Proposed Exemptions; Plumbers and Steamfitters Local No. 177

DEPARTMENT OF LABOR

[Application No. L-09927, et al.]

Proposed Exemptions; Plumbers and Steamfitters Local No. 177

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

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

date of publication of this Federal Register Notice. Comments and

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

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

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

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

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

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

hearing. 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.

[[Page 49015]]

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.

Plumbers and Steamfitters Local No. 177, Health and Welfare Fund (the

Welfare Plan), and Plumbers and Steamfitters Local No. 177, Pension

Trust Fund (the Pension Plan; collectively, the Plans), Located in

Brunswick, Georgia

[Application Nos. L-09927, D-09928 and L-09929]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

the Act and the sanctions resulting from the application of section

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

the Code, shall not apply (1) effective February 17, 1994, to the past

sale by the Welfare Plan of an office building located in Brunswick,

Georgia (the Office Building) to Plumbers and Steamfitters Local No.

177 (the Union), a party in interest with respect to the Plans; and (2)

effective February 16, 1995, to the past and proposed leases (the

Leases) of space in the Office Building by the Union to the Plans;

provided the following conditions are satisfied:

(a) The purchase price paid by the Union for the Office Building

was no less than the fair market value of the Office Building as of the

date of the sale;

(b) All terms of the Leases are at least as favorable to the Plans

as those which the Plans could obtain in arm's-length transactions with

unrelated parties;

(c) Rents paid under the Leases do not exceed the fair market

rental values of the leased spaces;

(d) The interests of the Plans under the Leases for all purposes

are represented by a qualified independent fiduciary who monitors the

Leases and takes appropriate action to enforce the Union's compliance

with all Lease terms and conditions; and

(e) Within 60 days of the publication in the Federal Register of a

notice granting this exemption, the Union pays any excise taxes

applicable under section 4975(a) of the Code by virtue of the past

Leases for the period commencing February 17, 1994 to February 16,

1995.

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

February 17, 1994 with respect to the sale of the Office Building, and

February 16, 1995 with respect to the Leases.

Summary of Facts and Representations

1. The Welfare Plan is a multi-employer welfare benefit plan with

total assets of $650,788 and approximately 600 participants as of July

31, 1994. The Pension Plan is a defined contribution money purchase

pension plan, with total assets of $8,406,592, and approximately 240

participants as of December 31, 1994. The Plans are maintained pursuant

to collective bargaining agreements between the Union and employers of

members of the Union (the Employers). The Plans share the same board of

trustees (the Trustees), consisting of three representatives of the

Union and three representatives of the Employers.

2. The Office Building, located on the New Jesup Highway in

Brunswick, Georgia, was constructed in 1960 as a single-family

residence, and has been remodeled and adapted for use as a business

office facility. The Office Building has 4,550 square feet of floor

space and is situated on a 4.11 acre parcel of land. The Trustees

represent that they purchased the Office Building on behalf of the

Welfare Plan on August 1, 1985 for $168,000 from an individual

unrelated to the Plans, the Union and the Employers. Since 1985 the

Office Building has served as the site of the administrative offices of

the Welfare Plan. The Welfare Plan also shared space in the Office

Building with the Pension Plan and the Union.1

\1\The Trustees represent that the sharing of office space in

the Office Building with the Pension Plan, the apprenticeship plan

and the Union satisfied the requirements of Prohibited Transaction

Class Exemption 76-1 (PTCE 76-1, 41 FR 12740, March 26, 1976) and

Prohibited Transaction Class Exemption 77-10 (PTCE 77-10, 42 FR

33918, July 1, 1977), and, therefore, is exempt from the

prohibitions of sections 406(a) and 406(b)(2) of the Act. The

Department expresses no opinion on whether the sharing arrangements

satisfied the requirements of PTCEs 76-1 and 77-10.

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3. In early 1994 the Trustees determined that the assets of the

Welfare Plan were in need of diversification and enhanced liquidity,

and that the Office Building should be sold in order to address these

needs. After investigations into the prevailing circumstances of the

real estate market in which the Office Building is situated, the

Trustees determined to accept an offer by the Union to purchase the

Office Building from the Welfare Plan. Accordingly, on February 17,

1994, the Union purchased the Office Building from the Welfare Plan,

and the Union immediately commenced leasing space in the Office

Building to the Welfare Plan and the Pension Plan (the New Leases). The

Trustees are requesting an exemption with respect to the sale of the

Office Building to the Union and the past and proposed New Leases,

under the terms and conditions described herein.

4. The Trustees represent that their sale of the Office Building

was necessary in order to diversify the investment of the assets of the

Welfare Plan, which were invested disproportionately in real property,

and that the sale to the Union was the most advantageous means of

achieving such a sale. The Trustees represent that due to the ``soft''

conditions prevailing in the local real estate market, the Welfare Plan

could not reasonably expect to receive the full appraised fair market

value of the Office Building in an arm's length sale transaction

involving an unrelated buyer. In the sale of the Office Building to the

Union, however, the Trustees state that they succeeded in obtaining a

purchase price in the amount of the Office Building's full fair market

value as of the sale date. The Office Building was appraised by Richard

C. Friedman, SRA (Friedman), an independent professional realty

appraiser in Brunswick, Georgia, who determined that as of February 5,

1994, the Office Building had a fair market

[[Page 49016]]

value of $230,000. In accordance with Friedman's appraisal, the Union

bought the Office Building on February 17, 1994 for a cash purchase

price of $230,000. Aside from a settlement charge of $230, the Union

paid all expenses related to the sale transaction.

5. Since the Union's purchase of the Office Building, the Welfare

Plan and the Pension Plan have continued to occupy and utilize space

therein as they had done prior to the sale transaction. Effective

February 28, 1994, leases were executed on behalf of each Plan (the

Leases) providing for the Plans' lease of space in the Office Building

from the Union. Under the Leases, each Plan leases one half of the same

1,327 square feet of space in the Office Building which the Plans had

shared and utilized prior to the Union's purchase of the Office

Building from the Union, consisting of a large office, supply room,

reception area, and use of all common areas. The Union occupies and

utilizes the remaining office space in the Office Building, which

consists of an office for the Union's business manager, a general

office, meeting space, storage space, reception area, and use of all

common areas. The Plans' Leases each have an initial term of three

years, with provisions for successive three-year renewal periods under

the same terms as the initial Lease, subject to increases in the rental

amounts. Under each Lease the Union is responsible for paying all

taxes, insurance and utilities other than telephone service, and for

all repairs to the Office Building. Each Lease includes a provision

giving the Plan the unconditional right to terminate the Lease at any

time without penalty upon sixty days written notice. The interests of

the Plans for all purposes under the Leases are represented by an

independent fiduciary (the Fiduciary), described below, whose functions

include the negotiation, monitoring and enforcement of the Leases'

terms and conditions on behalf of the Plans.

6. Rent under the Leases, payable monthly, will be no more than the

fair market value of the space leased. In another appraisal of the

Office Building, Friedman determined that as of April 17, 1995, the

fair market rental value of the Office Building space leased under each

Lease was $359.40 per month, for a combined total of $718.80. In

accordance with Friedman's appraisal, initial rent under each Lease is

set at $359.40 per month. Rental during any successive renewal term(s)

will be established as follows: During the last two months of the

initial term, and thereafter during the last two months of the renewal

term, the Fiduciary shall cause the Office Building to be reappraised

for its fair market rental value, and the rental in the subsequent

renewal term, if any, shall be the newly reappraised fair rental market

of the leased space.

7. The interests of the Plans under the Leases are represented for

all purposes by the Fiduciary, Julian R. Friedman, Esq., an attorney

who represents that he is independent of the Union.2 The Fiduciary

represents that he has substantial experience with collectively-

bargained employee benefit plans and the fiduciary responsibility

provisions of the Act. Acting as a fiduciary under the Act on behalf of

the Plans, the Fiduciary will oversee the relationship between the

Union as lessor and the Plans as lessees under the Leases, and will

monitor and enforce the Union's performance of its obligations

thereunder. The Fiduciary will be responsible for securing the

appraisals required by the Leases' rental-review provisions, and for

making any adjustments in the rent in accordance with such appraisals.

The Fiduciary negotiated and prepared the Leases on behalf of the

Plans, and he states that he has determined that they are in the best

interests of the participants and beneficiaries of the Plans due to the

protective and advantageous features of the Leases. The Fiduciary also

represents that he has determined that the particular space in the

Office Building which is shared by the Plans and rented from the Union

pursuant to the Leases is sufficient and appropriate for the Plans'

operations, and that the arrangement does not have the effect of

subsidizing the Union's use of other space in the Office Building.

\2\ The Fiduciary represents that he is not related to Richard

C. Friedman, S.R.A., a real property appraiser previously referred

to in this summary of facts and representations.

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8. The Department is not proposing exemptive relief for the Leases

for any period prior to February 16, 1995, because that is the date on

which the Plans's interests under the Leases commenced to be

represented for all purposes by the Fiduciary. The Union recognizes

that the leases of the Office Building to the Plans under the Leases

for the period commencing February 28, 1994 to February 16, 1995

constituted prohibited transactions under the Act and the Code for

which no exemptive relief is proposed herein. Accordingly, as a

condition of the proposed exemption, if granted, within sixty days of

the publication in the Federal Register of a notice granting the

exemption, the Union will pay any excise taxes which are applicable

under section 4975(a) of the Code by reason of such Leases of the

Office Building for the period commencing February 28, 1994 to February

16, 1995.

9. In summary, the applicant represents that the past and proposed

transactions satisfy the criteria of section 408(a) of the Act for the

following reasons: (1) The sale of the Office Building was necessary to

enhance the liquidity and diversification of the assets of the Welfare

Plan; (2) The sale was a cash transaction in which the Welfare Plan

received the full appraised fair market value of the Property as of the

sale date; (3) The interests of the Plans under the Leases are

represented by the Fiduciary, who has determined that the Leases are in

the best interests and protective of the participants and beneficiaries

of the Plans, and who will monitor and enforce the Union's compliance

with all Lease terms and conditions; (4) The Plans will pay no more

than fair market rental for the space leased in the Office Building;

and (5) Each Plan has the right under each Lease to terminate the Lease

for any reason upon sixty days written notice.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

State Mutual Life Assurance Company of America (State Mutual) Located

in Worcester, MA

[Application No. D-10008]

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 in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990).3

\3\For purposes of this exemption, reference to provisions of

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

corresponding provisions of the Code.

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Section I. Covered Transactions

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

the Act and the sanctions resulting from the application of section

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

the Code, shall not apply to (a) the receipt of common stock of State

Mutual, (b) the substitution of the common stock of Allmerica Financial

Corporation (Allmerica), State Mutual's prospective sole owner, for the

State Mutual stock, or (c) the receipt of cash or policy credits, by or

on behalf of an employee benefit plan policyholder of

[[Page 49017]]

State Mutual (the Plan), other than any policyholder which is a Plan

maintained by State Mutual or an affiliate of State Mutual for its own

employees (the State Mutual Plans)4, in exchange for such

policyholder's membership interest in State Mutual, in accordance with

the terms of a plan of reorganization (the Demutualization Plan)

adopted by State Mutual and implemented pursuant to section 19E

(Section 19E) of Chapter 175 of the Massachusetts General Laws.

\4\With the exception of the State Mutual Companies' Pension

Plan (the State Mutual Pension Plan), State Mutual is not

requesting, nor is the Department providing exemptive relief herein

with respect to the distributions of State Mutual or Allmerica

common stock to other plans that State Mutual or its affiliates

maintain for their own employees. State Mutual represents that such

stock would constitute qualifying employer securities within the

meaning of section 407(d)(5) of the Act and that section 408(e) of

the Act would apply to such distributions. In this regard, the

Department expresses no opinion on whether such distributions would

satisfy the terms and conditions of section 408(e) of the Act.

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In addition, the restrictions of section 406(a)(1)(E) and (a)(2)

and section 407(a)(2) of the Act shall not apply to the receipt and

holding, by the State Mutual Pension Plan, of employer securities in

the form of excess stock, in accordance with the terms of the

Demutualization Plan.

This proposed exemption is subject to the conditions set forth

below in Section II.

Section II. General Conditions

(a) The Demutualization Plan is implemented in accordance with

procedural and substantive safeguards that are imposed under

Massachusetts law and is subject to the review and supervision by the

Massachusetts Commissioner of Insurance (the Commissioner).

(b) The Commissioner reviews the terms of the options that are

provided to certain policyholders of State Mutual, which include, but

are not limited to the subject Plans and the State Mutual Plans (the

Eligible Policyholders), as part of such Commissioner's review of the

Demutualization Plan, and approves the Demutualization Plan following a

determination that such Demutualization Plan is not prejudicial to all

Eligible Policyholders.

(c) The Demutualization Plan is filed with the New York

Superintendent of Insurance (the Superintendent) who determines whether

the Demutualization Plan is fair and equitable to Eligible

Policyholders from New York.

(d) Each Eligible Policyholder has an opportunity to comment on the

Demutualization Plan and decide whether to vote to approve such

Demutualization Plan after full written disclosure is given such

Eligible Policyholder by State Mutual, of the terms of the

Demutualization Plan.

(e) Any election by an Eligible Policyholder which is a Plan

(including the State Mutual Plans), to receive stock, cash or policy

credits, pursuant to the terms of the Demutualization Plan is made by

one or more independent fiduciaries (the Independent Fiduciaries) of

such Plan and neither State Mutual nor any of its affiliates exercises

any discretion or provides investment advice with respect to such

election.

(f) In the case of the State Mutual Plans, where the consideration

is in the form of stock, the Independent Fiduciary--

(1) Elects the form of consideration that such Plans receive;

(2) Monitors, on behalf of such Plans, the acquisition and holding

of the stock;

(3) Makes determinations on behalf of such Plans with respect to

the voting, the continued holding or the disposition of such stock; and

(4) Disposes, in a prudent manner, shares of stock exceeding the 10

percent holding limitation of section 407(a)(2) of the Act within 90

days following its receipt by the State Mutual Pension Plan. Such

shares that are not disposed of during this initial 90 day period must

be disposed of within an additional period of 90 days.

(g) After each Eligible Policyholder entitled to receive stock is

allocated at least thirty shares of stock, additional consideration is

allocated to Eligible Policyholders who own participating policies

based on actuarial formulas that take into account each participating

policy's contribution to the surplus of State Mutual which formulas

have been approved by the Commissioner and the Superintendent.

(h) All Eligible Policyholders that are Plans participate in the

transactions on the same basis as other Eligible Policyholders that are

not Plans.

(i) No Eligible Policyholder pays any brokerage commissions or fees

in connection with their receipt of stock or in connection with the

implementation of the commission-free sales program.

(j) All of State Mutual's policyholder obligations remain in force

and are not affected by the Demutualization Plan.

Section III. Definitions

For purposes of this proposed exemption:

(a) The term ``State Mutual'' means State Mutual Life Assurance

Company of America and any affiliate of State Mutual as defined in

paragraph (b) of this Section III.

(b) An ``affiliate'' of State Mutual includes--

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

intermediaries, controlling, controlled by, or under common control

with State Mutual. (For purposes of this paragraph, the term

``control'' means the power to exercise a controlling influence over

the management or policies of a person other than an individual.)

(2) Any officer, director or partner in such person, and

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

officer, director or a 5 percent partner or owner.

(c) The term ``Eligible Policyholder'' means a policyholder whose

name appears on the conversion date on the insurer's records as owner

of a participating policy under which there is a right to vote and

which is in full force on both the December 31 immediately preceding

the conversion date and the date the insurer's board of directors first

votes to convert to stock form. Under Massachusetts law, only such

policyholders are entitled to receive consideration in the

demutualization. Policyholders who are not Eligible Policyholders will

not receive any stock or other consideration. As used herein, the term

``Eligible Policyholder'' includes, but is not limited to, the State

Mutual Pension Plan as well as those Plans that are not sponsored by

State Mutual.

(d) The term ``policy credit'' means an increase in accumulation

account value (to which no surrender or similar charges are applied) in

the general account or an increase in a dividend accumulation on a

policy.

Summary of Facts and Representations

1. State Mutual is a mutual life insurance company organized under

the laws of the State of Massachusetts and maintaining its headquarters

in Worcester, Massachusetts. It is the fifth oldest life insurance

company in the United States. In asset size, State Mutual ranks among

the 20 largest mutual life insurance companies in the country. As of

December 31, 1994, State Mutual and its subsidiaries had total assets

in excess of $10.5 billion and more than $40.2 billion of individual

life insurance policies in force. State Mutual has a number of

subsidiaries and affiliates that provide a variety of financial

services to policyholders including investment management and brokerage

services. State Mutual and its investment management subsidiaries had

approximately $10.7 billion in

[[Page 49018]]

assets under management as of December 31, 1994.

As a mutual life insurance company, State Mutual has no

stockholders. Instead, policyholders of State Mutual are considered

members of the company and, in this capacity, are entitled to vote to

elect directors of State Mutual and to share in the assets of the

company upon its liquidation.

2. State Mutual is the common parent of an affiliated group of

companies. One of these companies is SMA Financial Corporation (SMA

Financial), a Massachusetts corporation which is a wholly owned, direct

subsidiary of State Mutual. SMA Financial owns 57 percent of the common

stock of Allmerica Property & Casualty Companies, Inc. (APY), a

Delaware corporation. As a majority shareholder, State Mutual exercises

management control over APY. SMA Financial also owns 100 percent of the

stock of SMA Life Assurance Company (SMA Life), a Delaware stock life

insurance company.

The stock of APY that is not held by SMA Financial is widely held

and is traded on the New York Stock Exchange. APY is the holding

company and is the common parent of an affiliated group of companies

which includes two property and casualty insurance companies--The

Hanover Insurance Company and Citizens Insurance Company of America.

State Mutual and its affiliates provide a variety of fiduciary and

other services to Plans. These services include plan administration and

related services, investment management services and securities

brokerage and related services. Many Plans for which State Mutual

provides services are also State Mutual policyholders. As of December

31, 1994, there were approximately 10,000 State Mutual insurance

policies and contracts held by pension and welfare plans.

3. State Mutual and its affiliates sponsor a number of plans for

which it is not requesting exemptive relief herein.\5\ However, one

plan, for which State Mutual has specifically requested exemptive

relief is the State Mutual Companies' Pension Plan, a defined benefit

plan. The State Mutual Pension Plan covers eligible career agents,

general agents and clerical employees of State Mutual and its

affiliates. The State Mutual Pension Plan provides retirement,

disability and death benefits to eligible participants and their

beneficiaries. The trustee of the State Mutual Pension Plan is

Mechanics Bank of Worcester, Massachusetts. The decisionmakers with

respect to investments in the State Mutual Pension Plan are members of

an investment committee consisting of State Mutual's Board of

Directors. As of December 31, 1994, the State Mutual Pension Plan had

6,187 participants. As of December 31, 1994, the State Mutual Pension

Plan had net assets available for benefits of $156,100,000.

\5\As stated previously, State Mutual believes that

distributions of stock to such Plans would constitute ``qualifying

employer securities'' within the meaning of section 407(d)(5) of the

Act and that section 408(e) of the Act would apply to such

distributions.

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4. In July 1993, State Mutual's Board of Directors authorized

management to develop a plan of demutualization whereby State Mutual

would be converted from a mutual life insurance company to a stock life

insurance company. The purposes of the Demutualization Plan are to (a)

improve State Mutual's access to the capital markets and

competitiveness in the insurance industry; (b) establish Allmerica, a

single, publicly-traded company, which will become the exclusive owner

of State Mutual and whose stock will be issued by State Mutual to

certain Eligible Policyholders as a result of the demutualization; and

(c) raise capital for State Mutual through an initial public offering

(the IPO) of the stock of the new publicly-traded company. State Mutual

has developed the Demutualization Plan and its Board of Directors

formally adopted the Demutualization Plan on February 28, 1995.

5. It is currently anticipated that the following steps will be

undertaken with respect to the implementation of State Mutual's

Demutualization Plan:

(a) The Demutualization. To become a stock life insurance company,

State Mutual will demutualize under Massachusetts law as well as under

the provisions of the Demutualization Plan. Each policyholder's

membership interest in State Mutual will be terminated. As compensation

for their membership interests, Eligible Policyholders will receive

cash, policy credits and initially, shares of State Mutual common

stock. The State Mutual common stock will be issued to First Chicago

Trust Company of New York as transfer agent on behalf of Eligible

Policyholders and exchanged in the merger described below in Step (b).

(b) Creation of Special Purpose Subsidiary. Allmerica will form a

special purpose Massachusetts subsidiary called ``Allmerica Merger

Subsidiary Inc.'' (Merger Sub). On the effective date of the

demutualization (i.e., on or before December 31, 1995), Merger Sub will

merge with and into the demutualized State Mutual pursuant to Section

19E of Massachusetts demutualization law. In the merger, Eligible

Policyholders will receive shares of Allmerica common stock in exchange

for the shares of State Mutual common stock they initially held. The

stock of Merger Sub will be converted into the only issued and

outstanding stock of State Mutual. State Mutual will then become a

wholly owned subsidiary of Allmerica.

(c) The IPO. Allmerica may sell new Allmerica stock in an

underwritten IPO, which is expected to occur on the same day as the

demutualization. At present, the size of the IPO is not known.\6\

\6\The Demutualization Plan provides that in addition to the

IPO, Allmerica may raise capital through one or more of the

following: (a) A private placement of debt securities on or prior to

the demutualization date, (b) bank borrowings on or prior to the

demutualization date or (c) a public offering of debt securities on

the demutualization date.

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(d) Contribution to the Capital of State Mutual. Following the

transactions described above, Allmerica will contribute cash raised in

the IPO to State Mutual. The Demutualization Plan requires that the

contribution be in an amount at least equal to the amount required for

State Mutual (a) to pay transaction expenses resulting from the

demutualization, (b) to pay cash and fund policy credits awarded to

Eligible Policyholders required to receive such consideration under the

terms of such Demutalization Plan and (c) to purchase assets required

for the funding of certain ``closed block'' policies.\7\ The amount of

this contribution is currently anticipated to be in excess of $100

million.

\7\According to State Mutual, the closed block is an accounting

mechanism whereby the experience on certain dividend-paying policies

and contracts of State Mutual will be accounted for separately on

State Mutual's books so that dividend scales can be revised in the

future to reflect that experience. No assets will be physically

segregated. The closed block is not set aside or deposited for the

purpose of doing business. Thus, the purpose of the closed block is

to protect the dividend expectations of such dividend-paying

policies and contracts after the effective date of the

Demutualization Plan.

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The Demutualization Plan also permits Allmerica to retain, for

general corporate purposes, amounts raised in the IPO (or by the other

transactions described above) in excess of the amount to State Mutual.

6. In addition to economic arguments raised by State Mutual in

support of the Demutualization Plan, as noted above, State Mutual

represents that its proposed conversion from a mutual life insurance

company to a stock life insurance company will give Eligible

Policyholders marketable securities, cash or policy credits in exchange

for their membership interests. State Mutual represents that the

[[Page 49019]]

demutualization will provide the flexibility to cause its non-insurance

operations to become direct holdings of an ``upstream'' holding company

and enable it to use stock options or other equity-based compensation

arrangements in order to attract and retain talented employees. State

Mutual believes these consequences of the conversion will benefit all

of its policyholders. State Mutual further explains that its insurance

policies will remain in force and policyholders will be entitled to

receive the benefits under their policies and contracts to which they

would have been entitled if the Demutualization Plan had not been

adopted.

7. State Mutual represents that Section 19E of the Massachusetts

demutualization law establishes an approval process for the

demutualization of a life insurance company organized under

Massachusetts law. Section 19E requires that the demutualization plan

be filed with, and approved by, the Massachusetts Commissioner of

Insurance. The Commissioner may approve the demutalization plan only

after notice is given to the insurer, its directors, officers,

employees and policyholders and a hearing on such plan is held. All

persons to whom notice is given have the right to appear and be heard

at the hearing and to present oral or written comments.

After the hearing, State Mutual explains that the Commissioner may

approve the demutualization plan if he determines that the plan is not

prejudicial to the insurer's policyholders or to the ``insuring

public.'' The Commissioner must also determine that the demutualization

plan conforms to the provisions of Section 19E. In pertinent part,

Section 19E requires that (a) policyholders be provided with reasonable

notice of the procedure for voting on the demutualization plan; (b)

each policyholder, in exchange for membership interests in the insurer,

is given appropriate consideration determined under a fair and

reasonable formula, which is based upon the insurer's entire adjusted

surplus; (c) unless not approved by the Commissioner, each policyholder

is given a preemptive right to acquire such policyholder's

proportionate interest in the capital stock of the insurer within a

reasonable time period; (d) shares of the insurer's stock are offered

to policyholders at a price not greater than that offered to others

under the demutualization plan; (e) each policyholder receives

consideration which may consist of cash, securities, a certificate of

contribution, additional life insurance or annuity benefits, increased

dividends or other consideration or any combination of such forms of

consideration; (f) the converted insurer's paid-in capital stock is in

an amount not less than the minimum paid-in capital stock plus the net

cash surplus required of a new domestic stock insurer authorized to

transact similar kinds of insurance business; (g) the insurer's

management has not sought to affect the number or identity of the

insurer's policyholders to be entitled to participate in the

demutualization plan, or to secure for the insurer's management, any

unfair advantage through the demutualization plan; and (h) the

classifications of management and employee groups that are offered

shares not subscribed for by policyholders in the preemptive offering

are reasonable.

Section 19E authorizes the Commissioner to employ staff personnel

and to engage outside consultants to assist the Commissioner in

determining whether a demutualization plan meets the requirements of

Section 19E and any other relevant provisions of Massachusetts law. In

the case of State Mutual, it is anticipated that the Commissioner will

retain an actuarial firm, legal advisers and an investment banking firm

as consultants, and possibly other consultants as well. A decision by

the Commissioner to approve a demutualization plan under Section 19E is

subject to judicial review in the Massachusetts courts.

In addition to being approved by the Commissioner, State Mutual

represents that the demutualization plan must be approved by the

policyholders of the insurer. In this regard, Section 19E, requires

that the policyholders be provided with notice of a meeting convened

for the purpose of voting on whether to approve the demutualization

plan. Moreover, the demutalization plan must be approved by a vote of

not less than two-thirds of the votes of the policyholders who may vote

in person, by proxy or by mail.\8\

\8\State Mutual has approximately 100,000 policyholders who are

eligible to vote on the Demutualization Plan. The voting provisions

follow the voting regulations for annual meetings of mutual

insurance companies, as set out in Chapter 175, Section 94 of

Massachusetts Insurance Law. The number of votes to which any

Eligible Policyholder is entitled will vary with the number of

policies and the amounts of insurance owned by such Policyholder. In

no case, however, may an Eligible Policyholder cast more than 20

votes.

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8. State Mutual represents that it is licensed to transact business

in all fifty states. However, only the State of New York requires that

a foreign insurance company that is planning to demutualize file a copy

of its demutualization plan with state insurance authorities. In this

regard, State Mutual explains that section 1106(i) (Section 1106(i)) of

the New York Insurance Law authorizes the Superintendent to review the

demutualization plan of a foreign life insurer licensed in New York and

to specify the conditions that the Superintendent would impose in order

for the foreign insurer to retain its New York license following its

demutualization. Specifically, Section 1106(i) requires that a foreign

life insurer licensed in New York file with the Superintendent a copy

of the demutualization plan at least 90 days prior to the earlier of

(a) the date of any public hearing required to be held on the

demutualization plan by the insurer's state of domicile, and (b) the

proposed date of the demutualization.

If, after examining the demutualization plan, the Superintendent

finds that the plan is not fair or equitable to the New York

policyholders of the insurer, the Superintendent must set forth the

reasons for his findings. In addition, the Superintendent must notify

the insurer and its domestic state insurance regulator of his findings

and his reasons for such findings and advise of any requirements he

considers necessary for the protection of current New York

policyholders in order to permit the insurer to continue to conduct

business in New York as a stock life insurer after the demutualization.

In the event the Superintendent has any objections to the

Demutualization Plan, State Mutual represents that it will amend the

Plan so that it will meet the approval of the Superintendent or

otherwise, work out a satisfactory solution with the Superintendent.

However, should the Superintendent require changes in the

Demutualization Plan that are unacceptable to the Commissioner, State

Mutual will make a decision on how to proceed.

9. Once finalized, it is expected that State Mutual's

Demutualization Plan will provide for Eligible Policyholders to

ultimately receive common stock of Allmerica,\9\ cash or policy credits

as consideration for giving up their membership interests in State

Mutual. Accordingly, State Mutual requests an administrative exemption

from the Department in order that certain of its

[[Page 49020]]

Eligible Policyholders that are Plans, including the State Mutual

Plans, may receive stock, cash or policy credits in exchange for their

membership interests in State Mutual. In addition, State Mutual

requests exemptive relief in order that the State Mutual Pension Plan,

may receive consideration in the form of stock. Because the value of

the stock to be received by the State Mutual Pension Plan will exceed

the 10 percent limitation prescribed in section 407(a)(2) of the Act by

6 percent, State Mutual requests exemptive relief so that the State

Mutual Pension Plan may continue holding stock exceeding such

limitation for a temporary, three month period.

\9\It is expected that Allmerica stock will be traded on the New

York Stock Exchange. Under the terms of the Demutualization Plan,

Allmerica is required to arrange for the listing of its stock on a

national securities exchange and to use its best efforts to maintain

such listing for as long as it is a publicly-traded company.

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10. According to the Demutualization Plan, certain Eligible

Policyholders will receive cash or policy credits in lieu of stock

under the following circumstances:

a. Cash will be received in lieu of allocable stock (1) with

respect to a policy that is known to State Mutual to be subject to a

lien (other than a policy loan made by State Mutual) or a bankruptcy

proceeding, or (2) where the Eligible Policyholder's address for

mailing purposes, as shown on the records of State Mutual, is located

outside the United States of America, or (3) where the Eligible

Policyholder has made an affirmative election, on a form provided to

such Eligible Policyholder by State Mutual, to receive cash in lieu of

stock. (If no such preference is expressed under Item 3, the Eligible

Policyholder will receive stock.\10\

\10\Under the Demutualization Plan, Eligible Policyholders who

receive their entire consideration in the form of Allmerica common

stock were asked to express a preference for cash in lieu of stock,

should funds become available. However, these ``cash elections'' are

restricted by a number of factors. First, a limited amount of cash

will be available to pay all such cash elections (currently

estimated at $24 million). Second, all Eligible Policyholders

actually receiving cash pursuant to cash elections will receive

their entire consideration in the form of cash. Third, to the extent

the available cash is insufficient to satisfy all cash elections,

the cash elections of Eligible Policyholders allocated the fewest

number of shares will be satisfied first. Fourth, if State Mutual is

unable to pay cash to Eligible Policyholders allocated the fewest

number of shares who have expressed a cash preference, no cash

payments (other than mandatory cash payments) will be made.

Accordingly, on the effective date of the Demutualization Plan,

State Mutual, with the approval of the Commissioner, will allocate

an amount to make cash elections. Such cash will be applied first to

pay the entire consideration of those Eligible Policyholders

allocated the fewest number of shares, if all such requests for cash

may be satisfied. Thereafter, State Mutual will continue to apply

the allocated cash to pay the entire consideration of each Eligible

Policyholder requesting cash at higher share allocations until such

allocated cash is exhausted. After the allocated cash is exhausted,

each Eligible Policyholder whose request cannot be satisfied will

receive his or her entire consideration in the form of stock. Thus,

Eligible Policyholders electing cash will receive either stock or

cash but not both.

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b. Policy credits will be received in lieu of stock allocable to

any policy that is (1) an individual retirement annuity contract within

the meaning of section 408 of the Code, (2) a tax sheltered annuity

contract within the meaning of section 403(b) of the Code, (3) an

individual annuity contract that has been issued pursuant to a plan

qualified under section 401(a) of the Code directly to the plan

participant, or (4) an individual life insurance policy that has been

issued pursuant to a plan qualified under section 401(a) of the Code

directly to the plan participant.

The cash or policy credits will have a value equal to the stock

such policyholders would otherwise have received, based on the price

per share of Allmerica stock in the IPO which is expected to occur at

the time of the demutualization. Any election by a Plan, including the

State Mutual Plans, to receive stock or cash pursuant to the terms of

the Demutualization Plan, will be made by one or more fiduciaries of

such Plan which is independent of State Mutual.\11\ In addition,

neither State Mutual nor any of its affiliates may exercise discretion

or provide investment advice with respect to such election. Further, no

Eligible Policyholder will pay any brokerage commissions or fees in

connection with their receipt of stock.\12\

\11\State Mutual represents that under paragraph 5 of Section

19E of Massachusetts Insurance Law, the policyholder eligible to

participate in the distribution of stock, cash, policy credits or

other consideration resulting from the Demutualization Plan is ``the

person whose name appears . . . on the insurer's records as owner''

of the policy. State Mutual further represents that an insurance or

annuity policy that provides benefits under an employee benefit

plan, typically designates the employer that sponsors the plan, or a

trustee acting on behalf of the plan, as the owner of the policy. In

regard to insurance or annuity policies that designate the employer

or trustee as owner of the policy, State Mutual asserts that it is

required under Massachusetts Insurance Law to make distributions

resulting from the Demutualization Plan to the employer or trustee

as owner of the policy, with the following exception. Specifically,

the Demutualization Plan provides that where group policies or

annuities have been issued to a trust established by State Mutual

for an employee benefit plan, the employer will be deemed to be the

owner of such policy if the employer plan or policy has adopted the

master trust to which the policy is issued. The trustee of any such

trust established by State Mutual will not be considered a

policyholder or owner.

In general, it is the Department's view that, if an insurance

policy (including an annuity contract) is purchased with assets of

an employee benefit plan, and if there exist any participants

covered under the plan (as defined at 29 CFR 2510.3-3) at the time

when State Mutual incurs the obligation to distribute stock, cash,

policy credits or other compensation, then such consideration would

constitute an asset of such plan. Under these circumstances, the

appropriate plan fiduciaries must take all necessary steps to

safeguard the assets of the plan in order to avoid engaging in a

violation of the fiduciary responsibility provisions of the Act.

\12\Under current provisions of the Demutualization Plan,

Eligible Policyholders who receive stock or, for that matter, any

other form of consideration, will not be entitled to receive

subscription rights to purchase additional stock. Under Section 19E

of Massachusetts Insurance Law, the Commissioner has the authority

to approve a plan which provides for no preemptive rights.

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The stock allocated to Eligible Policyholders will be allocated

among them by providing at least thirty shares for each such

Policyholder. This number is, however, subject to proportional

adjustment. Any remaining stock will be allocated substantially on the

basis of the contributions to surplus made by each such Policyholder's

in force participating policies. The allocation methodology must be

fair and reasonable and approved by the Commissioner. The allocation

formulas are also subject to review by the Superintendent.

11. State Mutual notes that the proposed receipt of stock by the

State Mutual Pension Plan would violate section 406(a)(1)(E) of the Act

because the receipt of such stock would be in violation of section

407(a)(2) of the Act, which prohibits the acquisition by a plan of any

qualifying employer security if immediately after such acquisition, the

aggregate fair market value of such securities exceeds 10 percent of

the fair market value of the plan's assets. State Mutual represents

that the stock, which will be a ``qualifying employer security''

represent approximately 16 percent of the assets of the State Mutual

Pension Plan after its acquisition and thus will exceed the 10 percent

limitation of section 407(a)(2) of the Act. Accordingly, State Mutual

represents that the statutory exemptive relief contained in section

408(e) of the Act will not apply to the acquisition and holding of the

stock by the State Mutual Pension Plan. Thus, State Mutual requests

administrative exemptive relief from the Department. State Mutual

further notes that the holding of stock by the State Mutual Pension

Plan will not violate the provisions of section 407(f) of the Act.

12. State Mutual represents that pursuant to a Retainer Agreement

and an Indemnification Agreement, both of which are dated March 27,

1995 (collectively, the Engagement Agreements), it has retained the

services of State Street Bank and Trust Company (State Street) of

Quincy, Massachusetts to serve, on behalf of the State Mutual Pension

Plan and the other State Mutual Plans, as the Independent Fiduciary

[[Page 49021]]

(and also investment manager). Specifically, State Street represents

that it has been retained to consider, on behalf of the State Mutual

Plans, whether to approve the proposed transactions and, if so

approved, whether to receive consideration in the form of stock or

cash. To assist State Street in carrying out its fiduciary

responsibilities under the Engagement Agreements, State Street has

retained Whitman Heffernan Rhein & Co. (WHR & Co.), as its independent

financial adviser, and Paul, Weiss, Rifkind, Wharton & Garrison (Paul

Weiss), as its independent legal counsel.

State Street represents that it is one of the largest trust

companies in the United States with over $170 billion in assets under

management, a significant percentage of which consists of pension plan

assets. State Street also represents that it has served as an

independent fiduciary for numerous retirement plans that acquire or

hold employer securities and has managed, at various times, over $20

billion in employer securities held by various retirement plans. In

managing such investments, State Street states that it has supervised

numerous transactions involving the acquisition, retention and

disposition of employer securities. Further, State Street explains that

it monitors the performance of the employer securities it manages on a

continuing basis.

State Street represents that it has the following de minimus

business relationships with State Mutual:

(a) Its Insurance Division provides various services to several

retained asset accounts of State Mutual and/or various subsidiaries of

State Mutual. Revenue received by State Street for these services in

1994 totaled approximately $52,000.

(b) It serves as an investment manager for fixed income investment

funds of defined contribution plans. Currently, it manages

approximately $6 billion in fixed income securities. Approximately $84

million of that is invested, on behalf of various clients, in

guaranteed investment contracts issued by State Mutual. Revenue

received in 1994 by State Street for the investment in these contracts

totaled less than $10,000.

(c) It provides master trust and custody services to various

pension plans. Some of these plans may invest in guaranteed investment

contracts issued by State Mutual. It also serves as a directed trustee/

custodian to these plans and receives no revenue from the investment in

these contracts. State Street receives a trust/custody fee based on the

total value of the plan, irrespective of the investments.

(d) It has voting and/or dispositive control over 221,800 shares of

Allmerica stock.

State Street also explains that it had revenues in 1994 of over

$981 million. However, State Street points out that all revenues and

fees that were associated with State Mutual represented less than one-

hundredth of one percent of State Street's total revenues.

In addition, State Street represents that none of its officers or

directors is an officer or director of State Mutual or vice versa.

Further, State Street represents that State Mutual does not have an

ownership interest in State Street and State Street does not have an

ownership interest in State Mutual except for the relationships

described above.

As the Independent Fiduciary for the State Mutual Plans, State

Street represents that it understands and acknowledges its duties,

responsibilities and liabilities under the Act as a fiduciary for such

Plans. In this regard, State Street asserts that it will have the

authority and responsibility to monitor the acquisition and holding of

the stock that is received by the State Mutual Plans. State Street also

represents that it will be authorized to dispose, in a prudent manner,

shares of the stock that is held by the State Mutual Pension Plan which

exceeds the 10 percent limitation imposed by section 407(a)(2) of the

Act. Such disposition will take place within 90 days of the receipt of

the stock by the State Mutual Pension Plan. If, however, State Street

is unable to dispose of the stock following the initial 90 day period,

it will sell the stock within the following 90 day period. Therefore,

State Street must dispose of all shares of excess stock that are held

by the State Mutual Pension Plan within 180 days of receipt.

State Street also asserts that it will act as the Independent

Fiduciary for both the State Mutual Plans with respect to the

policyholder vote and decisions to be made by such plans as to the form

of consideration. Moreover, State Street explains that it will monitor

the proposed transactions throughout their duration on behalf of these

Plans and take all actions that are necessary and proper to safeguard

the interests of such Plans.

State Street represents that the proposed transactions are prudent

for the State Mutual Plans and in the best interests of such Plans'

participants and beneficiaries. State Street notes that the

consummation of the proposed transactions is conditioned upon approval

by Eligible Policyholders of State Mutual as well as the other

conditions set forth in the Demutualization Plan (including the receipt

of state regulatory approval). As a general matter, however, State

Street explains that its determination that the proposed transactions

are appropriate for the State Mutual Plans is based upon an economic

analysis of the consideration to be acquired by such Plans. In this

connection, State Street represents that WHR & Co. has performed a

comprehensive analysis of State Mutual in the context of prevailing

market conditions and has concluded that for each State Mutual Plan,

the proposed consideration to be received is fair to such plan from a

financial point of view. In reaching this conclusion, State Street

indicates that WHR & Co. has performed various activities such as

reviewing annual reports prepared by State Mutual and its affiliates,

conducting discussions with senior management of State Mutual and

Allmerica and reviewing the Demutualization Plan and portions of the

Policyholder Information Statement. In addition, State Street

represents that it has conducted its own due diligence which included a

review of all available policyholder information, a review of all

relevant Plan information, interviews with management and attending

policyholder meetings and public hearings relating to the proposed

transaction. Finally, State Street asserts that its fiduciary committee

met and determined, based on presentations from WHR & Co., Paul Weiss,

corporate counsel and other bank management officials, that the

transactions would be in the best interests of all of the State Mutual

Plans and their participants and beneficiaries. Accordingly, State

Street has directed the appropriate fiduciaries to approve the proposed

transactions.

13. The Demutualization Plan provides for the establishment of a

commission-free sales program whereby Eligible Policyholders will be

permitted to sell the stock they have received pursuant to the

Demutualization Plan in the public market. The commission-free sales

program will commence on the first business day after the six month

anniversary of the effective date of the demutualization and will

continue for ninety days thereafter. The program may be extended with

the approval of the Commissioner, if the Board of Directors of

Allmerica determines such extension would be appropriate and in the

best interest of Allmerica and its stockholders. In the commission-free

sales program, any Eligible Policyholder receiving fewer than one

hundred shares of stock will have the opportunity to sell, at

prevailing market prices, all of the stock or to increase

[[Page 49022]]

such Eligible Policyholder's holdings to a one hundred share round lot.

No brokerage commissions, mailing charges, registration fees or other

administrative expenses will be charged in connection with either the

demutualization or with sales or purchases of stock under the

commission-free sales program.

14. 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) The Demutualization Plan will be implemented in accordance with

procedural and substantive safeguards that are imposed under

Massachusetts law and will be subject to the review and supervision by

the Commissioner.

(b) The Commissioner will review the terms of the options that are

provided to Eligible Policyholders of State Mutual as part of such

Commissioner's review of the Demutualization Plan, and will approve the

Demutualization Plan following a determination that such

Demutualization Plan is not prejudicial to all Eligible Policyholders.

(c) The Demutualization Plan will be filed with the New York

Superintendent who will determine whether the Demutualization Plan is

fair and equitable to Eligible Policyholders from New York.

(d) Each Eligible Policyholder will have an opportunity to comment

orally or in writing on the Demutualization Plan and decide whether to

vote to approve in writing such Demutualization Plan after full written

disclosure is given such policyholder by State Mutual, of the terms of

the Demutualization Plan.

(e) Any election by an Eligible Policyholder which is a Plan to

receive stock, cash or policy credits, pursuant to the terms of the

Demutualization Plan will be made by one or more Independent

Fiduciaries of such plan and neither State Mutual nor any of its

affiliates will exercise any discretion or provides investment advice

with respect to such election.

(f) In the case of the State Mutual Plans, where the consideration

is in the form of stock, an Independent Fiduciary will (1) monitor, on

behalf of such Plans, the acquisition and holding of the stock; (2)

make determinations, on behalf of such Plans, with respect to the

voting, the holding or the disposition of such stock, and (3) dispose,

in a prudent manner, on behalf of the State Mutual Pension Plan, stock

that exceeds the 10 percent limitation under section 407(a)(2) of the

Act within 90 days following its receipt; however, if there are any

shares of excess stock remaining after the initial period, the

Independent Fiduciary will have an additional 90 days to sell such

stock.

(g) After each Eligible Policyholder is allocated at least thirty

shares of stock, additional consideration allocated to Eligible

Policyholders who own participating policies will be based on actuarial

formulas that take into account each participating policy's

contribution to the surplus of State Mutual which formulas have been

approved by the Commissioner and reviewed by the Superintendent.

(h) All Plans that are Eligible Policyholders, including the State

Mutual Plans and the State Mutual Pension Pension Plan, will

participate in the transactions on the same basis as other Eligible

Policyholders that are not Plans.

(i) No Eligible Policyholder will pay any brokerage commissions or

fees in connection with such Eligible Policyholder's receipt of stock

or in connection with the implementation of the commission-free sales

program.

(j) All of State Mutual's policyholder obligations will remain in

force and will not be affected by the Demutualization Plan.

Notice to Interested Persons

State Mutual will provide notice of the proposed exemption to

Eligible Policyholders which include Plans and the State Mutual Plan

within 5 days of the publication of the notice of pendency in the

Federal Register. Such notice will be provided to interested persons by

first class mail and will include a copy of the notice of proposed

exemption as published in the Federal Register. The notice will also

inform interested persons of their right to comment on the proposed

exemption and/or to request a hearing. Comments with respect to the

notice of proposed exemption are due within 35 days after the date of

publication of this exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,

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

Michael Elkin Individual Retirement Account (the IRA), Located in New

York, New York

[Application No. D-10022]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 4975(c)(2) of the Code and in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990). If the exemption is granted, the sanctions

resulting from the application of section 4975 of the Code, by reason

of section 4975(c)(1) (A) through (E) of the Code, shall not apply to

the proposed purchase for cash of a certain limited partnership

interest in the Medallion Fund (the Interest) by the IRA from Michael

Elkin, a disqualified person with respect to the IRA,13 provided

the following conditions are met:

\13\Pursuant to 29 CFR 2510.3-2(d), there is no jurisdiction

with respect to the IRA under Title I of the Act. However, there is

jurisdiction under Title II of the Act pursuant to section 4975 of

the Code.

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(a) The purchase is a one-time transaction for cash;

(b) The terms and conditions of the purchase are at least as

favorable to the IRA as those obtainable in an arm's-length transaction

with an unrelated party;

(c) The IRA pays no more than the fair market value of the

Interest, as established by an independent qualified appraiser at the

time of the transaction;

(d) The IRA is not required to pay any commissions, costs or other

expenses in connection with the transaction; and

(e) The fair market value of the Interest is based on an

independent valuation of the total net asset value of the Fund and does

not represent more than 25% of the total assets of the IRA at the time

of the transaction.

Summary of Facts and Representations

1. The IRA is an individual retirement account, as described under

section 408(a) of the Code, which was established by Michael Elkin (Mr.

Elkin). As of March 31, 1995, the IRA had assets valued at $330,286.

The trustee of the IRA is the Independent Trust Corporation, located at

15255 S. 94th Avenue, Orland Park, Illinois.

2. Mr. Elkin owns a limited partnership interest in the Medallion

Fund (the Fund). Mr. Elkin's interest in the Fund had a net asset value

of $251,854 as of April 30, 1995. The total net asset value of the Fund

was $585,910,089, as of April 30, 1995. Thus, Mr. Elkin states that his

interest in the Fund represented less than 1/20 of one (1) percent of

the total net asset value of the Fund as of such date.

3. The Fund is an investment fund established on April 1, 1988,

which was organized as an exempted limited partnership under the laws

of the Islands of Bermuda. The Fund was formed for the purpose of

investing in commodities of various types (i.e. foodstuffs, metals,

industrial raw materials, etc.), commodity futures contracts, financial

futures contracts (including stock index futures contracts), forward

contracts, as well as

[[Page 49023]]

options to purchase or sell any of the foregoing financial instruments.

Assets of the Fund not on deposit with brokers are invested principally

in U.S. Treasury Bills held at the Bank of New York, checking accounts

held at other major banks in the United States, and short-term

commercial paper with a minimum rating of A-1 or P-1 by Moody's

Investors Service.

Interests in the Fund are not registered under the Securities Act

of 1933 (the Securities Act), the Investment Company Act of 1940, or

the securities laws of any of the States of the United States. Mr.

Elkin states that he purchased his interest in the Fund as part of an

offering that was made in reliance upon an exemption from the

registration requirements of the Securities Act for a sale of

securities which does not involve a public offering, and analogous

exemptions under state securities laws. However, Mr. Elkin represents

that the Fund otherwise is fully registered with the appropriate U.S.

regulatory authorities and complies with various state ``blue sky''

laws, as discussed in the Fund's Information Memorandum. Mr. Elkin also

represents that the Fund fully complies with U.S. tax laws. In this

regard, the Fund files U.S. tax returns and provides all investors

(i.e. partners) with K-1 information returns so that such investors can

include their proportionate income in their personal tax returns.

The Information Memorandum for the Fund indicates that interests in

the Fund are subject to substantial restrictions on transferability.

However, certain transfers of Fund interests to relatives or other

entities are permissible under the terms of the Fund. In addition,

limited partners of the Fund may redeem all or part of their interests

in the Fund at the end of each calendar quarter on ten days notice.

Limited partners may also make, with permission of the managing

general partner, additional capital contributions to the Fund on the

first day of any calendar quarter. Each limited partner's respective

liability for the Fund's debts and other obligations is limited to the

balances in such partner's capital account. The Fund's limited partners

are under no obligation to make additional capital contributions to the

Fund.

4. The managing general partner of the Fund is Medallion Limited,

located at 3 Reid Street, Hamilton, Bermuda. The applicant states that

the individuals who are officers of Medallion Limited, Norman J.

Holbrow (President) and Jan J. Spiering (Vice President), have no

relationship to Mr. Elkin or any of his affiliates.

The investment general partner of the Fund is the Renaissance

Technologies Corporation (Renaissance), a corporation organized under

the laws of the State of Delaware with its principal offices located at

800 Third Avenue, New York, New York. The Information Memorandum for

the Fund states that Renaissance has been registered with the Commodity

Futures Trading Commission (CFTC) as both the commodity pool operator

and commodity trading adviser (CTA) of the Fund since July 6, 1988 and

April 2, 1991, respectively. The applicant represents that since

Renaissance is registered with the CFTC as a commodity pool operator

and a CTA, the Fund is subject to the same regulatory regimen as any

U.S. based commodity partnership. Mr. Elkin also states that he is

independent of and unrelated to Renaissance and its affiliates.

5. The applicant proposes to have the IRA invest approximately

$75,000 to purchase part of Mr. Elkin's interest in the Fund (i.e. the

Interest). The IRA would purchase the Interest directly from Mr. Elkin

for cash. The applicant represents that the proposed transaction would

be permissible under the terms of the Fund as they relate to the

restrictions on the transferability of a limited partner's interests in

the Fund. The IRA would pay no more than the fair market value of the

Interest as established by an independent, qualified appraiser (as

described below in Paragraph 7). The IRA would not pay any commissions

or other expenses in connection with the transaction.

Mr. Elkin states that the proposed purchase of the Interest for

$75,000 would involve approximately 22% of the total assets of the IRA.

Mr. Elkin states further that the proposed transaction will not exceed

the lesser of either $75,000 or 25% of the IRA's total assets at the

time of the transaction (see Paragraph 7 below). After the purchase of

the Interest by the IRA, the IRA would own approximately 1/60 of one

(1) percent of the Fund, based on recent quarterly valuations for the

Fund.14 Mr. Elkin would continue to own the balance of his current

interest in the Fund.

\14\ The applicant represents that the Fund's assets are not

considered to be ``plan assets'' under the Department's regulations

defining that term for purposes of plan investments because

investments in the Fund by benefit plan investors are not

significant (see 29 CFR 2510.3-101). In this regard, the Information

Memorandum for the Fund states that it is the intention of the Fund

to ensure that all types of plan investors collectively will own

less than 25 percent of the outstanding interests in the Fund. The

Department expresses no opinion in this proposed exemption as to

whether the assets held by the Fund would be considered ``plan

assets'' under the Department's regulations.

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6. Mr. Elkin states that the Fund has exhibited superior investment

performance over the last year. Mr. Elkin believes that an investment

in the Fund by the IRA would represent an excellent opportunity for the

IRA to achieve a high rate of return. Mr. Elkin states that the

proposed purchase of the Interest by the IRA would be consistent with

his investment strategy for the IRA's assets. In this regard, Mr. Elkin

maintains that his primary goal for the assets of the IRA that would be

involved in the proposed transaction is growth of capital, despite the

higher degree of risk involved with such an investment.15 Mr.

Elkin represents that he has reviewed information regarding investment

funds similar to the Fund and believes that the Fund offers a better

prospect for achieving superior returns on capital invested than other

such funds.

\15\The Department notes that the Internal Revenue Service has

taken the view that if a plan is exposed to the risk of large losses

because of the speculative nature of investments made by the plan,

such an investment strategy may raise questions in regard to the

exclusive benefit rule under section 401(a) of the Code. For

example, see Rev. Rul. 73-532, 1973-2 C.B. 128, which states, among

other things, that the safeguards and diversity that a prudent

investor would adhere to must be present in order for the

``exclusive-benefit-of-employees'' requirement to be met. The

Department notes further that section 408(a) of the Code, which

describes the tax qualification provisions for IRAs, also contains

an exclusive benefit rule for an individual and his or her

beneficiaries. However, the Department is expressing no opinion in

this proposed exemption regarding whether violations of section

408(a) of the Code would occur as a result of an IRA's acquisition

of investments that may be speculative in nature, such as the

proposed purchase of a partnership interest in a fund which invests

in exchange-traded futures contracts as well as forward contracts

and options relating to such financial instruments.

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7. Kempe & Whittle Associates Limited (KWAL), the administrators

for the Fund, will act as an independent, qualified appraiser to

establish the fair market value of the Interest for purposes of the

proposed transaction. KWAL is responsible for the maintenance of the

Fund's books and records and for the preparation of the Fund's

financial statements, annual reports, and monthly reports to investors.

In addition, KWAL determines the total net asset value of the Fund on a

quarterly basis for purposes of any redemptions of limited partnership

interests by partners in the Fund at that time. KWAL states that a

limited partnership interest in the Fund is equal to a partner's share

of the Fund's total net asset value on such date.

Therefore, Mr. Elkin proposes to have the IRA purchase the Interest

from

[[Page 49024]]

himself at an amount equal to the total net asset value which the

Interest would represent, as established by KWAL, as of the end of the

next calendar quarter following the granting of this proposed

exemption, provided that such amount does not exceed the lesser of

either $75,000 or 25% of the IRA's total assets at the time of the

transaction.

8. In summary, the applicant represents that the proposed

transaction would satisfy the statutory criteria of section 4975(c)(2)

of the Code because: (a) The terms and conditions of the purchase will

be at least as favorable to the IRA as those obtainable in an arm's-

length transaction with an unrelated party; (b) the purchase will a

one-time cash transaction which will allow the IRA to acquire an asset

which, in the applicant's view, has the prospect for superior

investment returns; (c) the IRA will pay no more than the fair market

value of the Interest, as established by an independent, qualified

appraiser at the time of the transaction; (d) the IRA will not pay any

commissions or other expenses in connection with the transaction; (e)

the fair market value of the Interest will be based on an independent

valuation of the total net asset value of the Fund and will not

represent more than 25% of the total assets of the IRA at the time of

the transaction; and (f) Mr. Elkin has determined that the proposed

transaction will be in the best interests of the IRA.

NOTICE TO INTERESTED PERSONS: Because Mr. Elkin is the only participant

in the IRA, it has been determined that there is no need to distribute

the notice of proposed exemption to interested persons. Comments and

requests for a hearing are due thirty (30) days after publication of

this notice in the Federal Register.

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

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

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete, and that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 18th day of September, 1995.

Ivan Strasfeld,

Director of Exemption Determinations Pension and Welfare Benefits

Administration U.S. Department of Labor.

[FR Doc. 95-23464 Filed 9-20-95; 8:45 am]

BILLING CODE 4510-29-P