Proposed Exemptions; Norwest Bank Minnesota, N.A., et al.

DEPARTMENT OF LABOR

[Application No. D-09595, et al.]

Proposed Exemptions; Norwest Bank Minnesota, N.A., et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

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

date of publication of this Federal Register Notice. Comments and

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

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

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

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

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

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

hearing. A request for a hearing must also state the issues to be

addressed and include a general description of the evidence to be

presented at the hearing.

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

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

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

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

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

Exemption. The applications for exemption and the comments received

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

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

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

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

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.

Norwest Bank Minnesota, N.A. Located in Minneapolis, MN

[Application No. D-09595]

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).1

\1\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. Exemption for the In-Kind Transfer of Assets

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

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

of section 4975 of the Code, by reason of section 4975(c) of the Code,

shall not apply, as of September 30, 1994, to the in-kind transfer of

assets of plans for which Norwest Bank Minnesota, N.A. or any of its

affiliates (collectively, the Bank) serves as a fiduciary (the Client

Plans), including plans established or maintained by the Bank (the Bank

Plans; collectively, the Plans), that are held in certain collective

investment funds (the CIFs) maintained by the Bank, in exchange for

shares of the Norwest Funds (the Funds), an open-end investment company

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

amended, for which the Bank acts as investment adviser, custodian, and

shareholder servicing agent, in connection with the termination of such

CIFs provided that the following conditions are met:

(a) No sales commissions or other fees are paid by a Bank Plan or a

Client Plan in connection with the purchase of shares of the Funds

through the in-kind transfer of CIF assets and no redemption fees are

paid in connection with the sale of such shares of the Funds.

(b) All of the assets of a Bank Plan or a Client Plan that are held

in the CIFs are transferred in-kind to the Funds in exchange for shares

of such Funds. A Plan not electing to participate in the Funds receives

a cash payment representing a pro rata portion of the assets of the

terminating CIF before the final liquidation takes place.

(c) Each Bank Plan and each Client Plan receives shares of the

Funds which have a total net asset value that is equal to the value of

such Plan's pro rata share of the assets of the CIF on the date of the

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

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

close of the same business day, using independent sources in accordance

with the procedures set forth in Rule 17a-7(b) (Rule 17a-7) under the

Investment Company Act of 1940 (the '40 Act), as

[[Page 13458]] amended, and the procedures established by the Funds

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

procedures must require that all securities for which a current market

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

transactions reported on a recognized securities exchange or NASDAQ be

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

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

Friday preceding the weekend of the CIF transfers, determined on the

basis of reasonable inquiry from at least three sources that are

broker-dealers or pricing services independent of the Bank.

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

Bank (the Second Fiduciary) receives advance written notice of the in-

kind transfer of assets of the CIFs and full written disclosure, which

includes but is not limited to, the following information concerning

the Funds:

(1) A current prospectus for each portfolio of the Funds in which a

Bank Plan or a Client Plan is considering investing;

(2) A statement describing (i) the fees for investment advisory or

similar services that are to be credited back to a Client Plan, (ii)

the fees retained by the Bank for Secondary Services, as defined in

paragraph (g) of Section III below, and (iii) all other fees to be

charged to or paid by the Bank Plan or the Client Plan and by such

Funds to the Bank or to unrelated third parties. Such statement also

includes the nature and extent of any differential between the rates of

the fees;

(3) The reasons why the Bank considers such investment to be

appropriate for the Bank Plan or the Client Plan;

(4) A statement describing whether there are any limitations

applicable to the Bank with respect to which assets of a Bank Plan or a

Client Plan may be invested in the relevant Funds, and, if so, the

nature of such limitations; and

(5) Upon request of the Second Fiduciary, a copy of the proposed

exemption and/or a copy of the final exemption, if granted.

(e) On the basis of the foregoing information, the Second Fiduciary

authorizes in writing the in-kind transfer of the Bank Plan's or the

Client Plan's CIF assets to a Fund in exchange for shares of the Funds,

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

the fees received by the Bank in connection with its services to the

Funds and, in the case of a Client Plan only, the purchase by such

Client Plan of additional shares of the corresponding Funds with the

fees credited back to the Client Plan by the Bank. Such authorization

by the Second Fiduciary will be consistent with the responsibilities,

obligations and duties imposed on fiduciaries under Part 4 of Title I

of the Act.

(f) For all subsequent transfers of CIF assets to a Fund following

the publication of the proposed exemption in the Federal Register, the

Bank sends by regular mail to each affected Bank Plan and Client Plan a

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

the transaction, containing the following information:

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

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

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

and

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

in determining the value of such securities.

(g) For all subsequent transfers of CIF assets to a Fund following

the publication of the proposed exemption in the Federal Register, the

Bank sends by regular mail, no later than 90 days after completion of

each transfer, a written confirmation that contains the following

information:

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

transfer, the related per unit value and the total dollar amount of

such CIF units;

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

following the conversion, the related per share net asset value and the

total dollar amount of such shares.

(h) The conditions set forth in paragraphs (c), (d), (e), (o) and

(p) of Section II below as they would relate to all Plans are

satisfied.

Section II. Exemption for the Receipt of Fees

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

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

of section 4975 of the Code, by reason of section 4975(c) of the Code,

shall not apply, as of November 11, 1994, to (1) the receipt of fees by

the Bank from the Funds for acting as an investment adviser to the

Funds; and (2) the receipt and proposed retention of fees by the Bank

from the Funds for acting as custodian or shareholder servicing agent

to the Funds, as well as for any other services provided to the Funds

which are not investment advisory services (i.e., the Secondary

Services), in connection with the investment in shares of the Funds by

the Client Plans, other than the Bank Plans, for which the Bank serves

as fiduciary.

The aforementioned transactions are subject to the following

conditions:

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

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

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

the Funds.

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

the Funds is the net asset value per share, as defined in paragraph (d)

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 Client Plans shares of

any of the Funds.

(d) The combined total of all fees received by the Bank for the

provision of services to the Client Plans, and in connection with the

provision of services to any of the Funds in which the Client Plans

invest, are 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 of the '40 Act (the 12b-1 Fees) in connection with the

transactions involving the Funds.

(f) Each Client Plan receives a credit, either through cash or, if

applicable, the purchase of additional shares of the Funds, pursuant to

an annual election, which may be revoked at any time, made by the

Client Plan, of such Plan's proportionate share of all investment

advisory fees charged to the Funds by the Bank, including any

investment advisory fees paid by the Bank to third party sub-advisers,

within not more than one business day after the receipt of such fees by

the Bank.

(g) The Second Fiduciary receives, in advance of investment by a

Client Plan in the Funds, full and detailed written disclosure of

information concerning the relevant Funds as set forth above in Section

I(d).

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

Section I, the Second Fiduciary authorizes in writing:

(1) The ongoing investment of assets of the Client Plans in shares

of the Funds, in connection with the transactions set forth in Section

II;

(2) The investment portfolios of the Funds in which the assets of

the Client Plans may be invested; and

(3) The fees to be paid by the Funds in which Client Plans invest

to the Bank [[Page 13459]] and the purchase of additional shares of the

Funds by the Client Plan with the fees credited to the Client Plan by

the Bank.

(i) The authorization referred to in paragraph (h) is terminable at

will by the Client Plan, without penalty to the Client Plan. Such

termination will be effected by the Bank selling the shares of the

Funds held by the affected Client Plan within the period of time

specified by the Client Plan but not more than one business day

following receipt by the Bank from the Second Fiduciary, of the

termination form (the Termination Form), as defined in paragraph (h) 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 sale.

(j) In the event of an increase in the contractual rate of any fees

paid by the Funds to the Bank regarding investment advisory services or

fees for similar services that had been authorized by the Second

Fiduciary in accordance with paragraph (h) of this Section II, the Bank

provides written notice to the Second Fiduciary in a prospectus for the

Funds or otherwise, of any increases in the contractual rate of fees

charged by the Bank to the Funds for investment advisory services even

though such fees will be credited to the Client Plans as required by

paragraph (f) of Section II.

(k) In the event of an additional Secondary Service, as defined in

paragraph (g) of Section III below, provided by the Bank to the Funds

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

any fee due from the Funds to the Bank for any Secondary Service, as

defined in paragraph (g) of Section III below, that results 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 Client 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 increased, provide written notice to the Second Fiduciary

explaining the nature and amount of the additional service for which a

fee is charged or the nature and amount of the increase in fees of the

affected Fund. Such notice will be accompanied by the Termination Form,

as defined in paragraph (h) of Section III below.

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

times specified in paragraphs (k) and (m) 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 Client

Plans, without penalty to such Plans. The termination will be effected

by the Bank selling the shares of the Funds held by the Client Plans

requesting termination within the period of time specified by the

Client Plan, but not later than one business day following receipt by

the Bank from the Second Fiduciary of the Termination Form or any

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

beyond the control of the Bank, the sale of shares of such Client Plans

cannot be executed within one business day, the Bank shall have one

additional business day to complete such sale; and

(2) Failure by the Second Fiduciary to return the form on behalf of

the 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

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 the Client Plan.

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

least once in each calendar year, beginning with the calendar year that

begins after the date of 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 (m) of this Section II,

sooner than six months after such Termination Form is supplied pursuant

to paragraph (k) of this Section II, except to the extent required by

said paragraph (k) of this Section II to disclose an increase in fees.

(n) On an annual basis, the Bank will provide the Second Fiduciary

of a Client Plan investing in the Funds with:

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

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

which contains a description of all fees paid by the Funds to the Bank.

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

the Bank which contains information about the portfolios of the Funds

and includes audit findings of an independent auditor (the Auditor)

within 60 days of the preparation of the report.

In addition, the Bank will respond to oral or written responses to

inquiries of the Second Fiduciary as they arise.

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

basis no less favorable to the Client Plans than dealings between the

Funds and other shareholders holding the same class of shares as the

Client Plans.

(p) The Bank maintains for a period of six years the records

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

determine whether the conditions of this exemption have been met,

except that--

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

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

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

and

(2) No party in interest 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 (q) of Section II below; and

(q)(1) Except as provided in paragraph (p)(2) and notwithstanding

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

referred to in paragraph (p) 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 or the Securities and Exchange

Commission (the SEC);

(ii) Any fiduciary of a Client Plan who has authority to acquire or

dispose of shares of the Funds owned by the Client Plan, or any duly

authorized employee or representative of such fiduciary, and

(iii) Any participant or beneficiary of a Client Plan or duly

authorized employee or representative of such participant or

beneficiary;

(2) None of the persons described in paragraphs (q)(1) (ii) and

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

commercial or financial information which is privileged or

confidential.

Section III. Definitions

For purposes of this proposed exemption:

(a) The term ``Bank'' means Norwest Bank Minnesota, N.A. and any

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

(b) An ``affiliate'' of the Bank includes--

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

intermediaries, [[Page 13460]] controlling, controlled by, or under

common control with the Bank. (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, employee, relative or partner in such

person, and

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

officer, director, partner or employee.

(c) The term ``Fund'' or ``Funds'' refers to the Norwest Funds or

to any diversified open-end investment company or companies registered

under the '40 Act for which the Bank serves as an investment adviser

and may also serve as a custodian, shareholder servicing agent,

transfer agent or provide some other ``Secondary Service'' (as defined

below in paragraph (g) of this Section IV) which as been approved by

such Funds.

(d) 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 chargeable to

each portfolio, by the number of outstanding shares.

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

defined in section 3(15) of the Act (or 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.

(f) 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,

affiliate, 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; provided, however that with respect to Bank Plans, the

Second Fiduciary may receive compensation from the Bank in connection

with the transactions contemplated herein, but the amount or payment of

such compensation may not be contingent upon or be in any way affected

by the Second Fiduciary's ultimate decision regarding whether the Bank

Plans participate in such transactions.

With the exception of the Bank Plans, if an officer, director,

partner, affiliate or employee of the Bank (or 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

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

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

charged to or paid by the Client Plan, any of the transactions

described in Sections I and II above, then paragraph (f)(2) of this

Section IV, shall not apply.

(g) The term ``Secondary Service'' means a service, other than

investment advisory or similar services which is provided by the Bank

to the Funds, including, but not limited to, custodial or shareholder

services. However, the term ``Secondary Service'' does not include any

brokerage services provided by the Bank to the Funds.

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

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

and (m) of Section II which expressly provides an election to the

Second Fiduciary to terminate on behalf of a Plan the authorization

described in paragraph (h) of Section II. Such Termination Form is to

be used at will by the Second Fiduciary to terminate such authorization

without penalty to the Plan and to notify the Bank in writing to effect

such termination by selling the shares of the Fund held by the Plan

requesting termination not later than one business day following

receipt by the Bank of written notice of such request for termination;

provided that if, due to circumstances beyond the control of the Bank,

the shares of such Client Plans cannot be executed within one business

day, the Bank shall have one additional business day to complete such

sale.

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

as of September 30, 1994 with respect to the transactions described in

Section I and as of November 11, 1994 with respect to the transactions

described in Section II.

Summary of Facts and Representations

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

described as follows:

a. The Bank and its affiliates are direct or indirect wholly owned

subsidiaries of Norwest Corporation, a bank holding company. The Bank

is a national bank that is principally located in Minneapolis,

Minnesota. It serves as trustee, directed trustee, investment manager

or custodian to approximately 7,500 employee benefit plans. As

custodian or directed trustee of a plan, the Bank has custody of a

Client Plan's assets but it has no duty to review investments or make

investment recommendations with respect to such assets. Instead, it

must act only as directed by an authorized third party. When the Bank

serves as a discretionary trustee or investment manager of a Client

Plan, it generally invests, with the sponsor's approval, the assets of

a Client Plan account in a series of CIFs it manages. The Bank may also

provide investment advice to other fiduciaries who have investment

discretion over a Client Plan's assets or manage an individual

investment portfolio for a Client Plan.

As of December 31, 1992, the Bank had discretionary and

nondiscretionary pension and welfare plan assets under management

totaling $16.25 billion. Of this total, $3.2 billion of pension and

welfare plan assets were held in 30 CIFs maintained by the Bank. Also

as of December 31, 1992, the Bank had total discretionary assets under

management for all trust clients, CIFs and investment advisory clients

of approximately $22.35 billion and total trust assets (both

discretionary and nondiscretionary) of approximately $90.75 billion.

With respect to the CIFs discussed herein, the Bank receives a

single, Plan-level management fee negotiated with each Client Plan. The

typical annualized fee range for the management fee is from .25 percent

to 1.50 percent of invested Client Plan assets. The management fee is

dependent upon such factors as asset class and negotiation. The Bank

charges a minimum fee of $500 to $1,000 for small accounts but it

charges no fee for Secondary Services (e.g., shareholder and custodial

services) provided to a Client Plan.

b. The Funds individually constitute a separate investment

portfolio or a series of portfolios having a separate prospectus and

representing a distinct investment vehicle. In the aggregate, the Funds

comprise a Delaware business trust currently registered as an open-end

investment company under the '40 Act. The Funds include seventeen new

portfolios ranging from money market funds to bond funds. In some

situations, the shares of a Fund will be divided into different classes

and charge different levels of expenses. Except for these differences,

the shares of each Fund will [[Page 13461]] represent the same

proportionate interest in the assets of that Fund.

c. The Board of Trustees (the Trustees) manages the Funds,

negotiates the investment advisory contracts and contracts for

Secondary Services described below. A majority of the Trustees are

independent of the Bank. The Trustees are elected by the shareholders

of the Funds, except that in certain cases following a vacancy on the

Board of Trustees, the Trustees can appoint a new Trustee without

advance shareholder approval.

The Bank serves as the investment adviser to each Fund and receives

investment advisory fees from the Funds. The Bank also serves as

custodian, shareholder servicing agent and transfer agent to the Funds

and is compensated by the Funds for the Secondary Services it renders

to such Funds in these capacities.

d. Forum Financial Services (FFS), a Delaware corporation which is

wholly independent of the Bank, serves as distributor of the shares of

the Funds and provides administrative and accounting services to the

Funds. FFS is compensated and reimbursed by the Funds for certain

expenses it incurs in performing these functions.

e. The Bank Plans consist of the Norwest Corporation Master Savings

Trust (the Savings Trust) and the Norwest Corporation Master Pension

Trust (the Pension Trust). As of June 30, 1994, the Savings Trust had

total assets of $747,976,484 and two participating Bank Plans, the

Norwest Corporation Savings-Investment Plan (the Norwest Savings Plan)

and the Ford Bank Group, Inc. Savings Plan (the Ford Savings Plan).

Also, as of June 30, 1994, the Norwest Savings Plan and the Ford

Savings Plan had 32,259 participants and 616 participants,

respectively.

The Pension Trust holds the assets of the Norwest Corporation

Pension Plan (the Norwest Plan), the First Minnesota Employee's Pension

Plan (the First Minnesota Plan) and the United Bank of Colorado, Inc.

Retirement Income Plan (the United Bank Plan). As of June 30, 1994, the

Pension Trust had total assets of $625,781,748. As of January 1, 1994,

the Norwest Pension Plan had 27,725 participants, the First Minnesota

Plan had 868 participants and the United Bank Plan had 3,437

participants.

f. The Client Plans include various pension, profit sharing, and

stock bonus plans as well as voluntary employees' beneficiary

associations, supplemental unemployment benefit plans, simplified

employee benefit plans, Keogh Plans and IRAs for which the Bank

presently serves (or will serve in the future) as a fiduciary

(including those plans whose assets are currently invested in the

Bank's CIFs).

g. Wilmington Trust Company (WTC) of Wilmington, Delaware, has been

retained by the Bank to serve as the Second Fiduciary for the Bank

Plans proposing to invest in the Funds. WTC, the primary subsidiary of

Wilmington Trust Corporation, was established in 1903. WTC is wholly

independent of the Bank and its affiliates.

As of December 31, 1993, WTC exercised discretionary investment

authority over approximately $25.7 billion of fiduciary assets,

including approximately $14.5 billion of assets of plans covered by the

Act and non-qualified employee benefit plans. As of December 31, 1993,

WTC also served as directed trustee, agent or custodian with respect to

more than $2.5 billion of assets of plans covered by the Act and non-

qualified employee benefit plans.

Description of the Transactions

2. The Bank maintains CIFs in which both Bank Plans and Client

Plans have invested. To better serve the interests of these Plans, the

Bank has decided, subject to approval of such Plans, to terminate

twelve of its CIFs and transfer the assets currently invested in the

CIFs to the corresponding Funds. The Bank notes that mutual funds are

subject to supervision by the SEC, place greater emphasis on

participant disclosure than do bank CIFs and provide an effective

mechanism for disclosure. Moreover, the Bank represents that Plan

sponsors and participants will be able to monitor more easily the

performance of their investments in the Funds on a daily basis since

information concerning investment performance of the Funds will be

available in daily newspapers of general circulation.

Accordingly, the Bank requests retroactive exemptive relief with

respect to the transfer of a Bank Plan's or a Client Plan's assets from

certain terminating CIFs to the Funds. In addition, the Bank requests

prospective exemptive relief for the receipt of fees from the Funds in

connection with the investment of assets of Client Plans for which the

Bank acts as a trustee, directed trustee, investment manager, or

custodian, in shares of the Funds in instances where the Bank is an

investment adviser, custodian, and shareholder servicing agent for the

Funds.\2\ The exemptive relief provided for the receipt of fees would

cover Client Plans only, specifically those Plans for which the Bank

exercises investment discretion as well as Client Plans where

investment decisions are participant-directed by a Second Fiduciary.

\2\The Bank is not requesting an exemption for investments in

the Funds by the Bank Plans. The Bank represents that Bank Plans may

acquire or sell shares of the Funds pursuant to Prohibited

Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977). PTE

77-3 permits the acquisition or sale of shares of a registered,

open-end investment company by an employee benefit plan covering

only employees of such investment company, employees of the

investment adviser or principal underwriter for such investment

company, or employees of any affiliated person (as defined therein)

of such investment adviser or principal underwriter, provided

certain conditions are met. The Department expresses no opinion on

whether any transactions with the Funds by the Bank Plans would be

covered by PTE 77-3.

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In-Kind Transfers to the Funds by Bank Plans and Client Plans

3. During the weekends of September 30, 1994-October 2, 1994 and

November 11-13, 1994, the Bank began transferring the assets of 12

terminated CIFs to the Funds. Specifically, during the weekend

beginning September 30, 1994, the Bank transferred the assets of two

CIFs, namely, ``Stock Fund S'' and ``Bond Fund R'' to the ``Contrarian

Stock Fund'' and the ``Total Return Bond Fund.'' Then, during the

weekend of November 11-13, 1994, the Bank terminated the assets of the

ten remaining CIFs. Once terminated, the assets from these CIFs were

transferred to fifteen ``Advantage Funds'' portfolios which also

comprise the Funds. Following the transfers, the Bank commenced

offering shares in the Funds to the Bank Plans and the Client Plans.\3\

\3\At present, the Bank does not intend to terminate or convert

two other CIFs, the ``Short Term Investment Fund'' and the ``Stable

Return Fund.'' Nevertheless, if at some future date the Bank were to

decide to terminate and convert these two CIFs as well, the Bank

represents that it will comply with the conditions of the final

exemption and it will value the assets of both the CIFs and the

transferee Funds in accordance with Rule 17a-7 of the '40 Act, as

amended, and the procedures established by the Funds pursuant to

Rule 17a-7 for the valuation of such assets. (See Representation 3.)

Although the Bank does not currently anticipate that either of

these CIFs will invest in the Funds, if such an investment were to

be made, the fee arrangements will be structured to comply with

Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732, April 8,

1977). In pertinent part, PTE 77-4 permits the purchase and sale by

an employee benefit plan of shares of a registered, open-end

investment company when a fiduciary with respect to the plan is also

the investment adviser of the investment company.

The Bank also represents that it will continue to comply with

PTE 77-4 in connection with the crediting of fees paid to it or its

affiliates by the Total Return Bond Fund and the Contrarian Stock

Fund.

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To the extent legally permissible, all transfers were effected in-

kind. However, because certain CIFs had already invested in other

mutual funds and transfers of those mutual fund investments to the

Funds would violate federal securities laws applicable to the

[[Page 13462]] mutual funds, the Bank decided to liquidate those

investments on the date of the transfer. The Funds then purchased

substantially the same securities held by the mutual funds in whose

shares the CIFs had previously been invested.

The Bank represents that the transfers of assets were conducted in

accordance with Rule 17a-7 of the '40 Act and the procedures

established by the Funds pursuant to Rule 17a-7 for the valuation of

such assets so as to make the transactions ministerial and as

nondiscretionary in nature as possible.\4\ In this regard, the asset

transfers to the funds occurred over one or more weekends selected by

the Trustees using market values as of the close of business on the

preceding Friday. Thus, the transfers of the securities were completed

on Friday prior to the opening of business on Monday, the next business

day. As of that day, a Bank Plan or a Client Plan whose assets were

transferred from a CIF would hold shares in the corresponding Fund. The

value of the Plan's assets in the Fund would be at the same aggregate

value as the units held in the CIF as of the close of trading on the

preceding Friday. The value of a CIF's portfolio was determined by FFS

in coordination with the Bank. In this regard, it is represented that

the current market price for specific types of CIF securities involved

in the in-kind transfers was determined as follows:

\4\In pertinent part, Rule 17a-7 mandates that such transactions

be effected at the ``independent current market price'' for such

security, involve no brokerage commissions or other remuneration,

and comply with valuation procedures adopted by the board of

directors of the investment company to ensure that all requirements

of the Rule are satisfied.

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

defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934

(the '34 Act), the last sale price with respect to such security

reported in the consolidated transaction reporting system (the

Consolidated System); or if there were 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; or

b. If the security was not a reported security, and the

principal market for such security was an exchange, then the last

sale on such exchange; or if there were no reported transactions 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; or

c. If the security was not a reported security and was 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; or

d. For all other securities (i.e., securities not listed on an

exchange and for which no bid and ask quotations are readily

available), valuation determined by (1) averaging prices obtained

from at least three independent matrix pricing services\5\ or (2)

averaging bid and ask quotations as of the close of trading on the

Friday preceding the in-kind transfers from three independent

brokers.

\5\According to the applicant, the SEC has permitted securities

not listed on an exchange and for which no bid and ask quotations

are readily available to be valued by a matrix pricing methodology.

The applicant explains that matrix pricing methodology is intended

to approximate what the actual market values of securities would be

if an active secondary market for those securities exists and takes

into account a variety of factors such as the most recent market

activity with respect to a subject security, liquidity, yield,

rating, type of industry, coupon rate, maturity and economic

conditions. If a matrix pricing service is used, the applicant

explains that the pricing entity will not be affiliated with the

Bank or the Funds.

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In essence, the Bank represents that the transfer transactions were

ministerial, performed in accordance with procedures prescribed by Rule

17a-7 and previously approved by the disinterested members of the

Fund's Board of Trustees. The Bank also represents that the pricing of

the securities was accomplished by reference to independent sources

such that the transaction would result in an affected Bank Plan or

Client Plan holding mutual fund shares of equal aggregate value to the

previously-held CIF units. No sales commissions or redemption fees were

or would be paid by a Bank Plan or a Client Plan in connection with

investments of shares in the Funds. In addition, no fees for

distribution expenses pursuant to Rule 12b-1 under the '40 Act were or

would be paid to FFS or the Bank by a Bank Plan or a Client Plan with

respect to transactions involving the Funds. Any fees charged by the

independent brokers for bid and ask prices were the responsibility of

the Bank. Further, the Bank represents that neither it nor its

affiliates, including any officer or director of the Bank, had

purchased or would purchase from or sell to any Bank Plan or Client

Plan shares of any of the Funds.\6\

\6\The Department notes that this representation is not intended

to limit the ability of Client Plans to deal with the Bank's account

representatives on matters involving the funds and is not meant to

prohibit purchases or sales of shares of the Funds that are placed

through personnel of the Bank when such personnel are acting as

agents for the Client Plans.

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4. As stated above, prior to investing a Plan's assets in the

Funds, the Bank was required to obtain the affirmative written approval

of an independent Second Fiduciary who is typically, in the case of a

Client Plan, the named fiduciary, trustee or sponsoring employer. In

the case of a Bank Plan, the Bank retained the services of WTC to

approve the in-kind transfer of assets of such Plan to the Funds.

The Bank provided advance written notice of the in-kind transfer of

assets of the CIFs and full written disclosure of information

concerning the Funds to the Second Fiduciary of a Bank or Client Plan.

In this regard, the Bank provided the Second Fiduciary with a current

prospectus for each portfolio of the Funds in which a Bank or Client

Plan is investing. The disclosure statement described the fees for

investment advisory or similar services to be credited back to the

Client Plan, including any fees for Secondary Services and all other

fees to be charged to or paid by a Bank Plan, a Client Plan or by the

Funds to the Bank. Such disclosure included the nature and extent of

any differential between the rates of fees. The disclosure statement

also explained why the Bank believed that the investment in the Funds

by a Bank Plan or a Client Plan was appropriate. As applicable, the

disclosure statement further described any limitations on the Bank

regarding which Plan assets may be invested in shares of the Funds and,

if so, the nature of such limitations.\7\ Upon request of the Second

Fiduciary, the Bank is required to provide a copy of the proposed

exemption and/or a copy of the final exemption, if granted.

\7\Section II(d) of PTE 77-4 requires, among other things, that

an independent plan fiduciary receive a current prospectus issued by

the investment company and a full and detailed written disclosure of

the investment advisory and other fees charged to or paid by the

plan and the investment company, including a discussion of whether

there are any limitations on the fiduciary/investment adviser with

respect to which plan assets may be invested in shares of the

investment company and, if so, the nature of such limitations.

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On the basis of information noted above, the Second Fiduciary could

authorize, in writing, that the Bank transfer a Bank Plan's or a Client

Plan's CIF assets to a Fund in exchange for shares of the Funds and

invest the Plan's assets in corresponding portfolios of the Funds. For

Client Plans, the written authorization also allowed the Bank to

receive fees from the Funds and to purchase additional shares of the

Funds with the fees credited back to the Client Plan by the Bank.

5. The Bank anticipated that the transfer of assets from the CIFs

to the Funds would be accomplished in stages as sufficient numbers of

approvals were received from Second Fiduciaries.\8\ If

[[Page 13463]] the Second Fiduciary had not provided the Bank with

approval of investment in the Funds by the time the last transfer of

assets from a terminating CIF to a Fund was to occur, a pro rata

portion of the assets of the terminating CIF was distributed in cash to

the trust account of a Bank Plan or a Client Plan before the final

liquidation of the CIF took place.

\8\According to the applicant, the conversion of the CIFs into

the Funds could be accomplished in stages for reasons of efficiency

and economy. Given the large number of Plans that had interests in

the CIFs, the applicant anticipated that it would take an extended

period of time to gather all of the necessary consents from Second

Fiduciaries. If consent was given promptly, the applicant saw no

reason to delay a Plan's investing in the Funds since a Second

Fiduciary would desire the timely investment of the Plan's assets.

Further, the applicant did not believe a staggered conversion

would operate to the detriment of a Plan. This was because all asset

transfers would be effected at fair market value and proratably

among the Plans. Therefore, Plans would have the same asset value

immediately before and after the conversion.

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6. Following each in-kind transfer, the Bank provided each affected

Plan with a written confirmation statement. This statement set forth

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

conversion, the related per unit value and the total dollar amount of

the CIF units. The confirmation statement also included the number of

shares in the Funds that were held by the Bank Plan or the Client Plan

following the conversion, the related per share net asset value and the

total dollar amount of the shares. The confirmation statement further

disclosed (a) the identity of each security that was valued for

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

For all subsequent transfers of CIF assets to a Fund following the

publication of the proposed exemption in the Federal Register, the Bank

will send by regular mail to each affected Bank Plan and Client Plan a

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

the transaction, containing the following information: (a) The identity

of each security that was valued for purposes of the transaction in

accordance with Rule 17a-7(b)(4) of the '40 Act; (b) the price of each

such security involved in the transaction; and (c) the identity of each

pricing service or market maker consulted in determining the value of

such securities. In addition, for all subsequent transfers of CIF

assets to a Fund following the publication of the proposed exemption in

the Federal Register, the Bank will send by regular mail, no later than

90 days after completion of each transfer, a written confirmation that

contains the following information: (a) The number of CIF units held by

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

and the total dollar amount of such CIF units; and (b) the number of

shares in the Funds that are held by the Plan following the conversion,

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

such shares.

Representations of the Second Fiduciary for the Bank Plans Regarding

the In-Kind Transfers

7. As stated above, the Bank retained WTC as the Second Fiduciary

to oversee the in-kind transfers of CIF assets to the Funds as such

transactions affect the Bank Plans. In such capacity, WTC represented

that it understood and would accept the duties, responsibilities and

liabilities in acting as a fiduciary for the Bank Plans, including

those imposed on fiduciaries under the Act.

WTC stated that it considered the effect of the in-kind transfer

transactions on the Bank Plans and noted that this investment

opportunity was being offered to Client Plans on the same terms and

conditions as the Bank Plans. Based on the foregoing, WTC believed that

the terms of the in-kind transfers were fair to participants of the

Bank Plans and comparable to and no less favorable than the terms that

would have been reached among unrelated third parties. Accordingly, WTC

represented that the in-kind transfer transactions were in the best

interest of the Bank Plans and their participants and beneficiaries for

the following reasons: (a) The impact of the in-kind transfers on the

Bank Plans was de minimus because the Funds substantially replicate the

CIFs in terms of the investment policies and objectives; (b) the Funds

would probably continue to experience relative performance similar in

nature to the CIFs given the continuity of investment objectives and

policies, management oversight and portfolio management personnel; (c)

the in-kind transfers would not adversely affect the cash flows,

liquidity or investment diversification of the Bank Plans; and (d) the

benefits to be derived by the Bank Plans and their participants by

investing in the Funds (e.g., broader distribution permitted of the

Funds to different types of plans impacting positively on asset size of

the Funds and resulting in cost savings to shareholders) would more

than offset the impact of minimum additional expenses that may be borne

by the Bank Plans.

In opining on the appropriateness of the in-kind transfers, WTC

represented that it conducted an overall review of the Bank Plans,

including the Bank Plan documents. WTC stated that it also examined the

total investment portfolios of the Bank Plans to ascertain whether or

not the Bank Plans were in compliance with their investment objectives

and policies. Further, WTC stated that it examined the liquidity

requirements of the Bank Plans and reviewed the concentration of the

Bank Plans' assets invested in the CIFs as well as the portion of the

CIFs comprised of the assets of the Bank Plans. Finally, WTC stated

that it reviewed the diversification provided by the investment

portfolios of the Bank Plans. Based on its review and analysis of the

foregoing, WTC represented that the in-kind transfer transactions would

not adversely affect the total investment portfolios of the Bank Plans,

compliance by such Plans with their stated investment objectives and

policies, or the cash flows, liquidity or diversification requirements

of the Bank Plans.

As Second Fiduciary, WTC represented that it was provided by the

Bank with the confirmation statements described in Representation 6. In

addition, WTC stated that it supplemented its findings following review

of the post-transfer account information to confirm whether or not the

in-kind transfer transaction had resulted in the Bank Plans' receipt of

shares in the Funds equal in value to the Plans' pro rata share of

assets of the CIFs on the conversion date. WTC further represented that

it would take such action as it deemed necessary to safeguard the

interests of the Bank Plans in the event the confirmation statements

did not confirm the foregoing.

Other Opportunities Available for a Client Plan to Invest in the Funds

8. Besides the one-time, in-kind transfer of assets from the CIFs

to a comparable Fund, a Client Plan's assets may be invested in the

Funds in three other ways. First, a Client Plan may purchase shares in

the Funds directly through the Bank. Second, the Bank may transfer a

Client Plan's assets from one Fund to another Fund. Third, the Bank may

effect a daily automated sweep of uninvested cash of a Client Plan into

one or more Funds designated by the Bank.9 However, all

investments [[Page 13464]] for Client Plans in the Funds must be made

pursuant to the Second Fiduciary's written authorization.

\9\The Bank represents that shares of the Funds may also be

purchased through CIFs that are not being terminated particularly if

the relevant CIF seeks to invest in cash equivalents such as those

being held in money market funds. The Bank explains that CIFs that

are not being terminated may invest in shares of mutual funds with

similar objectives or in money market funds. The Bank further

explains that the authorizations of Second Fiduciaries will be

contained in adoption agreements for these CIFs and purchases of

shares of the Funds for the CIFs will be effected in accordance with

PTE 77-4. The Department, however, offers no opinion on whether PTE

77-4 would apply to investments in the Funds by the non-terminating

CIFs.

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With respect to sweep services, where the Bank has investment

discretion over a Client Plan, it will not charge separately for the

provision of sweep services for uninvested cash balances. Instead, the

Bank will charge a single, Plan-level fee, which covers both the sweep

service and the management of assets in the sweep vehicle (generally, a

short-term investment fund). Such single fee is determined as a

percentage of the assets so invested. If the Bank does not have

investment discretion with respect to a Client Plan's assets invested

in the Funds, it may charge a separate fee for sweep services.10

\10\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.

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Receipt of Fees by Bank

9. To avoid charging its existing Client Plans any additional Fund-

level fees in connection with investment in the Funds and to

accommodate the specific needs of certain new Client Plans, the Bank is

implementing a fee structure under which, depending on each Client

Plan's provisions and the fee arrangements negotiated with the Second

Fiduciary, the Plan will not be required to bear any part of the

investment advisory fees charged to the Funds by the Bank.11 This

fee structure is an alternative to the crediting mechanisms provided

under PTE 77-4, which is also available if (a) negotiated by the Second

Fiduciary (provided the conditions contained in PTE 77-4 are met) or

(b) investments in the Total Return Bond Fund and Contrarian Stock Fund

are involved.12

\11\The fact that certain transactions and fee arrangements are

the subject of an administrative exemption does not relieve the

fiduciaries of the Client Plans from the general fiduciary

responsibility provisions of section 404 of the Act. Thus, the

Department cautions the fiduciaries of Client Plans investing in the

Funds that they have an ongoing duty under section 404 of the Act to

monitor the services provided to the Client Plans to assure that the

fees paid by the Client 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.

\12\PTE 77-4 conditions exemptive relief on a plan not paying an

investment management, investment advisory or similar fee with

respect to the plan assets invested in such shares for the entire

period of such investment. Section II(c) of PTE 77-4 states that

this condition does not preclude the payment of investment advisory

fees by the investment company under the terms of an investment

advisory agreement adopted in accordance with section 15 of the '40

Act. Section II(c) states further that this condition does not

preclude the payment of an investment advisory fee by the plan based

on total plan assets from which a credit has been subtracted

representing the plan's pro rata share of investment advisory fees

paid by the investment company.

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For providing custody and shareholder services to the Funds, the

Bank is retaining fees for Secondary Services.13 With respect to

fees for Secondary Services, the Funds are paying the Bank monthly

transfer agency fees ranging from .10 percent to .30 percent of the

daily net asset value of the Funds.14 In some instances, fees for

Secondary Services may be determined on a per item or a per account

basis subject to a cap based on the Funds' daily net asset value.

\13\As stated above, the term ``Secondary Service'' does not

include brokerage services. In this regard, the applicant

anticipates that neither it nor its affiliates will provide

brokerage services to the Funds.

\14\The Bank represents that it will continue its practice of

waiving secondary fees for the Contrarian Stock Fund and the Total

Return Bond Fund. As mentioned previously, the Bank states that PTE

77-4 will apply to transactions involving these Funds.

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10. Under the fee structure, the Bank is charging its previously

agreed upon Plan-level fees to each Client Plan for services rendered

to such Plans as a trustee, directed trustee, investment manager or

custodian.\15\ All such fees are billed on a quarterly basis and may be

paid by the Client Plan sponsor rather than the Client Plan.

\15\The applicant represents that all fees paid by the Client

Plans directly to the Bank for services performed by the Bank are

exempt from the prohibited transaction provisions of the Act by

reason of section 408(b)(2) of the Act. The Department notes that to

the extent there are prohibited transactions under the Act as a

result of any services provided by the Bank directly to the Client

Plans which are not covered by section 408(b)(2) and the regulations

thereunder, no relief is being proposed herein for such

transactions.

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The Bank is entitled to receive Fund-level investment advisory fees

at a different rate for each Fund that is based on the average net

assets for the respective Fund. The investment advisory fees range from

.10 percent to .85 percent for the Advantage Funds. With respect to the

Ready Cash Investment Fund, the investment advisory fees are tiered.

For example, Client Plans investing in the Ready Cash Investment Fund

will pay the Bank .40 percent for the first $300 million of average

daily net assets of the Fund, .36 percent of the next $400 million and

.32 percent for any additional average daily net assets. (At present,

the Bank has agreed to waive any fees in excess of .30 percent of

average daily net assets until further notice.)

The investment advisory agreements and any changes in the fees will

be approved by a majority of the independent members of the Trust's

Board of Trustees. The investment advisory fees paid by each of the

Funds will be accrued on a daily basis and billed by the Bank to the

Funds at the beginning of the month following the month in which the

fees have accrued.

11. For most Client Plans,16 at the beginning of each month

and on the same business day as the receipt of such fees by the Bank,

the Bank will credit to each Plan such Plan's pro rata share of all

investment advisory fees charged by the Bank to the Funds17

(including investment advisory fees paid by the Bank to third party

subadvisers18) pursuant to a credit procedure (the Credit Method).

The Bank represents that the credited fees will be paid to the Client

Plan in cash, except that the credit may be effectuated through the

purchase of additional shares of the Funds if the Client Plan makes an

election. The purchase of additional shares will occur in lieu of the

cash credit on the same day that such credit would have been paid to

the Client [[Page 13465]] Plan. Again, all decisions regarding the use

of the Credit Method will be made by the Second Fiduciary at the time

such fiduciary provides its original written approval of the investment

of a Plan's assets in the Funds.

16As stated in Representation 9, a Second Fiduciary of a

Client Plan who is not interested in using the rebate mechanism

discussed in this proposed exemption will invest in the Funds

pursuant to PTE 77-4.

17As stated above, investments in the Total Return Bond

Fund and the Contrarian Stock Fund will be made in conformance with

PTE 77-4 and not in accordance with the rebate mechanism described

herein.

18The Bank notes that if the fee it credits to a Client

Plan already includes a third party sub-adviser's fee, no additional

credits will be required with respect to the portion of such fee

actually paid by the Bank to the sub-adviser.

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12. The Bank notes that Section II(c) of PTE 77-4 (id. at 18733)

prohibits the payment of double fees to the fiduciary/investment

adviser, by requiring that the plan not pay the investment adviser a

plan-level investment management or advisory-type fee with respect to

plan assets that are invested in mutual fund shares. The Bank also

explains that the condition against duplicate fees can be complied with

either by excluding the affected plan assets in determining the plan-

level investment management/advisory fee (the Offset Method) or by

subtracting a credit representing the plan's pro rata share of the

mutual fund- level advisory fee from the plan-level fee (the

Subtraction Method).

The Bank represents that the Credit Method satisfies the objective

of the double fee prohibition by netting out any additional fees

generated for the Bank by investment in the Funds. However, instead of

reducing the fees charged at the Plan-level, as is done by the Offset

and Subtraction Methods, the Bank states that the Credit Method

assesses full fees at both levels and then credits back the Fund-level

fees (with the exception of fees for Secondary Services) directly to

the Client Plan. Thus, on an ongoing basis, the Bank indicates that

Client Plans would pay only the fees previously agreed upon between the

Bank and the Second Fiduciary for investment management services

without regard to the conversions.

The Bank explains that the Subtraction Method would accomplish

essentially the same economic result as the Credit Method. However,

under the Subtraction Method, the Bank notes that its fees from the

Funds would be deducted from the amounts billed to the Client Plan by

the Bank for services, rather than being credited directly to the

Client Plan. The Bank states that the Credit Method will restore a

Client Plan's investment in the Funds (or overall investment position

if it receives the credit in cash) to the level it would have been if

the Client Plan had not been charged the Bank's Fund-level fees. The

Bank represents that the Credit Method will allow the Bank to maintain

its fiduciary fee schedules for its services to Client Plans which is

more efficient and less costly than a system employing credits against

fiduciary fees. Finally, the Bank explains that use of the Credit

Method will permit the Client Plans to retain their fiduciary fee

structures despite the change to a new investment vehicle.

Authorization Requirements for Client Plans

13. As stated in Representation 4, the transfer of a Bank Plan's or

a Client Plan's assets in exchange for shares of the Funds must be

preceded by the prior written authorization of the Second Fiduciary.

The Second Fiduciary must also approve the fees to be paid by the Funds

to the Bank and, in the case of a Client Plan, the purchase of

additional shares of such Funds by the Client Plan with fees credited

to the Client Plan by the Bank. In the case of the Bank Plans, the Bank

has represented that it intends to use PTE 77-3 with respect to the

purchase or sale of shares of the Funds by the Bank Plans and for the

receipt of compensation by the Bank.19 Accordingly, the following

authorization requirements would apply to Client Plans only.

19The Department is not expressing an opinion herein on

the applicability of PTE 77-3 with respect to ongoing investments by

the Bank Plans in shares of the Funds or to the receipt of fees from

the Funds by the Bank.

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For a Client Plan, the authorization is terminable at will by the

Second Fiduciary without penalty to the Client Plan upon receipt by the

Bank of written notice of termination. A Termination Form expressly

providing an election to terminate the authorization with instructions

on the use of the form will be supplied to the Second Fiduciary. In

general, the Termination Form will be furnished by the Bank to the

Second Fiduciary at least once every twelve months or whenever there

are increases in the contractual rates of fees due from the Funds to

the Bank, for Secondary Services. (See Representation 14.) Termination

will be effected by the Bank selling the shares of the Funds held by

the affected Client Plan within the period of time specified by the

Client Plan but not more than one business day following receipt by the

Bank from 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 sale cannot be executed within one

business day, the Bank will have one additional business day to

complete such sale.

The Termination Form will instruct the Second Fiduciary of a Client

Plan that the authorization is terminable at will by the Plan, without

penalty to the Plan, upon receipt by the Bank of written notice from

the Second Fiduciary, and that failure to return the form will result

in the continued authorization of the Bank to engage in the subject

transactions on behalf of the Client Plan.

14. In the event of an increase in the contractual rate of any fees

paid by the Funds to the Bank regarding investment advisory services or

fees for similar services that had been authorized by the Second

Fiduciary, the Bank will provide written notice to the Second Fiduciary

in a prospectus for the Funds or otherwise, of any increases in the

rate of such fees even though these fees will be rebated by the Bank to

the Client Plans. Although the notice will explain the nature and

amount of the fee increase of the affected Fund or Funds, it will not

be accompanied by the Termination Form. This is because all increases

in investment advisory or similar fees will be subject to the annual

reauthorizations described in Representation 16.

15. In the event of an addition of a Secondary Service provided by

the Bank to the Funds for which a fee is charged or an increase in the

contractual rate of any fee due from the Funds to the Bank for any

Secondary Service that results 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 Client Plan, the

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

of the implementation of such increase, written notice explaining the

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

or fee increased for the affected Fund.20 Under these

circumstances, the notices will be accompanied by the Termination Form

with instructions on the use of such form. The instructions will

expressly provide an election to the Second Fiduciary to terminate at

will any prior authorizations without penalty to the Client Plan and

stipulate that failure to return the form will result in the

continuation of all authorizations [[Page 13466]] previously given to

the Second Fiduciary. Termination of the authorization by a Client Plan

to invest in the Funds will be effected by the Bank selling the shares

of the Funds held by the affected Client Plan within the period of time

specified by the Client Plan, but not later than one business day

following receipt by the Bank of the Termination Form or any other

written notice of termination. If, due to circumstances beyond the

control of the Bank the sale cannot be executed within one business

day, the Bank will have one additional day to complete such sale.

20An 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 Client 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.

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

16. The Second Fiduciary will be supplied with a Termination Form

at least once each year beginning with the calendar year that begins

after the date of the notice granting 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

the services rendered to the Funds. However, if the Termination Form

has been provided to the Second Fiduciary in the event of an addition

of a Secondary Service for which a fee is charged or an increase in any

fees for Secondary Services paid by the Funds 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 an addition of a Secondary

Service for which a fee is charged or any increase in any fees for

Secondary Services.

Audit Requirements

17. The Bank is responsible for establishing and maintaining a

system of internal accounting controls for the crediting of the fees.

In this regard, the Bank has retained the services of KPMG Peat

Marwick, an independent accounting firm, to audit annually the

crediting of fees to Client Plans under this program. Such audits will

provide independent verification of the proper crediting to the Client

Plans. Information regarding fees may be used in the preparation of

required financial disclosure reports of the Funds for the benefit of

the Client Plans.

By letter dated November 11, 1993, the Auditor has described the

procedures that will be utilized in the annual audit of the Credit

Method program. Specifically, in performing its audit, the Auditor

will: (a) Review and test compliance with the specific operational

controls and procedures established by the Bank for making credits; (b)

verify, on a test basis, the daily credit factors transmitted to the

Bank (or its affiliates) by the Funds; (c) verify, on a test basis, the

proper assignment of credit identification fields to the Client Plans;

(d) verify, on a test basis, the credits paid in total to the sum of

all credits paid to each Client Plan; (e) recompute, on a test basis,

the amount of the credit determined for selected Client Plans and

verify that the proper credit was made to the proper Client Plan. The

Bank and FFS will be the sources of the factual information upon which

the Auditor will rely.

In the event that either the internal audit by the Bank or the

independent audit by the Auditor identifies an error made in the

crediting of fees to the Client Plans, the Bank will correct the error.

With respect to any shortfall in credited fees to a Client Plan

involving cash credits, the Bank will make a cash payment to the Client

Plan equal to the amount of the error plus interest paid at money

market rates offered by the Bank for the period involved. With respect

to any shortfall in credited fees involving a Client Plan where the

Second Fiduciary's prior election was to have credited fees invested in

shares of a particular Fund, the Bank will make a cash payment to the

Client Plan equal to the amount of the error plus interest based on the

greater of either (a) the money market rate offered by the Bank for the

period involved or (b) the total rate of return for shares of the

Funds, including dividends, that would have been acquired during such

period. Any excess credits made to a Client Plan will be corrected by

an appropriate deduction and reallocation of cash during the next

payment period to reflect accurately the amount of total credits due to

the Plan for the period involved.

Ongoing Disclosures to Client Plans

18. On an annual basis, the Bank will provide the Second Fiduciary

of a Client Plan with a copy of the current prospectus for the Funds

and upon such fiduciary's request, a copy of the Statement of

Additional Information which contains a description of all fees paid by

the funds to the Bank. In addition, the Bank will provide the Second

Fiduciary with a copy of a financial disclosure report prepared by the

Bank which contains information about the portfolios of the Funds and

includes the Auditor's findings within 60 days of the preparation of

the report. Further, the Bank will respond to oral or written responses

to inquiries of the Second Fiduciary as they may arise.

19. In summary, the Bank represents that the transactions described

herein will satisfy the statutory criteria for an exemption under

section 408(a) of the Act because:

(a) The Funds will provide the Bank Plans and Client Plans with a

more effective investment vehicle than the CIFs maintained by the Bank

without any increase in investment advisory or similar fees paid to the

Bank.

(b) With respect to the transfer of a Bank Plan's or a Client

Plan's CIF assets into a Fund in exchange for Fund shares, a Second

Fiduciary has or will authorize in writing, such transfer prior to the

transaction only after full written disclosure of information

concerning the Fund.

(c) Each Bank Plan or Client Plan has or will receive shares of the

Funds in connection with the transfer of assets of a terminating CIF

which have a total net asset value that is equal to the value of such

Plan's pro rata share of the CIF assets on the date of the transfer as

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

the close of the business day, using independent sources in accordance

with procedures established by the Funds which comply with Rule 17a-7

of the '40 Act, as amended, and the procedures established by the Funds

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

(d) For all subsequent transfers of CIF assets to a Fund following

the publication of the proposed exemption in the Federal Register, the

Bank will send by regular mail to each affected Bank Plan and Client

Plan a written confirmation, not later than 30 days after the

completion of the transaction, containing the following information:

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

transaction in accordance with Rule 17a-7(b)(4) of the '40 Act; (2) the

price of each such security involved in the transaction; and (3) the

identity of each pricing service or market maker consulted in

determining the value of such securities.

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

the publication of the proposed exemption in the Federal Register, the

Bank will sends by regular mail, no later than 90 days after completion

of each transfer, a written confirmation that contains the following

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

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

amount of such CIF units; and (2) the number of shares in the Funds

that are held by the Plan following the conversion, the related per

share net asset value and the total dollar amount of such shares.

[[Page 13467]]

(f) The price that has been or will be paid or received by a Bank

Plan or a Client Plan for shares of the Funds is the net asset value

per share at the time of the transaction and is the same price for the

shares which was or would have been paid or received by any other

investor at that time.

(g) No sales commissions or redemption fees have or will be paid by

a Bank Plan or a Client Plan in connection with the purchase of shares

of the Funds.

(h) The Bank has not and will not receive any 12b-1 fees in

connection with the transactions.

(i) Any authorizations made by a Client Plan regarding investments

in a Funds and fees paid to the Bank (including increases in the

contractual rates of fees for Secondary Services that are retained by

the Bank) will be terminable at will by the Client Plan, without

penalty to the Client Plan and will be effected within one business day

following receipt by the Bank, from the Second Fiduciary, of the

Termination Form or any other written notice of termination, unless

circumstances beyond the control of the Bank delay execution for no

more than one additional business day.

(j) The Second Fiduciary has received or will receive written

notice accompanied by the Termination Form with instructions on the use

of the form at least 30 days in advance of the implementation of any

increase in the rate of any fees for Secondary Services that the Bank

provides to the Funds.

(k) All dealings by or between the Client Plans, the Funds and the

Bank will be on a basis which is at least as favorable to the Client

Plans as such dealings are with other shareholders of the Funds.

Notice to Interested Persons

Notice of the proposed exemption will be given to interested

persons who have investments in the terminating CIFs and from whom

approval is being sought for the transfer of Plan assets to the Funds.

In this regard, interested persons will include WTC, the Second

Fiduciary of the Bank Plans; active participants in the Bank Plans; and

Second Fiduciaries of the Client Plans. Notice will be provided to each

Second Fiduciary by first class mail and to active particpants in the

Bank Plans by posting at major job sites. Such notice will be given to

interested persons within 14 days following the publication of the

notice of pendency in the Federal Register. The notice will include a

copy of the notice of proposed exemption as published in the Federal

Register and give interested persons the right to comment on and/or to

request a hearing with respect to the proposed exemption. Comments and

requests for a public hearing are due within 44 days of the publication

of the notice of proposed exemption in the Federal Register.

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

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

General Motors Hourly-Rate Employees Pension Plan; General Motors

Retirement Program for Salaried Employees; Saturn Individual Retirement

Plan for Represented Team Members; and Saturn Personal Choices

Retirement Plan for Non-Represented Team Members (Collectively, the

Plans) Located in New York, New York

[Application Nos. D-09694 thru D-09697]

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 in accordance with the procedures set forth in 29 CFR Part 2570,

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

the restrictions of section 406(b)(2) of the Act shall not apply to the

stock index ``exchange of futures for physicals'' (EFP) transaction

between the General Motors Retirement Program for Salaried Employees

(the Salaried Plan) and the General Motors Hourly-Rate Employees

Pension Plan, Saturn Individual Retirement Plan for Represented Team

Members, and Saturn Personal Choices Retirement Plan for Non-

Represented Team Members (together, the Hourly Plan) which occurred on

November 30, 1993 in the amount of approximately $730 million, provided

the following conditions were met:

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

the Plans as the terms which would have been available in an arm's-

length EFP transaction involving unrelated parties;

(b) Each Plan received a price in the EFP transaction which was

equal to the midpoint between the highest independent bid and lowest

independent offer for buying and selling the futures involved on

November 30, 1993, based on EFP quotations obtained from at least six

independent broker-dealers capable of engaging in such an EFP at the

time of the transaction;

(c) Wells Fargo Institutional Trust Company, N.A. (WFITC), as an

independent fiduciary for the Salaried Plan, determined that the EFP

transaction was prudent and in the best interests of the Salaried Plan

and its participants and beneficiaries at the time of the transaction;

(d) WFITC monitored the EFP transaction on behalf of the Salaried

Plan and took whatever action was necessary to safeguard the interests

of the Salaried Plan at the time of the transaction;

(e) General Motors Investment Management Corporation (GMIMCo), as

the fiduciary for the Hourly Plan, determined that the EFP transaction

was prudent and in the best interests of the Hourly Plan and its

participants and beneficiaries at the time of the transaction; and

(f) GMIMCo monitored the EFP transaction on behalf of the Hourly

Plan and took whatever action was necessary to safeguard the interests

of the Hourly Plan at the time of the transaction.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption

will be effective November 30, 1993.

Summary of Facts and Representations

1. The Plans were established by General Motors Corporation (GMC)

to provide retirement benefits for eligible hourly and salaried

employees of GMC and its affiliates. The aggregate fair market value of

the assets of the Plans was approximately $40.5 billion as of September

30, 1993. The Plans covered a total of approximately 831,532 active and

retired participants or their beneficiaries as of October 1, 1993.

The assets of the Plans involved in the transaction described

herein were held by: (i) Mellon Bank, N.A., acting as directed master

trustee and custodian; (ii) Bankers Trust Company, acting as directed

master trustee and custodian; (iii) WFITC, acting as custodian for

assets its manages; and (iv) Chemical Bank, acting as custodian for

certain assets managed by other investment managers.

2. The Pension Investment Committee of GMC (the PIC) is a committee

established by the Finance Committee of the Board of Directors of GMC

(the Finance Committee). The Finance Committee is the ``named

fiduciary'' for the Plans. Certain fiduciary responsibilities have been

delegated by the Finance Committee to the PIC, including the

responsibility for allocating funds among asset classes within broad

investment guidelines, recommending changes in broad investment

guidelines to the Finance Committee, and monitoring the investment

performance of the assets of the Plans. The PIC is comprised of

officers of GMC and its affiliates.

The PIC carries out its in-house investment oversight

responsibility through GMIMCo, a separately-

[[Page 13468]] incorporated, wholly-owned subsidiary of GMC. Certain

members of the PIC serve on the Board of Directors of GMIMCo. All

GMIMCo activities are subject to the general direction of the PIC.

The Finance Committee, as the ``named fiduciary'' for the Plans,

reviews the actions of the PIC to evaluate performance and to assure

that the Finance Committee's delegation of authority continues to be

prudent.

3. On November 30, 1993, the Plans entered into an EFP with each

other in the amount of approximately $730 million. An EFP is an

integrated transaction where one party buys the underlying (or

``physical'') commodity/security and simultaneously sells a related

futures contract while the other party sells the underlying commodity/

security and simultaneously buys a futures contract.21 However,

unlike an exchange-traded futures contract, an EFP is privately

negotiated and is not required to be competitively executed in an

exchange trading pit.22 The parties to an EFP typically negotiate

a private contract outside the trading pit covering the terms of the

exchange of the underlying commodity/security and the futures position.

The price, quantity and characteristics of the underlying commodity/

security that is bought or sold will affect the final price and

quantity of the futures position exchanged.

\21\A futures contract is an agreement in which one party agrees

to sell and another party agrees to buy a specific quantity of a

commodity at a future date. Upon entering into a futures contract,

the parties establish the price for the future sale or purchase. The

Commodity Futures Trading Commission (CFTC) is the federal agency

responsible for regulating futures trading in all tangible and

intangible ``commodities'' including securities. Unless exempted by

the CFTC, all futures contracts must be traded on CFTC-designated

exchanges called contract markets.

\22\See Section 4c(a) of the Commodity Exchange Act and CFTC

Rule 1.38 (17 CFR 1.38(a)) which require that all futures

transactions be executed openly and competitively except for

transactions which are executed noncompetitively in accordance with

written rules of the exchange which have been submitted to and

approved by the CFTC, specifically providing for the noncompetitive

execution of such transactions. The applicant states that this

exception applies to EFPs and that all futures exchanges have CFTC-

approved rules permitting EFPs to be consummated.

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In a typical stock-index EFP, a customer (such as an employee

benefit plan) will sell a portfolio of common stocks which generally

replicates the Standard & Poors 500 Composite Stock Price Index (the

S&P 500 Index). In exchange for the stocks, the customer will receive

cash in an amount equal to the current value of the stock portfolio and

a corresponding long S&P 500 futures position.23 To effect the

transaction, the customer will contact its various broker-dealer/

futures commission merchants (``broker-dealers''), and will offer the

stocks in return for (1) a cash payment equal to the market price of

the stocks at the close of the New York equities market (e.g. the New

York Stock Exchange or American Stock Exchange) on that date and (2) a

corresponding long S&P 500 futures position established through that

broker-dealer and priced at a ``basis'' between the index and the

futures such that the cash plus futures is roughly equivalent in both

value and market exposure to the stocks.24

\23\The futures contract ``bought'' by the customer represents a

commitment to pay the cash value of the portfolio of S&P 500

securities at a specified time in the future.

\24\The applicant states that the market price of an S&P 500

futures contract will normally exceed the market price of the

underlying portfolio of stocks comprising the index (the ``cash

price'') by a certain amount (i.e. the ``basis'') primarily due to

the ``cost of carry.'' The ``cost of carry'' relates to the

difference between the U.S. Treasury Bill rate and the dividend

yield on the stock portfolio. In addition, the ``basis'' reflects

the deliverable supply of the underlying stocks and the expectations

of market participants.

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

However, the applicant states that two customers may negotiate such

an EFP transaction between themselves and use the broker-dealer merely

to facilitate the trade's execution by reporting and documenting the

stock and futures trades, as required by exchange rules.

4. On November 30, 1993, the Hourly Plan sold approximately $730

million of stock and simultaneously purchased approximately $730

million of S&P 500 futures contracts in an EFP transaction with the

Salaried Plan.25 Thus, the Salaried Plan purchased approximately

$730 million of stocks and sold approximately $730 million of S&P 500

futures in the transaction. WFITC acted as an independent fiduciary for

the Salaried Plan in the EFP transaction (as discussed further below).

\25\The applicant represents that GMIMCo consulted with the

Chicago Mercantile Exchange (CME) and the CFTC, both of which

advised that an EFP between the Plans would be consistent with their

applicable rules.

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The Hourly Plan

5. With respect to the Hourly Plan, the applicant states that in

November 1993 the Plan needed to raise cash for upcoming benefit

payments to the participants and beneficiaries. In addition, the PIC

had modified the Hourly Plan's asset allocation strategy by increasing

the allocation for investments in asset classes other than the Canadian

and U.S. large capitalization equity securities.

GMIMCo was responsible for implementing the PIC's asset allocation

strategy in the most cost-effective manner. GMIMCo analyzed the Hourly

Plan's equity holdings, futures positions, overall asset mix,

allocation of assets among equity investment managers, and upcoming

liquidity needs. Based on this review, GMIMCo determined that

approximately $730 million of equity holdings, managed by twelve equity

managers, eleven of whom were external investment advisers, should be

liquidated to raise cash to meet benefit payments and to fund

investments in other asset classes to meet the PIC's asset allocation

guidelines.

GMIMCo also determined that, simultaneous with the sale of stocks,

the Hourly Plan should purchase approximately $730 million of S&P 500

futures contracts so that the designated funds would continue to be

exposed to the equity markets until the cash was either used to pay

benefits or placed with managers in other investment areas. The PIC had

previously authorized the use of futures to facilitate the Hourly

Plan's asset allocation objectives.

6. GMIMCo evaluated the following alternatives for selling stocks

and purchasing equity futures for the Hourly Plan:

(a) Direct each of the twelve investment managers to independently

liquidate securities in the open market and GMIMCo would independently

purchase futures;

(b) Direct each of the twelve investment managers to transfer

stocks to a central account and GMIMCo would sell the stocks via

portfolio trades in the open market with simultaneous futures

purchases;

(c) Engage in an EFP with a broker-dealer; or

(d) Engage in an EFP with the Salaried Plan.

7. GMIMCo states that separate open market trades through the

investment managers under alternative (a) would have involved the

greatest risks and potentially the highest costs. Under this

alternative, as each manager sold stocks, the manager would have

advised GMIMCo of its actions and GMIMCo would have then purchased

futures to maintain the overall equity exposure. Since each individual

stock could have moved in a different direction and by a different

amount relative to the broader equity index (i.e. ``tracking

error''),26 the Hourly Plan could have incurred significant costs.

Since the futures purchases would not have been simultaneous with the

stock sales, the [[Page 13469]] Hourly Plan would have also experienced

``timing mismatches'' which could have resulted in significant costs.

GMIMCo states that tracking error and timing mismatches could have

resulted in costs in excess of $4 million and concluded that there was

no incentive to undertake these risks when lower cost alternatives were

available.

\26\Tracking error is the mismatch of price movement on the

individual stock versus the index.

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In addition, under alternative (a), the market impact cost

associated with the stock transactions could have been approximately $7

million. GMIMCo calculated this cost by considering such factors as:

(i) The managers in the aggregate held over 1500 stocks, and over 600

were stocks common to more than one manager, which would have caused

the managers to compete with each other in selling the stocks; (ii) for

over 50% of the individual stocks in the portfolio, the amount of the

stock held represented more than 10% of the average daily trading

volume for such stock; (iii) for about 25% of the individual stocks in

the portfolio, the amount of the stock held exceeded 50% of the average

daily trading volume for such stock; and (iv) for over 10% of the

individual stocks in the portfolio, the amount of the stock held

represented more than one day's trading volume for such stock. The

market impact costs associated with the futures transactions, which

would have represented about 10% of the daily volume on the CME, were

estimated to be at least $1 million.

Under alternative (a), GMIMCo estimated that the commission costs

at approximately $.06/share on 21.1 million shares would have been

approximately $1.3 million. With twelve managers with over 1500 stock

names, GMIMCo estimated that the master trustee recordkeeping fees

would have been approximately $30,000.

In total, GMIMCo estimated that alternative (a) would have cost the

Hourly Plan approximately $13 million.

8. With respect to separate open market trades through GMIMCo under

alternative (b), GMIMCo states that such transactions would have

resulted in lower costs resulting from tracking error (approximately $2

million). In addition, the timing mismatches would have been eliminated

because GMIMCo could have simultaneously executed both the sale of the

stocks and the purchase of the futures. GMIMCo states that alternative

(b) would have resulted in lower market impact cost (approximately $3.5

million) since the time period for execution would have been more

effectively controlled and one manager would not be selling in

competition with another manager. However, the market impact cost for

the futures would still have been approximately $1 million.

GMIMCo states that the commission costs on equity portfolio trades

versus individual stock trades would have been lower (approximately $.5

million) under alternative (b), but master trustee fees would have been

higher at about $50,000.

In total, GMIMCo estimated that alternative (b) would have cost the

Hourly Plan approximately $7 million.

9. With respect to an EFP with a broker-dealer under alternative

(c), GMIMCo states that such a transaction would have eliminated the

timing mismatch risk and incorporated the market impact, tracking error

and commission costs into the pricing of the EFP quoted by the broker-

dealer. Therefore, on November 30, 1993, the date of the proposed EFP,

GMIMCo sought EFP bids and offers from eight broker-dealers--First

Boston, Goldman Sachs, J.P. Morgan, Lehman Bros., Merrill Lynch, Morgan

Stanley, Paine Webber, and Salomon Brothers. GMIMCo requested bid and

offer quotes from each broker-dealer on the proposed transaction.

GMIMCo provided the broker-dealers with the characteristics of the

portfolio, for example, how many stocks traded on exchanges such as the

NYSE and AMEX and on the NASDAQ. The broker-dealers were advised that

the portfolio was valued at approximately $730 million, based on the

prior day's closing value, and involved approximately 21,147,800

shares. The broker-dealers also were advised regarding the tracking

error of the portfolio versus the S&P 500 Index. The broker-dealers

were provided with the general liquidity characteristics of the

portfolio, including the fact that: (i) For over 50% of the individual

stocks in the portfolio, the amount of stock held represented more than

10% of the average daily trading volume for such stock, (ii) for about

25% of the individual stocks in the portfolio, the amount of the stock

held exceeded 50% of the average daily trading volume for such stock,

and (iii) for over 10% of the individual stocks in the portfolio, the

amount of the stock held represented more than one day's trading volume

for such stock.

Based on these characteristics, two broker-dealers declined to

participate. The remaining six broker-dealers provided the following

EFP quotations, with a bid to buy the futures and an offer to sell the

futures expressed as a discount or premium on the S&P 500 Index closing

price on the date of the transaction, as noted in the table below. In

each case, the broker-dealers agreed to buy or sell the stocks involved

at the S&P 500 Index closing price as of the date of the transaction.

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

B-D's bid to B-D's offer to

Broker-dealer (B-D) buy futures EFP quotes sell futures

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

A....................... -2.37 .............. 1.86

B....................... -2.39 .............. 3.29

C....................... -3.15 .............. 3.85

D....................... -3.95 .............. 4.55

E....................... -5.50 .............. 5.90

F....................... -5.37 .............. 6.07

Best Prices............. -2.37 .............. 1.86

Midpoint Between Best

Prices................. .............. -0.255

S&P 500 Index Close (11-

30-93)................. .............. 461.79

EFP Futures Price

(agreed to by parties

based on midpoint)..... .............. 461.535

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

Of all of the broker-dealers providing quotes, Broker-Dealer A offered

the best price for the Hourly Plan to buy futures--i.e. 1.86, the

lowest premium above the S&P 500 Index closing price.

GMIMCo determined that an EFP with the Salaried Plan under

alternative (d) would be the least costly alternative. Under this

alternative, the Hourly Plan would engage in the EFP with the Salaried

Plan at the midpoint of the best EFP bid quoted by the broker-dealers

to sell stocks and buy futures (i.e. -2.37) versus the best EFP offer

quoted by the broker-dealers to buy stocks and sell futures (i.e.

1.86). Thus, alternative (d) provided the Hourly Plan with a better

price to buy the futures because the price of the futures based on the

-0.255 midpoint (i.e. 461.79 - 0.255 = 461.535) would be more favorable

to the [[Page 13470]] Hourly Plan than the price offered by Broker-

Dealer A based on the 1.86 premium above the closing price of the index

(i.e. 461.79 + 1.86 = 463.65).

GMIMCo states that alternative (d) saved the Hourly Plan

approximately $3.4 million, which otherwise would have been paid to

Broker-Dealer A. This cost savings resulted from the fact that the

difference between 463.65 (the best price at which the Hourly Plan

could have bought futures in an EFP with Broker-Dealer A) and 461.535

(the price at which the Hourly Plan bought futures in the EFP with the

Salaried Plan) was 2.115 index points or approximately 46 basis

points.27

\27\Note: 2.115/461.79 = .00458 = .458% or 45.8 basis points,

since .01% equals one basis point. Thus, the Hourly Plan would have

paid Broker-Dealer A approximately $3.4 million ($730 million x

.0046).

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GMIMCo states that the transaction eliminated the tracking error,

timing mismatch risk and market impact costs. The Hourly Plan also

reduced costs under alternative (d) since the stock transfers were

directly between the respective investment managers via master trustee

bookkeeping entries, which reduced one layer of stock transfers and

resulted in savings of approximately $30,000.

GMIMCo determined that it was in the best interests of the Hourly

Plan and its participants and beneficiaries to sell the stocks and

purchase the futures through an EFP with the Salaried Plan.

Accordingly, on November 30, 1993, the Hourly Plan purchased from the

Salaried Plan 948 December S&P 500 futures contracts at a price of

461.50 and 2216 December S&P 500 futures contracts at a price of 461.55

or 3164 total contracts for an average price of 461.535.

The Salaried Plan

10. On November 19, 1993, GMIMCo appointed WFITC to act as an

independent fiduciary for the Salaried Plan for the proposed EFP with

the Hourly Plan. GMIMCo granted WFITC complete discretion to act on

behalf of the Salaried Plan for the proposed transaction and to take

any appropriate action necessary to safeguard the interests of the

Salaried Plan. WFITC was engaged as independent fiduciary prior to the

transaction with the understanding that it would determine whether it

was in the best interests of the Salaried Plan and its participants and

beneficiaries: (i) To purchase stocks and sell futures in the amount of

approximately $730 million; (ii) to engage in an EFP for the purchase

of stock and the sale of futures; and (iii) to engage in the EFP with

the Hourly Plan.

11. With respect to the determination for the Salaried Plan to

purchase stocks and sell futures, WFITC represents that the Salaried

Plan's holdings in equities and equity futures were approximately equal

to the PIC's designated asset allocation to the U.S. and Canadian

equity markets. The policy structure for the Salaried Plan established

by the PIC had allocated a specified percentage of the Plan's assets to

large capitalization U.S. and Canadian equity securities. This fact

coupled with the fact that the Plan held futures in an amount valued

well in excess of the value of the proposed transaction led WFITC to

conclude that the sale of long futures and their replacement by

purchasing U.S. and Canadian equity securities would be consistent with

the asset allocation policy of the PIC. In this regard, WFITC believed

that the PIC's asset allocation strategy for the Salaried Plan was

reasonable. Thus, WFITC concluded that the proposed sale of the futures

by the Salaried Plan would be appropriate for and in the best interest

of the Salaried Plan. This conclusion was based upon WFITC's view that

while financial futures are a legitimate method of achieving temporary

exposures to markets, there are differences in holding financial

futures as opposed to securities for the long term. These differences

include ``tracking error risk'' and ``basis risk.''

WFITC states that ``tracking error risk'' is defined in this

instance as the variance in performance of a given portfolio of

securities as compared to the index underlying a particular stock index

futures contract. In the case of the proposed transaction, WFITC

determined that such tracking error risk existed between the stock

index futures contracts held temporarily by the Salaried Plan and the

portfolio of cash securities that it had determined by policy to hold

for the long term. Therefore, WFITC concluded that the best interests

of the Salaried Plan would be served by replacing the stock index

futures contracts with stocks reflecting the strategies of the selected

investment managers.

WFITC states further that ``basis risk'' is defined in this

instance as the variance in value between an index and a fully

collateralized position in stock index futures contracts that is based

on the return of the same index. Such variance in value arises because,

while stock index futures are priced to equal the underlying index at

expiration, prior to expiration they are priced in an auction market

that is partially independent of the auction markets in which the

securities in the underlying index are priced. Therefore, WFITC

concluded that the interests of the Salaried Plan would be served by

eliminating the basis risk of the Salaried Plan by replacing the stock

index futures contracts with stocks in an amount up to $730 million

reflecting the strategies of the selected investment managers.

12. With respect to the determination for the Salaried Plan to

engage in an EFP, WFITC evaluated the various methods the Plan could

use in selling futures and purchasing equity securities. WFITC began

its analysis with the premise that the Salaried Plan should reduce or

eliminate transaction costs, including brokerage commissions, dealer

bid/offer spreads, market impact and opportunity costs. Based on

WFITC's experience in the futures and equity markets, WFITC believed

that EFP transactions are often the most cost effective method for

simultaneously selling index futures and buying equity securities.

WFITC states that because in an EFP both the sale of futures and the

purchase of securities is achieved in a single simultaneous transaction

with a single counterparty, all sources of transaction costs are

subsumed in a single negotiated price, reflected in the price at which

the futures in the EFP are traded.

WFITC represents that the negotiated price of an EFP can be readily

compared for cost-effectiveness against an ideal hypothetical

transaction with no transaction costs whatsoever. Such an ideal

transaction would consist of simultaneously (1) buying stocks at the

last reported sale price for each stock as of the moment of the

transaction, and (2) selling the stock index futures position such that

the futures are priced at or above a ``fair economic value'' with no

brokerage commissions, dealer bid/offer spread, market impact, or

opportunity cost.

WFITC determined the fair economic value of the futures by

calculating the difference between (1) the interest income foregone

through the expiration date of the futures by having to liquidate

positions in money-market instruments in order to provide cash required

to settle the stock purchases, and (2) the dividend income estimated to

be earned by holding stocks rather than futures contracts through the

expiration date of the futures. On November 30, 1993, the date of the

transaction, there were 20 days remaining until the expiration of the

futures contracts held by the Salaried Plan. WFITC states that the

prevailing money market interest rates at the time were 3.10%.

Therefore, the amount of interest that would have been earned for 20

days on the cash required to settle the stock purchases, expressed

[[Page 13471]] in S&P 500 Index points based on the closing price of

461.79, was equal to a premium of approximately 0.78 index

points.28 In addition, WFITC represents that the dividend income

that was expected to be earned on the stocks through the expiration

date of the futures, expressed in S&P 500 Index points based on the

closing price of 461.79, was equal to a premium of approximately 0.59

index points.29 Given these factors, WFITC calculated that the

fair economic value of the futures contracts to be equal to a premium

of 0.19 S&P 500 Index points above the quoted price of the

index.30 Thus, with the S&P 500 Index published at 461.79 at the

close of trading, the fair economic value of the futures contracts as

of November 30, 1993 was calculated by WFITC to be 461.98 (i.e. 461.79

+ 0.19 = 461.98). The applicant states that the actual closing price

for the December futures contracts on November 30, 1993 was 461.85, as

traded on the CME.

28Note: 0.78/461.79 = .00168 = .168% or approximately 16.8

basis points. The interest income expected through expiration would

have been calculated in dollars as follows: $730 million x .00168

= 1,226,400.

29Note: 0.59/461.79 = .00127 = .127% or approximately 12.7

basis points. The dividend income expected through expiration would

have been calculated in dollars as follows: $730 million x .00127

= $927,100.

30Note: 0.19/461.79 = .00041 = .041% or approximately 4.1

basis points. The fair economic value of the futures contracts would

have been calculated in dollars as follows: $730 million x .00041

= $299,300.

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WFITC also represents that the negotiated price of an EFP can be

readily compared for cost-effectiveness against the estimated

transaction costs of selling the futures in the open futures market and

purchasing stock in the open stock market. For purposes of this

analysis, WFITC assumed that the transaction would be approximately

$730 million of stocks reflecting the then current value of the

securities held by the selected investment managers. WFITC estimated

commissions by assuming a rate of $.01 per share. At this rate, the

Salaried Plan would have paid brokerage commissions for purchasing

listed securities of approximately $186,286 or 2 basis points

(expressed as a percentage of the total value of the stocks).31

WFITC estimated the dealer bid/offer spread by measuring the difference

between the last reported sale for each security and its quoted offered

price. Using this technique, the Salaried Plan would have paid a total

dealer bid/offer spread of approximately $2,050,384 or 28 basis

points.32 WFITC states that it did not estimate any savings to the

Salaried Plan for brokerage commissions on the sale of the futures

contracts because such commissions would have been paid regardless of

whether the transaction was made in the open market or through an

EFP.33 WFITC states further that it made no estimate of market

impact or opportunity costs. Thus, WFITC estimated that the total costs

to execute the transactions in the open market would have been at least

$2,236,670 or approximately 30 basis points.

\31\Note: $186,286/$730 million = .0002 or .02%.

\32\Note: $2,050,384/$730 million = .0028 or .28%.

\33\With respect to the futures portion of the EFP, WFITC and

GMIMCo mutually agreed upon an independent CME clearing member

broker-dealer that presented the EFP to the CME, and conducted the

necessary reporting and documentation, ensuring that the EFP was

accepted by the CME and that the futures positions were properly

recorded. The broker-dealer received the customary commission for

such services from each Plan. Neither WFITC nor GMIMCo received any

of this compensation.

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Using the pricing methodology described below, WFITC determined

that the total cost to the Salaried Plan of transacting the EFP with

the Hourly Plan would be approximately $701,225 or 9.6 basis points

(expressed as a percentage of the total value of the stocks). This cost

figure was calculated by comparing the price of the futures contracts

negotiated in the EFP based on the midpoint between the best EFP

quotations (461.535) to the fair economic value of the futures as

calculated by WFITC based on a premium of 0.19 S&P 500 Index points

above the closing price of the index (461.98), resulting in a

difference of 0.445 S&P 500 Index points (461.98 - 461.535 = 0.445).

The difference of 0.445 index points represented approximately 9.6

basis points based on the S&P 500 Index closing price of 461.79.34

\34\Note: 0.445/461.79 = .00096 or .096%, which is 9.6 basis

points.

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WFITC compared the cost of 9.6 basis points to transact the EFP

with the Hourly Plan to the estimate of approximately 30 basis points

to execute the proposed transaction in the open market, and concluded

that there was an advantage of 20.4 basis points to transacting the EFP

with the Hourly Plan (or approximately $1,535,445). WFITC believed that

a projected savings of 20.4 basis points for the EFP transaction was a

conservative estimate of the advantages for the Salaried Plan because,

in establishing the cost estimates for the open market alternative,

WFITC had assumed a low commission rate of $.01 per share and had

assumed no market impact or opportunity costs for open market trading.

Thus, WFITC believed that 20.4 basis points would be the minimum

advantage to transacting the EFP with the Hourly Plan.

13. WFITC determined that it would permit the Salaried Plan to

engage in an EFP only if the price determination methodology was fair

to the Salaried Plan, was in the best interests of the Salaried Plan

and was consistent with general market standards. In this regard, WFITC

represents that it was involved in the EFP transaction, including the

pricing determinations that would be made, throughout the proceedings.

For example, prior to the consummation of the transaction, WFITC

determined along with GMIMCo the broker-dealers from which bids should

be solicited.

WFITC reviewed the information that was delivered to these brokers

as to the nature of the securities portfolios to be transacted as part

of the EFP. Additionally, WFITC performed an analysis of the portfolio,

using analytic software provided by BARRA, an independent investment

technology firm. This analysis provided WFITC with the correlation

between the securities in the portfolio and the S&P 500 futures

contracts.

WFITC and GMIMCo each determined independently that a single

broker--Broker-Dealer A--had quoted both the highest bid and the lowest

offer of any of the brokers who provided EFP quotations. Specifically,

Broker-Dealer A bid to sell the stocks at the closing price of the S&P

500 Index and buy the futures at a discount of 2.37 S&P 500 Index

points below the closing value of the S&P 500 Index. Since the other

brokers had bid larger discounts to buy the futures, Broker-Dealer A's

bid was the best price from the prospective of the Salaried Plan. As

noted above in the discussion involving GMIMCo, Broker-Dealer A had

also offered to buy the stocks at the S&P 500 Index closing price and

sell the futures at a premium of 1.86 S&P 500 Index points, or

approximately 40 basis points above the closing price of the S&P 500

Index. Since no other broker had offered to sell futures at a lower

premium relative to the index, Broker-Dealer A's offer price was also

best from the perspective of the Hourly Plan.

WFITC determined that the Salaried Plan's transacting the EFP with

the Hourly Plan at the midpoint between Broker-Dealer A's bid price and

offered price was better than trading in an EFP directly with Broker-

Dealer A at its bid price. Specifically, by trading with the Hourly

Plan, the Salaried Plan bought stocks at the closing price of the S&P

500 Index and sold futures at a discount of 0.255 S&P 500 Index points,

or approximately 5 basis points below the [[Page 13472]] closing price

of the S&P 500 Index.35 If the Salaried Plan had traded with

Broker-Dealer A directly, it would have bought stocks at the identical

price that was transacted via the EFP (i.e. the closing price of the

S&P 500 Index). However, the Salaried Plan would have sold futures to

Broker-Dealer A at a discount of 2.37 S&P 500 Index points, or

approximately 51 basis points below the value of the S&P 500

Index.36 Thus, the price for selling the futures would have been

46 basis points lower than the price the Salaried Plan received in the

EFP transaction with the Hourly Plan.

\35\Note: 0.255/461.79 = .0005 or .05%.

\36\Note: 2.37/461.79 = .0051 or .51%.

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WFITC determined that the price determination methodology was fair

to the Salaried Plan, was in the best interests of the Salaried Plan,

and was consistent with general market standards, because the

methodology included a thorough exploration of EFP prices in the

marketplace. WFITC states that the EFP price achieved for the Salaried

Plan was at least as favorable as any price the Plan could have

received from an independent broker-dealer capable of executing the

transaction on November 30, 1993.

14. In summary, the applicant represents that the transaction met

the statutory criteria contained in section 408(a) of the Act because:

(a) The terms of the EFP were at least as favorable to both the

Salaried Plan and the Hourly Plan as the terms which either Plan could

have received in an arm's-length transaction involving an unrelated

party; (b) each Plan received a price in the EFP transaction which was

equal to the midpoint between the highest independent bid and lowest

independent offer for buying and selling the futures involved, based on

EFP quotations obtained from independent broker-dealers capable of

engaging in such an EFP at the time of the transaction; (c) WFITC, as

an independent fiduciary for the Salaried Plan, determined that an EFP

with the Hourly Plan was in the best interests of the Salaried Plan and

its participants and beneficiaries; (d) WFITC monitored the EFP

transaction and took appropriate actions necessary to safeguard the

interests of the Salaried Plan; (e) GMIMCo, as fiduciary for the Hourly

Plan, determined that an EFP with the Salaried Plan was in the best

interests of the Hourly Plan and its participants and beneficiaries;

and (f) GMIMCo monitored the EFP transaction and took appropriate

actions necessary to safeguard the interests of the Hourly Plan.

Notice to Interested Persons

The applicant states that notice to interested persons shall be

made within twenty (20) business days following the publication of the

proposed exemption in the Federal Register. This notice shall include a

copy of the notice of proposed exemption (the Proposal) as published in

the Federal register and a supplemental statement (see 29 CFR

2570.43(b)(2)) which informs interested persons of their right to

comment on and/or request a hearing with respect to the proposed

exemption. The applicant will post a copy of the Proposal and the

supplemental statement in areas customarily used for notices to

employees regarding employee benefit and labor relations matters at GMC

locations where employees covered by the Plans are employed. The

applicant will send to each of the unions representing such employees a

copy of the Proposal and will request that each union post these

materials at local union halls within twenty (20) business days of the

publication of the Proposal in the Federal Register. Finally, the

applicant will send a copy of the Proposal and supplemental statement

to the presidents (or comparable officers) of the approximately 230 GMC

retiree organizations and clubs as a reasonable means of providing

notice to Plan participants who are retirees of GMC or an affiliate.

Comments or requests for a public hearing must be received by the

Department within sixty (60) days following the publication of the

Proposal in the Federal Register.

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

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

Law Offices of Bryson and Berman, P.A. Employees' Pension Plan and

Trust (Pension Plan) and Law Offices of Bryson and Berman, P. A.

Employees' Profit Sharing Plan and Trust (P/S Plan, Collectively; the

Plans) Located in Miami, Florida

[Application Nos. D-09884 and D-09885]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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

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

Code, shall not apply to the proposed sale by the two individual

accounts in the Plans of Rodney W. Bryson of two adjacent parcels of

vacant land (Lots 3 and 4, collectively; the Lots) to Mr. Rodney Bryson

(Mr. Bryson), a trustee of the Plans and a party in interest with

respect to the Plans; provided that the following conditions are

satisfied:

(a) the proposed sale will be a one-time cash transaction;

(b) the Accounts in this transaction will receive the current fair

market value of the Lots established at the time of the sale by an

independent qualified appraiser; and

(c) the Accounts will pay no expenses associated with the sale.

Summary of Facts and Representations

1. The Plans were established in 1976 and have a total of three

participants, including Mr. Bryson and Mark S. Berman (Mr. Berman). Mr.

Bryson and Mr. Berman are the trustees of the Plans and are also the

sole stockholders of Law Offices of Bryson and Berman, P.A. (the

Employer). The Plans are a money purchase pension plan and a profit

sharing plan. The Plans provide for individually directed accounts. As

of June 30, 1994, the Pension Plan and the P/S Plan had $386,380 and

$487,419 in net assets, respectively. As of the same date, Mr. Bryson's

account in the Pension Plan (P/P Account) and the P/S Plan (P/S

Account, collectively; the Accounts) had $175,201 and $214,134 in net

assets, respectively. The Employer is a professional association

incorporated in the State of Florida, which specializes in trial law.

2. The Lots were originally acquired as follows. Pursuant to the

direction of Mr. Bryson, on December 14, 1989, the Accounts purchased

twenty acres of vacant land located in Broward County, Ft. Lauderdale,

Florida, from Suzanne F. Sinaiko, an unrelated third party for a total

consideration of $375,000. On the same day, the Accounts sold one half

of the twenty acres to Richard French and Mrs. Claudia French (the

Frenchs), unrelated third parties, for $187,500. As a result, at the

close of business on December 14, 1989, the Accounts owned ten acres of

vacant unimproved land (the Land) in Broward County, Ft. Lauderdale,

Florida. The applicant represents that at the time of acquisition, the

Lots represented 38% of the P/P Account and 38% of the P/S

Account.37

\ 37\The Department expresses no opinion as to whether the

Plans' acquisition and holding of the Lots in the Accounts violated

any provision of part 4 of title I of the Act. [[Page 13473]]

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3. Consequently, the Accounts, in conjunction with the Frenchs,

made certain improvements to the Land. These improvements were made by

independent third party companies, and consisted of platting the Land,

constructing an access road, providing fill and landscaping. In this

regard, it is represented that the P/P Account paid $16,628 in capital

improvement costs, and the P/S Account paid $20,322 in capital

improvement costs. The Land was platted into two residential lots of

approximately 5 acres each (Lots 3 and 4). The Lots were allocated

among the Accounts as follows. The P/P Account owned 45% of Lot 3 and

Lot 4 (two 45% Interests), and the P/S Account owned 55% of Lot 3 and

Lot 4 (two 55% Interests, collectively; Four Interests).

4. Lot 3 was appraised on April 19, 1994 (the Appraisal), by Thomas

R. Wachtstetter A.S.A, I.F.A., an independent general appraiser

certified in the State of Florida (Mr. Wachtstetter). In the Appraisal,

Mr. Wachtstetter stated that Lot 3 contains 4.98 acres and is vacant

land. In establishing the fair market value of Lot 3, Mr. Wachtstetter

relied on the sales comparison approach to value and determined that

the fair market value of Lot 3 was $135,000. On October 26, 1994, Mr.

Wachtstetter submitted an addendum to the Appraisal (the Addendum),

which addressed the fair market value of Lot 4. In the Addendum he

stated that all information contained in the Appraisal of Lot 3 is also

applicable in estimating the value of Lot 4. Specifically, Mr.

Wachtstetter represented that Lot 3 and Lot 4 are adjacent, nearly the

same size, and neither Lot has any apparent easements, encroachments or

environmental concerns which would adversely affect the value of that

Lot. Mr. Wachtstetter concluded that the estimated value of each Lot is

$135,000 each, for an aggregate fair market value of $270,000. Mr.

Wachtstetter also addressed the assemblage value of Lots 3 and 4 as a

ten acre parcel, and concluded that the aggregate fair market value of

the Lots does not exceed the fair market value of five acre Lot 3 or

Lot 4, if purchased separately. The applicant represents that the Lots

are currently not encumbered by any debt, and that the Lots were never

used by any related persons, and are not adjacent to other real

property owned by Mr. Bryson or other parties in interest or related

persons. Since original acquisition, the Lots have remained vacant and

unutilized by any person, and have yielded no income to the Accounts.

5. Mr. Bryson now desires to purchase the Lots from the Accounts in

a one time cash transaction for their current aggregate fair market

value in order to build a personal residence. Once the transaction is

consummated, the P/S Account will receive fifty five percent (55%) of

the sale proceeds and the P/P Account will receive forty five percent

(45%) of the sale proceeds. It is represented that the proposed

transaction is in the best interest of the Accounts because the

transaction will enable the Accounts to divest of a non-income

producing asset which constitutes a relatively high percentage of the

Accounts' assets, and will provide the Accounts with liquidity. The

transaction is protective of the Accounts because as a result of the

sale the Accounts will receive the current fair market value of the

Lots, and the Accounts will incur no expenses as a result of the

proposed transaction. The applicant maintains that a real estate broker

has been attempting to sell the Lots since the summer of 1993, but the

Accounts received no reasonable offers.

6. In summary, the applicant represents that the transaction

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

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

(a) The proposed sale will be a one-time cash transaction;

(b) The Accounts will receive the current fair market value of the

Lots established at the time of the sale by an independent qualified

appraiser;

(c) The Accounts will pay no expenses associated with the sale; and

(d) The sale will enable the Accounts to diversify its investment

portfolio and will provide the Accounts with liquidity.

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

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

Welborn Clinic Employees' Retirement Plan (the Plan) Located in

Evansville, Indiana

[Application No. D-09890]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

the Act and the sanctions resulting from the application of section

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

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

improved real property (the Property) located in Evansville, Indiana,

to WANC Leasing Company (WANC), a party in interest with respect to the

Plan; provided the following conditions are satisfied:

(A) All terms and conditions of the transaction are no less

favorable to the Plan than those which the Plan could obtain in an

arm's-length transaction with an unrelated party;

(B) The Plan receives a cash purchase price of no less than the

greater of (1) $8,555,000, or (2) the Property's fair market value as

of the sale date; and

(C) The Plan does not incur any expenses with respect to the

transaction.

Summary of Facts and Representations

Introduction: The Plan owns the Property, which is improved real

property leased to and occupied by the Plan sponsor, Welborn Clinic

(the Employer), as its principal place of business. The Employer

requires substantial improvements of the Property to accommodate

updated and modernized operations, but the Plan trustee has determined

that it is not in the best interests of the Plan to finance such

improvements. Instead, WANC (a partnership owned by principals of the

Employer) proposes to purchase the Property from the Plan, complete the

necessary improvements, and lease the Property to the Employer. The

exemption proposed herein would enable the Plan's sale of the Property

to WANC as described below.

1. The Plan is a defined contribution plan with 643 participants

and total net assets of $55,721,511 as of December 31, 1993. The

Employer is a multi-specialty group medical practice with its principal

place of business situated in the Property, located at 421 Chestnut

Street in the downtown sector of Evansville, Indiana. The Employer is

an Indiana business trust which is controlled by the physicians who

hold staff memberships with the Employer. The trustee of the Plan is

the Citizens National Bank of Evansville (the Trustee), which

represents itself to be independent of and unrelated to the Employer,

except as Plan Trustee. WANC is an Indiana general partnership in which

all of the 65 general partners are staff member physicians of the

Employer.

2. The Property is owned by the Plan and leased to the Employer

(the Employer Lease) pursuant to an individual administrative

exemption, PTE 89-4 (54 FR 2241, January 19, 1989). The rights of the

Plan with respect to the Property, including the Employer Lease and PTE

89-4, are represented for all purposes by the Trustee. The Property is

a 4.437 acre [[Page 13474]] parcel of land located in downtown

Evansville, Indiana, and is improved with a three-level, 99,500 square

foot medical office building (the Main Building) which constitutes the

main facility for the Employer's medical clinic (the Clinic). The

entire Clinic consists of three components: (1) the Main Building, (2)

a nearby medical facility building owned by WANC (the WANC Building)

and leased to the Employer, and (3) a two-story structure (the

Connector Building), owned by WANC and leased to the Employer,

connecting the Main Building with the WANC Building. Pursuant to an

additional administrative exemption, PTE 93-24 (58 FR 8991, February

18, 1993), the Employer Lease was modified in 1993 to enable an

exchange of land parcels between the Plan and WANC in connection with

WANC's construction of the Connector Building. As a result of the

property exchange covered by PTE 93-24, the Plan acquired a parking lot

(the New Parking Lot) adjacent to the Main Building, and WANC acquired

a parcel of property abutting both the Main Building and the WANC

Building, on which it constructed the Connector Building. The Connector

Building and the land underlying it are owned by WANC, leased to the

Employer, and utilized between the Main Building and the WANC Building

as the main entrance and reception area for the Clinic. Only the Main

Building is located on the Property owned by the Plan, which includes

the New Parking Lot.

The Trustee represents that the Employer has complied with, and

continues in compliance with, all terms and conditions of the Employer

Lease and the individual exemptions, PTE 89-4 and PTE 93-24.

3. The Employer represents that with the aid of consultants, it has

determined that the Main Clinic is in need of at least $3,000,000 of

expansion and renovation work in order to satisfy the Employer's needs.

As a result of WANC's 1993 construction of the Connector Building and a

recent renovation of the WANC Building, those two components of the

Clinic are new, updated medical facilities. However, the Employer

represents that the Main Building remains in need of substantial

refurbishing and refitting to provide updated, modernized workspace for

surgery, urology, oncology, hematology, dermatology, allergy, ear/nose/

throat, eyecare, the Employer's health maintenance organization, and

administrative/business offices. The Trustee is unwilling to commit

Plan assets to finance the necessary renovations of the Main Building

because the Trustee considers such expenses to be the obligation of the

Employer, and because the Trustee finds that the participants and

beneficiaries would receive very little short-term or intermediate-term

benefit from such additional investment of capital in the Clinic. The

Employer, as tenant and occupant of the Main Building, is unwilling to

bear the expense of the renovations because the improvements to the

Main Building would eventually increase the Employer's rent under the

Employer Lease, assuming such improvements would increase the

Property's fair market value. The Employer represents that even if it

were willing to finance renovations currently required, it is likely a

similar problem would arise again in the future, whereby the Main

Building would require renovations and the Trustee, on behalf of the

Plan, and the Employer would each be unwilling to finance the

improvements. The principals of WANC, however, have expressed a

willingness to finance the necessary renovations of the Main Building

pursuant to a proposed purchase of the Property from the Plan and its

lease to the Employer.

4. Accordingly, the Trustee, the Employer and WANC propose that the

Plan sell the Property to WANC, and are requesting an exemption for the

sale transaction. The proposed sale transaction will proceed in

accordance with a written agreement (the Agreement) executed between

the Trustee, on behalf of the Plan, and WANC after the exemption

proposed herein, if granted, is published in the Federal Register.

Under the Agreement, the Plan will sell the Property, consisting of

the Main Building, the underlying land, and the New Parking Lot, for a

cash purchase price of no less than $8,555,000 (the Minimum Purchase

Price). In an appraisal of the Property effective June 24, 1994, Brian

D. Shelton and William R Bartlett II, MAI, SRA (Shelton and Bartlett),

determined that the fair market value of the Property, inclusive of the

Employer Lease, was $8,250,000. Shelton and Bartlett are professional

real estate appraisers with Appraisal Company, Inc. in Evansville,

Indiana. In another appraisal of the Property, inclusive of the

Property, C. David Matthews (Matthews) determined that the Property had

a fair market value of $8,860,000 as of December 31, 1993. The Minimum

Purchase Price represents the mean of the two appraisals. Pursuant to

the Agreement, the Property will be reappraised by Matthews and

Bartlett (the Reappraisals) no earlier than the date of the Agreement

and no later than 30 days after the date of the Agreement. If the mean

of the Reappraisals is higher than $8,555,000, then the purchase price

of the Property shall be the mean of the Reappraisals. In no event will

the purchase price be lower than the Minimum Purchase Price.

5. The Trustee represents that the agreement to set the purchase

price for the Property at no less than the Minimum Purchase Price

resulted from arm's-length negotiations between the Trustee and WANC

over a two-month period. The Trustee initially proposed a sale of the

Property to WANC for a purchase price of $8,860,000, consistent with

Matthews' 1993 appraisal. The Trustee states that WANC considered this

price to be excessive, in light of the more recent appraisal by Shelton

and Bartlett, and WANC counter-proposed a purchase price of $8,250,000.

The Trustee represents that the two appraisals were reviewed and

analyzed by the Trustee's appraisal expert, Darrell Woehler (Woehler),

who noted differences in the approach of the two appraisers and

determined that substantial subjectivity could be expected among such

appraisals. Woehler noted that Matthews had considered the current rent

under the Employer Lease to be in excess of fair market rent, whereas

Shelton and Bartlett had found the current rent to be equivalent to

fair market rent. After Woehler's review, the Trustee continued

discussions with representatives of WANC, until both parties agreed on

the Minimum Purchase Price and the Reappraisals. The Trustee represents

that the Plan's depreciated net cost basis of the Property was

$3,751,070.42 as of December 31, 1993.

6. The Trustee represents that after careful consideration of all

facts and circumstances surrounding the proposed sale of the Property

to WANC, it has determined that it will be in the best interests and

protective of the participants and beneficiaries of the Plan. The

Trustee states that it has determined that the proposed purchase price

of at least $8,555,000 is not less than the fair market value of the

Property, and the Reappraisals ensure that the Plan will benefit from

any increase in fair market value as of the date of the sale. The

Trustee states that although the Plan has benefitted from favorable

returns on the Property, it is time for the Plan to dispose of the

Property and invest in other assets, in light of the pressing need for

renovations and modernization of the Property's improvements.

The Trustee notes that due to the nature of the Property as a

component [[Page 13475]] in a three-part medical facility, the other

two parts of which are owned by WANC, it would be very difficult to

find a buyer other than WANC willing to offer a purchase price as

favorable to the Plan as that offered by WANC.

7. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 408(a) of the Act for the

following reasons: (1) The Plan will receive a cash purchase price of

no less than the Minimum Purchase Price, subject to possible upward

adjustment pursuant to the Reappraisals, which the Trustee has

determined to be no less than the fair market value of the Property;

(2) The Plan will incur no costs or expenses relating to the

transaction; (3) The Trustee has determined that retention of the

Property would not be in the best interests of the Plan due to the

necessity of renovation expenses; and (4) The Trustee has determined

that the Plan is unlikely to secure an unrelated buyer willing to pay a

purchase price for the Property as favorable to the Plan as the

proposed purchase price under the Agreement.

FOR FURTHER INFORMATION CONTACT: Ronald Willett 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 that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 8th day of March, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration Department of Labor.

[FR Doc. 95-6118 Filed 3-10-95; 8:45 am]

BILLING CODE 4510-29-P