the basis of the information described in paragraph (g) of

this Section II, the Second Fiduciary authorizes in writing the

investment of assets of the Plans in shares of the Funds and the fees

received by the Bank in connection with its services to the Funds. Such

authorization by the Second Fiduciary is consistent with the

responsibilities obligations, and duties imposed on fiduciaries by Part

4 of Title I of the Act.

(i) The authorization, described in paragraph (h) of this Section

II, is terminable at will by the Second Fiduciary of a Plan, without

penalty to such Plan. Such termination will be effected by the Bank

selling the shares of the Fund held by the affected Plan within one

business day following receipt by the Bank, either by mail, hand

delivery, facsimile, or other available means at the option of the

Second Fiduciary, of the termination form (the Termination Form), as

defined in paragraph (i) of Section III below, or any other written

notice of termination; 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 redemption.

(j) 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 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 '40 Act or other agreement between the Bank and the Funds.

(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 a Second Fiduciary, in accordance with paragraph

(h) of this Section II, the Bank will, at least 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

Second Fiduciary of each of the Plans invested in a Fund which is

increasing such fees. Such notice shall be accompanied by the

Termination Form, as defined in paragraph (i) of Section III below.

(l) In the event of an addition of a Secondary Service, as defined

in paragraph (h) of Section III below, provided by the Bank to the Fund

for which a fee is charged or an increase in the rate of any fee paid

by the Funds to the Bank for any Secondary Service, as defined in

paragraph (h) of Section III below, that results either from an

increase in the rate of such fee or from the decrease in the number or

kind of services performed by the Bank for such fee over an existing

rate for such Secondary Service which had been authorized by the Second

Fiduciary of a Plan, in accordance with paragraph (h) of this Section

II, the Bank will at least 30 days in advance of the implementation of

such additional service for which a fee is charged or fee 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 additional

service for which a fee is charged or the nature and amount of the

increase in fees) to the Second Fiduciary

[[Page 47600]]

of each of the Plans invested in a Fund which is adding a service or

increasing fees. Such notice shall be accompanied by the Termination

Form, as defined in paragraph (i) of Section III below.

(m) The Second Fiduciary is supplied with a Termination Form at the

times specified in paragraphs (k), (l), and (n) of this Section II,

which expressly provides an election to terminate the authorization,

described above in paragraph (h) of this Section II, with instructions

regarding the use of such Termination Form including statements that:

(1) The authorization is terminable at will by any of the Plans,

without penalty to such Plans. Such termination will be effected by the

Bank redeeming shares of the Fund held by the Plans requesting

termination within one business day following receipt by the Bank,

either by mail, hand delivery, facsimile, or other available means at

the option of the Second Fiduciary, of the Termination Form or any

other written notice of termination; provided that if, due to

circumstances beyond the control of the Bank, the redemption of shares

of such Plans cannot be executed within one business day, the Bank

shall have one additional business day to complete such redemption; and

(2) Failure by the Second Fiduciary to return the Termination Form

on behalf of a Plan will be deemed to be an approval of the additional

Secondary Service for which a fee is charged or increase in the rate of

any fees, if such Termination Form is supplied pursuant to paragraphs

(k) and (l) of this Section II, and will result in the continuation of

the authorization, as described in paragraph (h) of this Section II, of

the Bank to engage in the transactions on behalf of such Plan.

(n) The Second Fiduciary is supplied with a Termination Form,

annually during the first quarter of each calendar year, beginning with

the first quarter of the calendar year that begins after the date the

grant of this proposed exemption is published in the Federal Register

and continuing for each calendar year thereafter; provided that the

Termination Form need not be supplied to the Second Fiduciary, pursuant

to paragraph (n) of this Section II, sooner than six months after such

Termination Form is supplied pursuant to paragraphs (k) and (l) of this

Section II, except to the extent required by said paragraphs (k) and

(l) of this Section II to disclose an additional Secondary Service for

which a fee is charged or an increase in fees.

(o)(1) With respect to each of the Funds in which a Plan invests,

the Bank will provide the Second Fiduciary of such Plan:

(A) At least annually with a copy of an updated prospectus of such

Fund;

(B) Upon the request of such Second Fiduciary, with a report or

statement (which may take the form of the most recent financial report,

the current statement of additional information, or some other written

statement) which contains a description of all fees paid by the Fund to

the Bank; and

(2) With respect to each of the Funds in which a Plan invests, in

the event such Fund places brokerage transactions with the Bank, the

Bank will provide the Second Fiduciary of such Plan at least annually

with a statement specifying:

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

Fund's investment portfolio that are paid to the Bank by such Fund;

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

each Fund's investment portfolio that are paid by such Fund to

brokerage firms unrelated to the Bank;

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

per share, paid to the Bank by each portfolio of a Fund; and

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

per share, paid by each portfolio of a Fund to brokerage firms

unrelated to the Bank.

(p) All dealings between the Plans and any of the Funds are on a

basis no less favorable to such Plans than dealings between the Funds

and other shareholders holding the same class of shares as the Plans.

(q) The Bank maintains for a period of 6 years the records

necessary to enable the persons, as described in paragraph (r) of

Section II below, to determine whether the conditions of this proposed

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 6 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 (r) of Section II below;

(r)(1) Except as provided in paragraph (r)(2) of this Section II

and notwithstanding any provisions of subsection (a)(2) and (b) of

section 504 of the Act, the records referred to in paragraph (q) of

Section II above are unconditionally available at their customary

location for examination during normal business hours by--

(i) Any duly authorized employee or representative of the

Department, the Internal Revenue Service (the Service) or the

Securities and Exchange Commission (the SEC);

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

acquire or dispose of shares of any of the Funds owned by such a Plan,

or any duly authorized employee or representative of such fiduciary;

and

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

authorized employee or representative of such participant or

beneficiary;

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

(r)(1)(iii) of Section II shall be authorized to examine trade secrets

of the Bank, or commercial or financial information which is privileged

or confidential.

Section III. Definitions

For purposes of this proposed exemption,

(a) The term ``Bank'' means First Hawaiian Bank and any affiliate

of the Bank, as defined in paragraph (b) of this Section III.

(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.

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

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

individual.

(d) The term ``Fund or Funds'' means any diversified open-end

investment company or companies registered under the '40 Act for which

the Bank serves as investment adviser, and may also provide custodial

or other services as 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 a Fund's prospectus

and statement of additional information, and other assets belonging to

each of the portfolios in such Fund, less the liabilities charged to

each portfolio, by the number of outstanding shares.

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

defined in

[[Page 47601]]

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 plan who

is independent of and unrelated to the Bank. For purposes of this

exemption, the Second Fiduciary will not be deemed to be independent of

and unrelated to the Bank if:

(1) Such Second Fiduciary directly or indirectly controls, is

controlled by, or is under common control with the Bank;

(2) Such Second Fiduciary, or any officer, director, partner,

employee, or relative of such Second Fiduciary is an officer, director,

partner, or employee of the Bank (or is a relative of such persons);

(3) Such Second 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 proposed

exemption.

If an officer, director, partner, or employee of the Bank (or a

relative of such persons), is a director of such Second Fiduciary, and

if he or she abstains from participation in (i) the choice of the

Plan's investment manager/adviser, (ii) the approval of any purchase or

redemption by the Plan of shares of the Funds, and (iii) the approval

of any change of fees charged to or paid by the Plan, in connection

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

paragraph (g)(2) of Section III above, 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 the Bank to the Funds, including but not limited to

custodial, accounting, brokerage, administrative, or any other service.

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

Second Fiduciary, at the times specified in paragraphs (k), (l), and

(n) of Section II above, which expressly provides an election to the

Second Fiduciary to terminate on behalf of the Plans the authorization,

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

used at will by the Second Fiduciary to terminate such authorization

without penalty to the Plans and to notify the Bank in writing to

effect such termination by redeeming the shares of the Fund held by the

Plans requesting termination within one business day following receipt

by the Bank, either by mail, hand delivery, facsimile, or other

available means at the option of the Second Fiduciary, of written

notice of such request for termination; provided that if, due to

circumstances beyond the control of the Bank, the redemption cannot be

executed within one business day, the Bank shall have one additional

business day to complete such redemption.

Summary of Facts and Representations

Description of the Parties

1. The parties or entities that are involved in the subject

transactions are described as follows:

a. The Bank is state-chartered bank that is incorporated under the

laws of Hawaii and maintains its principal office at 1132 Bishop

Street, Honolulu, Hawaii. The Bank is a wholly-owned subsidiary of

First Hawaiian, Inc., a Delaware holding company.

Over the past seventy years, the Bank and its corporate

predecessors have provided asset management services to several types

of accounts including personal trusts, guardianship and probate

accounts, corporate assets portfolio accounts and employee benefit

plans including HR-10 Plans. As of May 1, 1994, the Bank had total

assets under management of approximately $1.5 billion. The Bank serves

as trustee with respect to the CIFs and as an investment adviser to the

Fund portfolios described herein.

b. The Plans consist of retirement plans qualified under section

401(a) of the Code with respect to which the Bank serves or will serve

as a trustee or investment fiduciary and that constitute ``pension

plans'' as defined in section 3(2) of the Act and section 4975(e)(1) of

the Code. The Plans do not include any plans that are sponsored by the

Bank.\7\

\7\ The Department herein is not proposing relief for

transactions afforded relief by Section 404(c) of the Act.

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c. The CIFs consist of separate investment portfolios of the First

Hawaiian Bank Collective Investment Trust for Employee Benefit Trusts

(the Collective Investment Trust) or similar investment trusts that may

be established and maintained by the Bank. The Bank serves as trustee

of the Collective Investment Trust.

As of June 30, 1993, the aggregate fair market value of the current

CIFs maintained by the Bank was approximately $165.3 million.

Participation in the CIFs is limited to Plans and public retirement

funds for which the Bank acts as trustee or co-trustee or agent for the

trustee or trustees of such Plan or CIF.

The CIFs that will be involved initially in the subject

transactions are the Equity Fund, the HR-10 Equity Fund and the Pooled

Fixed Income Fund.\8\ These CIFs will be terminated immediately

following the in-kind transfers.\9\

\8\ The Pooled Equity Fund and the HR-10 Equity Fund principally

invest in equity securities. The Pooled Fixed Income Fund invests

primarily in fixed income securities or other tangible or intangible

property or interests in either real or personal property.

\9\ A fourth CIF, the Pooled Short-Term Fixed Income Fund, will

be terminated at or prior to the time that the other CIFs are

converted. At present, the only investor in this CIF is the Pooled

Fixed Income Fund.

d. The Funds are separate portfolios of open-end investment

companies registered under the '40 Act. The Funds currently consist of

the Bishop Street Funds, a Massachusetts business trust that was

established on May 25, 1994. The Bishop Street Funds constitute a no-

load, open-end management investment company with four portfolios in

existence. The existing Funds include the Equity Fund (corresponding to

the Pooled Equity Fund and the HR-10 Equity Fund of the Collective

Investment Trust) and the High-Grade Income Fund (corresponding to the

Fixed Income Fund of the Collective Investment Trust).

The Bishop Street Funds will issue two classes of shares.

Institutional Class A shares will be offered primarily to agency,

fiduciary, custodial and advisory clients of the Bank. Retail Class B

shares will be offered primarily to individuals. The Bishop Street

Funds will be offered and sold exclusively through the use of

prospectuses and other materials and will be offered and sold in full

compliance with regulations of the SEC.

The Bank will serve as the investment adviser to each of the Bishop

Street Funds. As the investment adviser, the Bank will make investment

decisions with respect to the assets of each Fund and continuously

review, supervise and administer each Fund's investment program. For

investment advisory services rendered to the Funds, the Bank will

receive an investment advisory fee. The Bishop Street Funds will pay

separate fees for services provided to the Funds by the transfer agent,

administrator and custodian, all of whom will not be affiliated with

the Bank. Neither the Bank nor its affiliates will receive any 12b-1

fees from the Funds.

Description of the Transactions

2. Because the Bank recognizes that (a) in-kind transfers to Funds

that the Bank services or advises of all or a pro rata portion of Plan

assets in the CIFs or all or a pro rata portion of Plan assets

[[Page 47602]]

that the Bank otherwise manages, and (b) the approval process for

additional services for which a fee is charged and fee increases by the

Bank for these services may be outside the scope of Prohibited

Transaction Exemption 77-4 (42 FR 18732, April 8, 1977), the Bank has

requested relief for the transactions described in Sections I and II.

Each of these transactions is discussed more fully herein. The proposed

exemption is conditioned on the satisfaction of certain requirements

and compliance with various general conditions which are also discussed

below. It is the Bank's express intention that the description of these

transactions and the conditions of the requested exemption with respect

to such transactions will be applicable uniformly to the current Funds

and to any of the other Funds for which the Bank serves as the

investment advisor and in which the Plans invest.

In-Kind Transfers to Funds

3. The Bank has maintained CIFs in which the Plans have invested in

accordance with requirements under Hawaiian banking law that apply to

CIFs. The Bank has decided to terminate all current CIFs and to offer

to the Plans participating in such CIFs appropriate interests in

certain Funds as alternative investments. Because interests in CIFs

generally must be liquidated or withdrawn to effect distributions, the

Bank believes that the interests of the Plans invested in CIFs would be

better served by investment in shares of the Funds which can be

distributed in-kind. Also, the Bank believes that the Funds offer the

Plans numerous advantages as pooled investment vehicles. In this

regard, the Plans, as shareholders of a Fund, have the opportunity to

exercise voting and other shareholder rights.

The Plans, as shareholders of the Funds, as mandated by the SEC,

periodically receive certain disclosures concerning the Funds: (a) A

copy of the prospectus which is updated annually; (b) an annual report

containing audited financial statements of the Funds and information

regarding such Funds' performance (unless such performance information

is included in the prospectus of such Funds); and (c) a semi-annual

report containing unaudited financial statements. In addition, at the

option of the Funds, the Plans may receive other pertinent information.

With respect to the Plans, the Bank reports all transactions in

shares of the Funds in periodic account statements provided the Second

Fiduciary of each of the Plans. Further, the Bank maintains that the

net asset value of the portfolios of the Funds can be monitored daily

from information available in newspapers of general circulation.

In order to avoid the potentially large brokerage expenses that

would otherwise be incurred, the Bank proposes that from time to time

it may be appropriate for an individual Plan for which the Bank serves

as a fiduciary to transfer all or a pro rata share of its in-kind

assets to any of the Funds in exchange for shares of such Funds. In

this regard, for example, in the case of an in-kind exchange between an

individual Plan whose portfolio consists of common stock, money market

securities and real estate, and a Fund that, under its investment

policy, invests only in common stock and money market securities, the

exchange would involve all or a pro rata share of the common stock and

money market securities held by the Plan, if such stock and securities

are eligible for purchase by the Fund, and would not involve the

transfer or exchange of the real estate holdings of such Plan. A Fund's

eligible investments are set forth in its prospectus. No brokerage

commission or other fees or expenses (other than customary transfer

charges paid to parties other than the Bank or its affiliates) will be

charged to the Plans or the CIFs in connection with the in-kind

transfers of assets into the Funds and the acquisition of shares of the

Funds by the Plans or the CIFs. Thus, the Bank has requested

prospective relief for transactions which would involve: (a) The in-

kind transfer by the CIFs of all or a pro rata portion of the assets of

any of the Plans held in such CIFs to the Funds in exchange for shares

of the Fund which subsequently are distributed to the Plans; or (b) the

in-kind transfer of all or a pro rata portion of the assets of any of

the Plans held by the Bank in any capacity as fiduciary on behalf of

such Plans to the Funds in exchange for shares of such Funds; provided

that conditions described in Section I above are satisfied.

The Bank maintains that the in-kind transfers of assets in exchange

for shares of the Funds are ministerial transactions performed in

accordance with pre-established objective procedures which are approved

by the board of trustees of each Fund. Such procedures require that

assets transferred to a Fund: (a) Are consistent with the investment

objectives, policies, and restrictions of the corresponding portfolios

of such Fund, (b) satisfy the applicable requirements of the '40 Act

and the Code, and (c) have a readily ascertainable market value. In

addition, any assets that are transferred will be liquid and will not

be subject to restrictions on resale. Assets which do not meet these

requirements will be sold in the open market through an unaffiliated

brokerage firm prior to any transfer in-kind. Further, prior to

entering into an in-kind transfer, each affected Plan receives certain

disclosures from the Bank and approves such transaction in writing.

Valuation of assets transferred in-kind to the Funds will be

established by reference to independent sources. In this regard, for

purposes of the transaction, it is represented that all assets

transferred in-kind are valued in accordance with the valuation

procedures described in Rule 17a-7 under the '40 Act, as amended from

time to time or any successor rule, regulation, or similar

pronouncement 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 last business day

preceding the date of the Plan or 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.

Further, the Bank represents that within 30 days of the completion

of a transfer in-kind, it will provide to Plans written confirmation of

the identity of each security valued under Rule 17a-7(b)(4), the price

of each security, and the identity of each pricing service or market

maker consulted in determining the value of the assets transferred. The

securities subject to valuation under Rule 17(a)-7(b)(4) include all

securities other than ``reported securities,'' as the term is defined

in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the '34

Act), or those quoted on the NASDAQ system or for which the principal

market is an exchange.

The value of the assets transferred in-kind will be equal to the

aggregate value of the corresponding portfolios shares of the Fund at

the close of business on the date of the transaction. In this regard,

it is represented that for all conversion transactions that occur after

the date of this proposed exemption, the Bank, no later than 90 days

after completion of each in-kind transfer of assets of the Plans or the

CIFs in exchange for shares of the Funds, will mail to the Second

Fiduciary a written confirmation of the

[[Page 47603]]

number of CIF units held by each affected Plan immediately before the

conversion (and the related per unit value and the aggregate dollar

value of the units transferred), and the number of shares in the Funds

that are held by each affected Plan following the conversion (and the

related per share net asset value and the aggregate dollar value of the

shares received).

The Initial Exemption Transactions

4. The Bank has requested prospective exemptive relief, for the in-

kind transfer to the Bishop Street Funds. At the time of such in-kind

transfer, all of the assets of the three CIFs described above, which

are maintained by the Bank and in which the Plans hold interests, will

be transferred to the Bishop Street Funds which have investment

objectives and policies substantially identical to those of the CIFs.

At the same time, the three CIFs will be terminated and the assets of

each, then consisting of shares in portfolios of the Bishop Street

Funds, will be distributed in-kind to the Plans participating in such

CIFs based on each Plan's pro rata share of the assets of the CIFs on

the date of the transaction.

The Bank will provide to each affected Plan disclosures that

announce the termination of the CIFs, summarize the transaction and

otherwise comply with provisions of Section I of the exemption. Based

on these disclosures, the Second Fiduciary from each affected Plan will

approve in writing the transfer of the CIFs' assets to the

corresponding portfolios of the Bishop Street Funds in exchange for

shares of the Bishop Street Funds, and the receipt by the Bank of fees

for services to the Bishop Street Funds. The assets of Plans that do

not approve investment in the Bishop Street Funds will be withdrawn

from the CIFs and held or invested in appropriate alternative

investments in accordance with the terms of such Plans.

Prior to the transaction, the assets of the three CIFs will be

reviewed to confirm that such are appropriate investments for the

corresponding portfolios of the Bishop Street Funds into which such

assets will be transferred. If any of the assets of the three CIFs are

not appropriate for the Bishop Street Funds, the Bank intends to sell

such assets in the open market through an unaffiliated brokerage firm

prior to the transfer.

The assets transferred by the three CIFs to the Bishop Street Funds

will consist entirely of cash and marketable securities. For purposes

of the transfer in-kind, the value of the securities in each of the

three CIFs will be determined based on market values as of the close of

business on the last business date prior to the transfer (the CIF

Valuation Date). The values will be determined in a single valuation

using the valuation procedures described in Rule 17a-7 under the '40

Act. In this regard, the ``current market price'' for specific types of

CIF securities involved in the transaction will be determined as

follows:

a. If the security is a ``reported security'' as the term is

defined in Rule 11Aa3-1 under the 1934 Act, the last sale price with

respect to such security reported in the consolidated transaction

reporting system (the Consolidated System) for the CIF Valuation

Date; or if there are no reported transactions in the Consolidated

System that day, the average of the highest independent bid and the

lowest independent offer for such security (reported pursuant to

Rule 11Ac1-1 under the '34 Act), as of the close of business on the

CIF Valuation Date; or

b. If the security is not a reported security, and the principal

market for such security is an exchange, then the last sale on such

exchange on the CIF Valuation Date; or if there is no reported

transaction on such exchange that day, the average of the highest

independent bid and lowest independent offer on such exchange as of

the close of business on the CIF Valuation Date; or

c. If the security is not a reported security and is quoted in

the NASDAQ system, then the average of the highest independent bid

and lowest independent offer reported on Level 1 of NASDAQ as of the

close of business on the CIF Valuation Date; or

d. For all other securities, the average of the highest

independent bid and lowest independent offer as of the close of

business on the CIF Valuation Date, determined on the basis of

reasonable inquiry. For securities in this category, the Bank

intends to obtain quotations from at least three sources that are

either broker-dealers or pricing services independent of and

unrelated to the Bank and, where more than one valid quotation is

available, use the average of the quotations to value the

securities, in conformance with interpretations by the SEC and

practice under Rule 17a-7.

The securities received by the corresponding portfolios of the

Bishop Street Funds will be valued by such portfolio for purposes of

the transfer in the same manner and on the same day as such securities

will be valued by the CIFs. The per share value of the shares of each

portfolio of the Bishop Street Funds issued to the CIFs will be based

on the corresponding portfolio's then current net asset value. As a

result of the proposed procedure, the Bank expects that the aggregate

value of the shares of the corresponding portfolio of the Bishop Street

Funds issued to the CIFs to be equal to the value of the assets (cash

and marketable securities) transferred to such portfolio as of the

opening of business on next business day following the CIF Valuation

Date. The Bank also expects the value of a Plan's investment in shares

of a corresponding portfolio of the Bishop Street Funds as of the

opening of business on the date of the transaction will be equal to the

value of such Plan's investment in the CIF as of the close of business

on the last business day prior to the transaction.

Not later than 30 business days after completion of the

transaction, the Bank will send by regular mail a written confirmation

of the transaction to each affected Plan. Such confirmation will

contain: (a) The identity of each security that is valued in accordance

with Rule 17a7(b)(4), as described above; (b) the price of each such

security for purposes of the transaction; and (c) the identity of each

pricing service or market maker consulted in determining the value of

such securities. In accordance with the conditions under Section I of

the proposed exemption, similar procedures will occur upon any future

in-kind exchanges between CIFs maintained by the Bank or Plans, and the

Funds.

Receipt of Fees From Funds

5. Under certain conditions, PTE 77-4 permits the Bank to receive

fees from the Funds under either of two circumstances: (a) Where a Plan

does not pay any investment management, investment advisory, or similar

fees with respect to the assets of such Plan invested in shares of a

Fund for the entire period of such investment; or (b) where a Plan pays

investment management, investment advisory, or similar fees to the Bank

based on the total assets of such Plan from which a credit has been

subtracted representing such Plan's pro rata share of such investment

advisory fees paid to the Bank by the Fund. As such, it is represented

that there are two levels of fees--those fees which the Bank charges to

the Plans for serving as trustee with investment discretion or as

investment manager (the Plan-level fees); and those fees the Bank

charges to the Funds (the Fund-level fees) for serving as investment

advisor, custodian, or service provider.

Plan-level investment management, investment advisory, or fees for

similar services provided by the Bank are currently charged in the form

of a single asset-based investment management fee. There is also a

Plan-level trustee fee for basic administrative services provided by

the Bank as well as other specific service fees, such as a cash

``sweep'' fee. Currently, the annual investment management fee for

assets invested in the Pooled Equity Fund and the HR-10 Equity Fund is

0.60 percent of assets under management, based on the daily net asset

value of the fund. The fee for

[[Page 47604]]

assets invested in the Pooled Fixed Income Fund is 0.40 percent of

assets under management, based on the daily net asset value of the

fund. Plan-level fees are subject to annual minimums for administration

and management expressed as flat dollar amounts and administrative fees

are subject to the application of certain ``break points.'' In addition

to the Plan-level fees for investment management, investment advisory,

or similar services, a one-time fee (also a flat dollar amount) may be

charged in connection with the establishment of an account for a Plan,

and separate transaction fees may be charged for various administrative

transactions, such as for example, a participant loan. Depending on the

terms governing documents of the Plan, Plan-level fees are paid to the

Bank either by the sponsor of the Plan or from the assets of the Plan.

Plan-level fees for investment management, investment advisory or

similar investment services will terminate immediately after the

execution of the subject transactions described herein.

As mentioned above, the Bank may receive Fund-level fees. Such

Fund-level fees can be divided into: (a) Fees paid to the Bank by a

Fund for investment management, investment advisory, or similar

services provided to such Fund, and (b) fees paid to the Bank for

administrative, custodial, transfer, accounting, and other Secondary

Services provided either to such Fund or to the distributor of shares

of such Funds and its affiliates. The Bank is currently not paid any

fees in this category from the Bishop Street Funds. The current fee

arrangements between the Bank and the Bishop Street Funds provide for

the Bank to receive fees from the Bishop Street Funds only for acting

as investment adviser. This compensation paid to the Bank for

investment advisory services is in accordance with agreements between

the Bishop Street Funds and the Bank. In this regard, it is represented

that the Bishop Street Funds' Trustees and the shareholders of the

Bishop Street Funds approve the compensation that the Bank receives

from the Bishop Street Funds. Also, the Bishop Street Funds' Trustees

approve any changes in the compensation paid to the Bank for services

rendered to the Bishop Street Funds.

With respect to Plans managed by the Bank that are invested in the

Funds, although such Plans will no longer pay a Plan-level investment

management fee to the Bank, a Plan-level fee will continue to be

charged to the Plans for basic administrative services not including

investment management.10 Such administrative services would

include, among others, the Bank's acting as custodian of the assets of

a Plan, maintaining the records of a Plan, preparing periodic reports

concerning the status of the Plan and its assets, and accounting for

contributions, benefit distributions, and other receipts and

disbursements. These functions performed by the Bank on the Plan-level

are separate and distinct from those performed on the Fund-level by the

Bank.

\10\ The fact that certain transactions and fee arrangements are

the subject of an administrative exemption does not relieve the

fiduciaries of the Plans from the general fiduciary responsibility

provisions of section 404 of the Act. Thus, the Department cautions

the fiduciaries of the Plans investing in the Funds that they have

an ongoing duty under section 404 of the Act to monitor the services

provided to the Plans to assure that the fees paid by the Plans for

such services are reasonable in relation to the value of the

services provided. Such responsibilities would include

determinations that the services provided are not duplicative and

that the fees are reasonable in light of the level of services

provided.

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

The Bank will continue to receive Plan-level compensation from the

Plans for investment management services provided with respect to

assets of the Plans not invested in shares of any of the Funds. Since

the Plan-level investment management fee for Plans investing in the

Funds will terminate, there will be no credit to the Plans their pro

rata share of the investment advisory fees paid at the Fund-level.

Instead, the only compensation received by the Bank for investment

advisory services will be that which is paid by the Funds to the Bank

for such services rendered to such Funds. In addition, the Bank will

retain fees for providing Secondary Services to the Funds.

The Bank believes that this proposed fee arrangement complies with

PTE 77-4. However, there is one difference from PTE 77-4 requested by

the Bank for which an exemption is required. In this regard, one of the

requirements of PTE 77-4 has been that any change in any of the rates

of fees would require prior written approval by the Second Fiduciary of

the Plans participating in the Funds. The applicant maintains that

where many Plans participate in a Fund, the addition of a service or

any good faith increase in fees could not be implemented until written

approval of such change is obtained from every Second Fiduciary. The

Bank proposes an alternative which the Bank believes provides the basic

safeguards for the Plans and is more efficient, cost effective, and

administratively feasible than those contained in PTE 77-4.

In the event of an increase in the rate of any investment

management fees, investment advisory fees, or similar fees, the

addition of a Secondary Service for which a fee is charged, or an

increase in the fees for Secondary Services paid by the Funds to the

Bank over an existing rate that had been authorized by the Second

Fiduciary, the Bank will provide, at least 30 days in advance of the

implementation of such additional service or fee increase, to the

Second Fiduciary of the Plans invested in such Fund a written notice of

such additional service or fee increase, (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 additional service or the nature and amount of the increase in

fees). In this regard, such increase in fees for Secondary Services can

result either from an increase in the rate of such fee or from the

decrease in the number or kind of services performed by the Bank for

such fee over that which had been authorized by the Second Fiduciary of

a Plan. The Bank believes that notice provided in this way will give

the Second Fiduciary of each of the Plans adequate opportunity to

decide whether or not to continue the authorization of a Plan's

investment in any of the portfolios of the Funds in light of the

increase in investment management fees, investment advisory fees, or

similar fees, the addition of a Secondary Service for which a fee is

charged, or the increase in fees for any Secondary Services. In

addition, the Bank represents that such fee increase will be disclosed

to the Second Fiduciaries in an amendment of or supplement to the

Funds' prospectus or in the Funds' statement of additional information,

to the extent necessary to comply with SEC disclosure

requirements.11

\11\ An increase in the amount of a fee for an existing

Secondary Service (other than through an increase in the value of

the underlying assets in the Funds) or the imposition of a fee for a

newly-established Secondary Service shall be considered an increase

in the rate of such Secondary Fee. However, in the event a Secondary

Fee has already been described in writing to the Second Fiduciary

and the Second Fiduciary has provided authorization for the amount

of such Secondary Fee, and such fee was waived, no further action by

the Bank would be required in order for the Bank to receive such fee

at a later time. Thus, for example, no further disclosure would be

necessary if the Bank had received authorization for a fee for

custodial services from Plan investors and subsequently determined

to waive the fee for a period of time in order to attract new

investors but later charged the fee. However, reinstituting the fee

at an amount greater than previously disclosed would necessitate the

Bank providing notice of the fee increase and a Termination Form.

[[Page 47605]]

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Authorization Requirements for the Second Fiduciary

6. The written notice of an additional service for which a fee is

charged or a fee increase, as described in Representation 5, will be

accompanied by a Termination Form, as defined in paragraph (i) of

Section III, and by instructions on the use of such form, as described

in paragraph (l) of Section II, which expressly provide an election to

the Second Fiduciaries to terminate at will any prior authorizations

without penalty to the Plans. The Second Fiduciary will be supplied

with a Termination Form annually during the first quarter of each

calendar year, beginning with the first quarter of the calendar year

that begins after the date the grant of this proposed exemption is

published in the Federal Register and continuing for each calendar year

thereafter, regardless of whether there have been any changes in the

fees payable to the Bank or changes in other matters in connection with

services rendered to the Funds. However, if the Termination Form has

been provided to the Second Fiduciary in the event of an increase in

the rate of any investment management fees, investment advisory fees,

or similar fees, an addition of a Secondary Service for which a fee is

charged, or an increase in any fees for Secondary Services paid by the

Fund to the Bank, then such Termination Form need not be provided again

to the Second Fiduciary until at least six months have elapsed, unless

such Termination Form is required to be sent sooner as a result of

another increase in any investment management fees, investment advisory

fees, or similar fees, the addition of a Secondary Service for which a

fee is charged, or an increase in any fees for Secondary Services.

The Termination Form will contain instructions regarding its use

which will state expressly that the authorization is terminable at will

by a Second Fiduciary, without penalty to any Plan, and that failure to

return the form will be deemed to be an approval of the additional

Secondary Service or the increase in the rate of any fees and will

result in the continuation of all authorizations previously given by

such Second Fiduciary. Termination by any Plan of authorization to

invest in the Funds will be effected by the Bank redeeming the shares

of the Fund held by the affected Plan by the close of business on the

day following receipt by the Bank, either by mail, hand delivery,

facsimile, or other available means at the option of the Second

Fiduciary, of the Termination Form or any other written notice of

termination. If, due to circumstances beyond the control of the Bank,

the redemption cannot be executed within one business day, the Bank

shall have one additional business day to complete such redemption.

The rates paid by each of the portfolios of the Funds to the Bank

for services rendered may differ depending on the fee schedule for each

portfolio and on the daily net assets in each portfolio. The investment

advisory fees paid to the Bank by the Funds will be based on the

different fee rates of each of the portfolios into which the assets of

the Plans are allocated. For example, for services provided to the

Equity Fund, the Bank receives from the Bishop Street Funds an annual

fee of 0.40 percent based on the Fund's average daily net assets. For

services provided to the High-Grade Income Fund, the Bank receives from

the Bishop Street Funds an annual fee of 0.25 percent, based on the

Fund's average daily net assets. The Bank proposes to allocate the

assets of the Plans among the portfolios offered of the Bishop Street

Funds and/or among any of the Funds under the terms of this proposed

exemption.

The impact of the change in fee structures resulting from the

exemptive transactions on the aggregate fees received by the Bank is

difficult to determine, according to the applicant, because various

factors and variables are unique to each Plan. These factors include

the size of the Plan, the extent to which Plan assets are invested in

the Funds, usage by the Plans of separate services provided by the Bank

and the application of certain ``break points'' in the schedule of

Plan-level fees. Further, the Bank notes that Fund size, the identity

of the particular investment portfolio of the Fund into which the Plan

assets are allocated and voluntary waivers by the Bank of Fund-level

fees are likely to be different in each situation and may affect the

aggregate amount of fees received by the Bank. In this regard, the Bank

believes that, as to each individual Plan, the combined total of all

Plan-level and Fund-level fees received by it for the provision of

services to the Plans and to the Funds, respectively, is not in excess

of ``reasonable compensation'' within the meaning of section 408(b)(2)

of the Act.

Conditions for Exemption

7. If granted, this proposed exemption will be subject to the

satisfaction of certain general conditions that will further protect

the interests of the Plans. For example, the proposed transactions are

subject to the prior authorization of a Second Fiduciary, acting on

behalf of each of the Plans, who has been provided with full written

disclosure by the Bank. The Second Fiduciary will generally be the

administrator, sponsor, or a committee appointed by the sponsor to act

as a named fiduciary for a Plan.

With respect to disclosure, the Second Fiduciary of such Plan will

receive 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).

On the basis of the information disclosed, the Second Fiduciary

will authorize in writing the investment of assets of a Plan in shares

of the Funds in connection with the transactions set forth herein and

the compensation received by the Bank in connection with its services

to the Funds. Written authorization will extend to only those

investment portfolios of the Funds with respect to which the Plan has

received the written disclosures referred to above and which are

specifically mentioned in such disclosure described above. Having

obtained the authorization of the Second Fiduciary, the Bank will

invest the assets of a Plan among the portfolios and in the manner

covered by the authorization, subject to satisfaction of the other

terms and conditions of this proposed exemption. However, the Bank will

not invest assets of a Plan in any portfolio not specifically mentioned

in the written disclosure and authorization described above. For

example, if the written authorization of the Second Fiduciary covered

only one of the portfolios then existing, the Bank could only invest

the assets of such Plans in that one portfolio specifically authorized.

Further, if a new portfolio were established under any of the Funds,

the Bank could invest assets of a Plan in such new portfolio only after

providing the required disclosures and obtaining from the Second

Fiduciary a separate written authorization which specifically mentions

the new portfolio.

In addition to the disclosures provided to the Plan prior to

investment in any of the Funds, the Bank represents that it will

routinely provide at least annually to the Second Fiduciary updated

prospectuses of the Funds in accordance with the requirements of the

'40 Act and the SEC rules promulgated thereunder. Further, the Second

Fiduciary will be supplied, upon request, with a report or statement

(which may take the form of the most recent financial report of such

Funds, the current statement of additional information, or some other

written

[[Page 47606]]

statement) which contains a description of all fees paid by the Fund.

The Bank does not now execute nor in the future intend to execute

securities brokerage transactions for the investment portfolios of any

of the Funds, except as and to the extent permitted by the '40 Act and

applicable rules of the SEC. However, in the event the Bank ever

performs brokerage services for which a fee is paid to the Bank by the

investment portfolio of any of the Funds, the Bank represents that it

will at least 30 days in advance of the implementation of such

additional service provide a written notice which explains the nature

of such additional brokerage service and the amount of the fees.

Further, the Bank represents that it will provide at least annually to

the Second fiduciary of any Plan that invests in such Funds with a

written disclosure indicating (a) the total, expressed in dollars, of

brokerage commissions of each Fund's investment portfolio that are paid

to the Bank by such Fund; (b) the total, expressed in dollars, of

brokerage commissions of each Fund's investment portfolio that are paid

by such Fund to brokerage firms unrelated to the Bank; (c) the average

brokerage commissions per share, expressed as cents per share, paid to

the Bank by each portfolio of a Fund; and (d) the average brokerage

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

portfolio of a Fund to brokerage firms unrelated to the Bank.

The receipt of fees, as described above, is generated in connection

with the investment in the Funds by the Plans. These investments are

the result of purchases of shares in the Funds and exchanges of assets

of the Plans, including those in CIFs, for shares in the Funds.

With respect to such purchases, (a) the Plans and other investors

will purchase or redeem shares in the Funds in accordance with standard

procedures described in the prospectus for each portfolio of the Funds;

(b) the Plans will pay no sales commissions or redemption fees in

connection with purchase or redemption of shares in the Funds by the

Plans; (c) the Bank will not purchase from or sell to any of the Plans

shares of any of the Funds; and (d) the price paid or received by the

Plans for shares of the Funds will be the net asset value per share at

the time of such purchase or redemption and will be the same price as

any other investor would have paid or received at that time. The value

of the Bishop Street Funds' shares and the value of each Bishop Street

Funds' portfolios are determined on a daily basis. In the case of the

non-money market portfolios, assets are valued at fair or market value,

as required by Rule 2a-4 under the '40 Act. In the case of any money

market portfolio, the assets are valued based on the amortized cost

method authorized by SEC Rule 2a-7, in order to maintain a net asset

value of $1.00 per share. Both the money market portfolios and the non-

money market portfolios determine the net asset value per share for

purposes of pricing purchases and redemptions by dividing the value of

all securities, determined by a method as set forth in the prospectus

for each Bishop Street Fund portfolio, and other assets belonging to

each of the portfolios, less the liabilities charged to each portfolio,

by the number of each portfolio's outstanding shares.

Purchases and redemptions of shares in any of the Funds by the

Plans may also occur in connection with daily automated cash ``sweep''

arrangements. However, agreement to such arrangement is not a condition

for the Plan otherwise choosing to invest in shares of the Fund, nor

will the reverse be required.

Under the automated cash ``sweep'' arrangement, a Plan may

participate in the ``sweep'' program only with the initial written

approval of the Second Fiduciary and only after certain disclosures

have been provided by the Bank. If such approval is given, cash

balances of the Plan held from time to time thereafter pending other

investment or distribution are invested automatically in shares of the

Bishop Street Funds Money Market Fund or other short-term investment

vehicle selected by the Second Fiduciary on behalf of a Plan. The

automated cash ``sweep'' arrangement would not involve shares of any

non-money market portfolios.

After the Money Market Fund of the Bishop Street Funds has been

selected by the Second Fiduciary on behalf of the Plan, otherwise

uninvested cash down to the last $1.00 balance of the Plans may be

invested automatically on a nightly basis. The Bank has no discretion

with respect to the timing of the ``sweep'' either into or out of the

Bishop Street Funds. Under the automated ``sweep'' arrangement, the

Bank's computerized cash management system automatically scans the

accounts of the Plans, as of the end of each business day to determine

whether such accounts have positive or negative net cash balances.

Based on this information, the system automatically invests the case of

the Plans having positive balances in shares of the Money Market Fund.

In the case of a Plan having a negative cash balance, the system

automatically liquidates the Bishop Street Fund shares as necessary to

eliminate such negative balance.

Plans may terminate their participation in the automated cash

``sweep'' arrangement and withdraw at any time by notifying the Bank.

Such termination will be effected by the Bank redeeming the shares of

the Bishop Street Funds held by the Plan requesting termination by the

close of the business day following the date of receipt by the Bank,

either by mail, hand delivery, facsimile, or other available means of

written communication at the option of the Second Fiduciary, of the

Termination Form or any other written notice of termination. However,

if due to circumstances beyond the control of the Bank, the redemption

of shares of such Plan cannot be executed within one business day, the

Bank would complete the redemption within one additional business day.

No fee, charge or penalty of any kind is charged in connection with

a termination by a Plan of participation in the automated cash ``sweep

arrangement'' in the Bishop Street Funds or in any of the Funds. The

Bank currently charges a Plan-level cash sweep fee for sweep services

in connection with the investment of cash balances in short-term

investment vehicles managed by unaffiliated entities. This fee will be

terminated for Plans that elect to use the Money Market Fund as their

cash management vehicle. The Bank does not charge separate or

additional fees to Plans in order to participate in the daily automated

cash ``sweep'' arrangement through the Bishop Street Funds, nor is such

additional compensation contemplated by the proposed exemption.12

\12\ The Department in a letter, dated August 1, 1986, to Robert

S. Plotkin, Assistant Director, Division of Banking Supervision and

Regulation, Board of Governors of the Federal Reserve System,

addressed the application of section 408(b)(2) of the Act to

arrangements involving ``sweep services.'' In that letter, the

Department set forth several examples to illustrate various

circumstances under which violations of section 406(b) of the Act

would arise with respect to such arrangements. Conversely, the

letter provided that, if a bank provides ``sweep'' services without

the receipt of additional compensation or other consideration (other

than reimbursement of direct expenses properly and actually incurred

in the performance of such services), then the provision of

``sweep'' services by the bank would not, in itself, constitute a

violation of section 406(b) of the Act. Moreover, including

``sweep'' services under a single fee arrangement for investment

management services which is calculated as a percentage of the

market value of the total assets under management would not, in

itself, constitute an act described in section 406(b)(1), because

the bank would not be exercising its fiduciary authority or control

to cause a plan to pay an additional fee.

In addition, the letter also discusses the applicability of the

statutory exemptions under section 408(b)(6) of the Act (fees for

``ancillary services'') and under section 408(b)(8) of the Act

(investments in collective trust funds maintained by such bank) to

such ``sweep'' service arrangements.

[[Page 47607]]

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8. In summary, it is represented that the proposed transactions

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because:

(a) Neither the Plans nor the CIFs will pay sales commissions or

redemption fees in connection with the in-kind transfer of assets to

the Funds in exchange for shares of the Funds or in connection with

purchases or redemptions by the Plans of shares of the Funds, including

purchases and redemptions handled through daily automated cash

``sweep'' arrangements.

(b) The Plans or the CIFs will receive shares of the Funds that are

equal in value to the assets of the Plans or the CIFs exchanged for

such shares, as determined in a single valuation performed in the same

manner and as of the close of business on the same day in accordance

with the procedures set forth in Rule 17a-7 under the '40 Act, as

amended from time to time or any successor rule, regulation or similar

pronouncement.

(c) Not later than 30 business days after completion of each in-

kind transfer of assets in exchange for shares of the Funds, the Plans

will receive written confirmation of the assets involved in the

exchange which were valued in accordance with Rule 17a-7(b)(4), the

price of such assets and the identity of the pricing service or market

maker consulted.

(d) No later than 90 days after completion of each in-kind transfer

of assets of the plans or the CIFs in exchange for shares of the Funds,

the Bank will mail to the Second Fiduciary of each Plan, a written

confirmation of the number of CIF units held by each affected Plan

immediately before the conversion (and the related per unit value and

the aggregate dollar value of the units transferred), and the number of

shares in the Funds that are held by each affected Plan following the

conversion (and the related per share net asset value and the aggregate

dollar value of the shares received).

(e) The price that will be paid or received by the Plans for shares

in the Funds is the net asset value per share at the time of the

transaction and is the same price for the shares which would have been

paid or received by any other investor for shares of the same class at

that time.

(f) Neither the Bank nor an affiliate, including any officer or

director will purchase from or sell to any of the Plans shares of any

of the Funds.

(g) As to each individual Plan, the combined total of all fees

received by the Bank for the provision of services to the Plan, and in

connection with the provision of services to any of the Funds in which

the Plan may invest, will not be in excess of ``reasonable

compensation'' within the meaning of section 408(b)(2) of the Act.

(h) The Bank will not receive any 12b-1 Fees in connection with the

proposed transactions.

(i) Prior to investment by a Plan in any of the Funds, in

connection with transactions, the Second Fiduciary will receive a full

and detailed written disclosure of information concerning such Fund.

(j) Subsequent to the investment by a Plan in any of the Funds, the

Bank will provide the Plan, among other information, at least annually

with an updated copy of the prospectus for each of the Funds in which

the Plan invests.

(k) In the event such Fund places brokerage transactions with the

Bank, the Bank will provide the Second Fiduciary of such Plan at least

annually with a statement specifying the total, expressed in dollars,

of brokerage commissions of each Fund's investment portfolio that are

paid by such Fund to the Bank and to unrelated brokerage firms and the

average brokerage commissions per share, expressed as cents per share,

by each portfolio of a Fund paid to the Bank and to brokerage firms

unrelated to the Bank.

(l) On the basis of the disclosures, the Second Fiduciary will

authorize the transactions.

(m) The authorization by the Second Fiduciary will be terminable at

will without penalty to such Plans, and any such termination will be

effected by the close of the business day following the date of receipt

by the Bank, either by mail, hand delivery, facsimile or other

available means of written communication at the option of the Second

Fiduciary, of the Termination Form or any other written notice of

termination, unless due to circumstances beyond the control of the Bank

delay execution for no more than one additional business day.

(n) The Plans do not pay investment management, investment advisory

or similar fees to the Bank with respect to any of the assets of such

Plans which are invested in shares of any of the Funds.

(o) The Second Fiduciary will receive a written notice accompanied

by the Termination Form with instructions regarding the use of such

form, at least 30 days in advance of the implementation of any increase

in the rate of any fees for investment management, investment advisory

or similar fees, any addition of a Secondary Service for which a fee is

charged, or any increase in fees for Secondary Services that the Bank

provides to the Funds.

(p) All dealings between the Plans and any of the Funds will be on

a basis no less favorable to such Plans than dealings between the Funds

and other shareholders holding the same shares of the same class as the

Plans.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,

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

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of

[[Page 47608]]

the transaction which is the subject of the exemption. In the case of

continuing exemption transactions, if any of the material facts or

representations described in the application change after the exemption

is granted, the exemption will cease to apply as of the date of such

change. In the event of any such change, application for a new

exemption may be made to the Department.

Signed at Washington, DC, this 8th day of September, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 95-22753 Filed 9-12-95; 8:45 am]

BILLING CODE 4510-29-P