Proposed Exemptions; Bank of America Illinois, et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-9511, et al.]

Proposed Exemptions; Bank of America Illinois, 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 [[Page 17810]] 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, DC 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, DC 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.

Bank of America Illinois, Located in Chicago, IL

[Exemption Application Nos. D-9511, D-9512 and D-9513]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

2570, subpart B (55 FR 32836, August 10, 1990).

Section I--Exemption for Purchases and Sales

If the exemption is granted, effective September 1, 1993, the

restrictions of section 406(a)(1)(A) through (D) and section 406(b) of

the Act and the sanctions resulting from the application of section

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

Code, shall not apply to the purchase and sale by employee benefit

plans (the Plans), to which the Bank serves as fiduciary, of shares in

the Prime Fund, the Government Securities Fund, and the Treasury Fund,

three open-end money market mutual fund portfolios (collectively

referred to as the Funds), to which the Bank of America Illinois, and

its affiliates (the Bank) provide investment advisory and other

services, in connection with the Supplemental Sweep Service (as defined

in paragraph (a) of section IV below), provided that the conditions of

Section III are met.

Section II--Exemption for Receipt of Fees

If the exemption is granted, effective September 1, 1993, the

restrictions of section 406(a)(1)(A) through (D) and section 406(b) of

the Act and the sanctions resulting from the application of section

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

Code, shall not apply to the receipt of fees by the Bank from the Funds

for providing investment advisory and other services to the Funds, in

connection with the investment of the assets of the Plans in the Funds,

for which the Bank provides investment advisory and other services,

provided that the conditions of Section III are met.

Section III--Conditions

(a) The Bank does not have investment discretion or render

investment advice (within the meaning of 29 CFR 2510.3-21(c)) with

respect to the Plan assets invested in the Funds pursuant to this

proposed exemption.

(b) No sales commissions or redemption fees are paid by the Plans

in connection with the purchase or sale of shares in the Funds.

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

12b-1 under the Investment Company Act of 1940 (the 12b-1 Fees) in

connection with the transactions.

(d) The price paid or received by a Plan for shares in a Fund is

the net asset value per share on the date of the transaction, as

defined in section IV(a), and is the same price which would have been

paid or received for the shares by any other investor on that date.

(e) Prior to the Bank's receipt of fees paid by each Fund with

respect to Plan assets invested therein, each Plan receives a credit of

such Plan's proportionate share of all fees charged to the Fund by the

Bank.

(f) The Plans are not employee benefit plans sponsored or

maintained by the Bank.

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

Bank or any of its affiliates (the Second Fiduciary), receives full

written disclosure of information concerning the Fund(s), including but

not limited to:

(1) A current prospectus for each fund in which a Plan is

considering investing;

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

similar services, and all other fees to be charged to or paid by the

Plan or the Funds, including the nature and extent of any differential

between the rates of such fees;

(3) The reason why the Bank may consider such investment to be

appropriate for the Plan; and

(4) Upon request of the Second fiduciary, a copy of the proposed

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

documents become available.

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

(g) of section III, the Second Fiduciary authorizes in writing the

investment of assets of the Plan in each particular Fund, the fees to

be paid by the Fund and the Plan to the Bank, and the credit to the

Plan of fees received by the Bank from the Funds for investment

advisory and other services, consistent with the responsibilities,

obligations, and duties imposed on fiduciaries by part 4 of Title I of

the Act.

(i) The Second Fiduciary referred to in paragraph (g) of section

III, or any successor thereto, is notified of any change in the rates

of the fees referred to in paragraph (g) of section III and approves in

writing the continued holding of any Fund shares acquired by the Plan

prior to such change and still held by the Plan.

(j) The Bank provides annually, written disclosures to the Second

Fiduciary which are provided to all shareholders of the Fund(s), which

establish the rate of return of the Fund(s) absent the credit paid to

the Plans for fees paid by the Funds to the Bank.

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

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

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

invest, are not in excess [[Page 17811]] of ``reasonable compensation''

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

(l) All dealings between the Plans and the Funds are on a basis no

less favorable to the Plans than dealings between the Funds and other

shareholders of the Funds.

(m) The Bank shall maintain, for a period of six years, the records

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

determine whether the conditions of this exemption have been met,

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

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

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

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

the civil penalty that may be assessed under section 502(l) of the Act,

or the taxes imposed by section 4975(a) and (b) or the code, if the

records are not available for examination as required by section (n)

below;

(n) (1) Except as provided in section (2) of this paragraph and

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

504 of the Act, the records referred to in paragraph (l) above shall be

unconditionally available at their customary location during normal

business hours by:

(A) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

(B) Any fiduciary of a Plan who has the authority to acquire or

dispose of the interests of the Plan or any duly authorized

representative of such fiduciary;

(C) Any contributing employer to any Plan that has an interest in

any of the Funds or any duly authorized employee or representative of

such employer; and

(D) Any participant or beneficiary of any Plan that has an interest

in the Funds or any duly authorized representative of such participant

or beneficiary.

(2) None of the persons described in paragraphs (k)(1)(B) through

(D) shall be authorized to examine the trade secrets of the Bank's

commercial or financial information which is privileged or

confidential.

Section IV--Definitions

For purposes of this proposed exemption:

(a) Supplemental Sweep Service means the transfer of shares in the

Funds between the Bank and the Plans by means of the Banks's internal

accounting procedures at the end of the Supplemental Sweep Period, in

connection with Plan orders to purchase shares in the Funds that the

Bank is otherwise unable to settle prior to the Supplemental Sweep

Period, and Plan orders to purchase or redeem shares in the Funds that

are received by the Bank during the Supplemental Sweep Period. A Plan

order to purchase or redeem shares in the Fund(s) pursuant to the

Supplemental Sweep Service occurs solely as a result of investment

decisions, deposits or withdrawals, directed by an independent Second

Fiduciary.

(b) Supplemental Sweep Period means the period of time on each

business day after the Funds stop accepting orders for the purchase or

redemption of shares in the Funds and before the Bank's close of

business.

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

pricing all purchase and sale of shares in the Funds calculated by

dividing the value of all securities, determined by a method as set

forth in the Fund's prospectus and statement of additional information,

and other assets belonging to the Fund or portfolio of the Fund, less

the liabilities charged to each such portfolio or fund, by the number

of outstanding shares.

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

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

intermediaries, controlling, controlled by, or under common control,

with the person;

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

such person; and

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

officer, director, partner or employee.

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

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

individual.

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

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

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

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

(g) A fiduciary will not be deemed to be an independent fiduciary

with respect to the Bank and its affiliates if:

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

by, or is under common control with the Bank or any affiliate:

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

relative of such fiduciary, is an officer, director partner, or

employee of the Bank or any affiliate (or is a relative of such

persons); or

(3) The fiduciary directly or indirectly receives any compensation

or other consideration for his or her own personal account in

connection with any transaction described in this proposed exemption.

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

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

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

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

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

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

of the transactions described in sections I and II above, then

paragraph (g)(2) of section III above, shall not apply.

The availability of this proposed exemption would be subject to the

express condition that the material facts and representations contained

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

accurately describes all material facts which are the subject of this

exemption.

Summary of Facts and Representations

1. The Bank, which is comprised of Bank of America Illinois, and

its wholly owned subsidiary, Continental Trust Company, provides a full

range of fiduciary services to qualified employee benefit plans,

welfare plans, and governmental retirement plans. Such services include

trustee and custodial services, discretionary and directed investment

of plan assets, and all related securities processing activities,

domestic and foreign. As of December 31, 1994, the Bank provided

investment management and custodial services with respect to total

assets of approximately $179 billion.

The Plans are comprised of retirement plans qualified under section

401(a) of the Code, pension plans that meet the definition of pension

plan set forth in section 3(2) of the Act and section 4975(e)(1) of the

Code, with respect to which the Bank serves as a trustee, or investment

fiduciary. In addition, the Bank states that it may offer the Funds,

under the arrangement described herein, to welfare plans.

2. The Bank provides the Plans with the opportunity to purchase

shares in the Funds, to which the Bank provides investment advisory and

other services, in connection with existing and expanded cash

management sweep services. The Bank states that it currently invests

certain assets of the Plans in a short term collective investment fund

(the Collective Fund) maintained by the Bank in connection with the

provision of sweep services. In this regard, the Bank represents that

the addition of the Funds as short term [[Page 17812]] investment

alternatives will result in greater investment choice, greater

diversification and reduced risk for the Plans.\1\

\1\The Bank represents that it invests the assets of plans

covering its employees in the Funds on terms that are identical to

the terms of the proposed exemption set forth herein. In this

regard, the Bank states that this arrangement meets the terms and

conditions of Prohibited Transaction Exemption (PTE) 77-3 (42 FR

18734, April 8, 1977). The Department expresses no opinion as to

whether PTE 77-3 provides relief for the purchase or sale of shares

in the Funds by plans covering employees of the Bank pursuant to the

arrangement described herein.

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3. The Funds are comprised of the Prime Fund, the Government

Securities Fund and the Treasury Fund, each of which is a money market

mutual fund portfolio of the 231 Funds, an open-end management

investment company organized as a Massachusetts business trust (the

Trust). The Trust is organized under the Investment Company Act of

1940, as amended. Fund shares offered by the Trust are registered under

the Securities Act of 1933.

The assets of the Prime Fund are invested in a diversified

portfolio of U.S. Dollar denominated money market instruments,

including: Obligations issued or guaranteed by the U.S. Government, its

agencies or instrumentalities, bank obligations, including certificates

of deposits, time deposits, bankers' acceptances and debt securities

issued or supported by domestic banks or domestic branches of foreign

banks; short-term corporate obligations including commercial loan

participations, commercial paper, corporate bonds, privately placed

commercial paper, and participation interests in trusts or special

purpose vehicles backed by consumer or commercial credit receivables;

and municipal securities including taxable and tax-exempt general

obligations, revenue obligations, private activity and industrial

development bonds.

The assets of the Government Securities Fund are invested

exclusively in obligations issued or guaranteed by the U.S. Government,

its agencies or instrumentalities; receipts evidencing separately

traded interest and principal components of U.S. Government obligations

(including TIGRs and CATS); and repurchase agreements collateralized by

government obligations.

The Treasury Fund invests its assets exclusively in obligations

issued by the U.S. Treasury, and repurchase agreements relating to such

Treasury obligations.

4. The Bank states that the Plans pay a short term cash management

fee (Cash Management Fee) of .12 percent of average daily assets to the

Bank in connection with Plan investments in the short term collective

investment fund maintained by the Bank. In addition, each Plan pays a

trustee fee to the Bank of between .01 percent and .15 percent of all

Plan assets under the Bank's custody. The Bank negotiates its trustee

fees with each Plan individually. The Bank represents that Plan assets

are invested in the Funds as an alternative to the short term

collective investment fund.\2\ In order to avoid charging double fees

with respect to Plan assets invested in the Funds, the Bank credits all

fees attributable to Plan assets invested therein, payable to the Bank

by the Funds, to the Plans. In this regard, the Bank states that its

crediting to the Plans of all fees to be paid by the Funds to the Bank

results in no additional cost to any of the Plans with respect to Plan

assets invested in shares in the Funds.

\2\The Bank represents that it invests cash collateral provided

to the Plans by borrowers of securities in connection with

securities lending transactions (the Collateral), in the Funds. The

Bank states that it receives a securities lending fee which is part

of the Plans' net return from the investment of the Collateral. In

this regard, The Bank represents that the securities lending service

is separate from the cash management service. According to the Bank,

no Cash Management Fee, or investment management fee, is paid by the

Plans to the Bank with respect to the management of the Collateral.

The Bank states that it is relying on the relief provided by

PTEs 81-6 (46 FR 7527, January 23, 1981) and 82-63 (47 FR 14804,

April 6, 1982) for the securities lending transactions and its

receipt of fees in connection therewith. In addition, The Bank

represents that it is relying on PTE 77-4 (42 FR 18732, April 8,

1977) for relief for the investment of the Collateral in the Funds.

The Bank is not requesting, and the Department is not providing,

any relief with regard to the investment of the Collateral in the

Funds. In this regard, the Department expresses no opinion as to the

availability of the relief provided by PTE's 81-6 and 82-63 for the

Plan's securities lending activities and securities lending fees

paid by the Plan in connection therewith, nor the availability of

PTE 77-4 for the investment of the Collateral in shares of the

Funds.

Nevertheless, the Department notes that the relief provided by

PTE 77-4 is predicated on, among other things, avoiding the payment

of double investment management, investment advisory or similar fees

by a plan to a fiduciary of the plan, or any affiliate, which also

serves as investment advisor to the mutual fund company. In this

regard, it is the Department's view that whether a particular

service constitutes the provision of investment advisory services or

similar services depends on the particular facts and circumstances

of each case. The Department emphasizes that, regardless of whether

an administrative exemption may be applicable, it expects the plan

fiduciary with investment management responsibility to consider the

totality of fees to be paid by the plan directly, and/or indirectly,

prior to entering into the arrangement in order to determine that

the fees to be paid by the plan do not exceed reasonable

compensation for the particular advisory service offered.

The fees payable to the Bank by the Funds are accrued daily and

paid to the Bank on the first day of the following month, in arrears.

On the same day, the Bank credits to the Plans their proportionate

shares of all fees to be paid by the Funds to the Bank with respect to

Plan assets invested therein.

The Bank states that it discloses annually in writing to the Plans:

The total rate of return earned on their shares in the Fund(s) which

includes the amounts received by the Plan from the Bank as a credit of

the fees paid by the Fund(s) to the Bank in connection with Plan assets

invested therein; and the portion of the rate of return which is

attributable to the amounts credited by the Bank to the Plans. In

addition, the Bank represents that it discloses to the Second Fiduciary

annually in writing the rate of return earned on shares in the Fund(s)

held by investors other than the Plans.

5. The Bank states that it does not have investment discretion with

respect to Plan assets involved in the purchase or sale of shares in

the Funds for which relief is requested.\3\ Purchases and redemptions

of shares in the Funds are solely the result of investment directions

from a Second Fiduciary. The Bank represents that only liquid Plan

assets awaiting distribution, or investment, are used to purchase

shares in the Funds. The Bank states that it has no discretion with

respect to the amount of liquid assets available for investment in the

funds. The liquid assets of the Plans are always the proceeds of other

assets which have been liquidated, or new assets transferred to the

Bank, at the direction of a Second Fiduciary.

\3\The Bank represents that it invests plan assets with respect

to which it has investment discretion in the Funds. In this regard,

the Bank represents that such transactions meet the terms and

conditions of PTE 77-4. The Department expresses no opinion as to

the availability of the relief provided by PTE 77-4 for such

transactions.

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The Bank states that it has no discretion with respect to how

liquid assets of the Plans are invested. The Bank represents that the

investment of the liquid assets of a Plan in the Funds is either

specifically directed by a Second Fiduciary, or pursuant to standing

orders by a Second Fiduciary to invest any daily cash balances in the

Fund absent the Bank's receipt of any other investment directions.

6. The Bank states that share purchases and redemption requests

communicated by the Bank to the Funds are transmitted each business day

prior to the time established by the Fund (currently expected to be

2:00 P.M. Central Standard Time) (the Cutoff Time) for same-day

processing and payment of transaction requests. If a transaction

triggering a purchase or redemption of Fund shares is processed by the

Bank prior to the Cutoff Time, the [[Page 17813]] Bank, in turn,

transmits the purchase or redemption request to the Fund, which

executes the request that same day.

The Bank states that additions to customer accounts (including

additions made to cover Fund purchase requests placed prior to the

Cutoff Time) and withdrawals from customer accounts may occur

subsequent to the Cutoff Time but prior to the close of business for

the Bank (the Posting Time). The Bank represents that in order to

provide additional opportunities for same-day processing of Plan

purchase and redemption requests with respect to shares in the Funds,

it offers a Supplemental Sweep Service. The Supplemental Sweep Service

provides for the settlement of deposits and withdrawals late each

business day subsequent to the Cutoff Time but prior to the Posting

Time (the Supplemental Sweep Period).

The Bank represents that the Supplemental Sweep Service assures the

overnight investment of any Plan assets to which it applies in order to

maximize the return to the Plans by providing an additional period

during which the Plan's otherwise idle assets would be invested. In

addition, the Bank represents that the Supplemental Sweep Service helps

to meet the liquidity needs of the Plans by providing an opportunity

for the Plans to, in effect, redeem shares in the Funds and withdraw

assets during the Supplemental Sweep Period.

The Bank states that the Supplemental Sweep Service is for selected

institutional customers, primarily Plans, and is effective for purchase

orders which cannot be settled prior to the Supplemental Sweep Period

and for purchase and withdrawal orders received during the Supplemental

Sweep Period each business day.

7. The Bank represents that shares acquired by the Plans through

the Supplemental Sweep Service are, in some cases, first acquired by

the Bank and subsequently allocated to customers which have assets

available to be swept as of the Posting Time on that same day. In

addition, in order to facilitate prompt redemption of customer shares

on the same day that the customer wishes to redeem them, the Bank

processes the customer redemption requests received during the

Supplemental Sweep Period internally by providing immediate credit to

the customer for the Fund Shares.

The Bank represents that the price paid, or received by, a Plan for

shares in a Fund purchased, or redeemed, pursuant to the Supplemental

Sweep Service is the net asset value per share for all other purchases

and redemptions of shares in the Fund on that date.

8. The Bank represents that its acquisition of shares from the

Funds through the Supplemental Sweep Service is based on estimates of

the prospective purchase and sale of shares in the Funds by the Plans

during the Supplemental Sweep Period.

Immediately prior to the Supplemental Sweep Period on each business

day, the Bank estimates the approximate number of shares of each fund

which its customers will require as of the Posting Time later that same

day (in addition to the number of shares needed to cover net customer

purchase and sale orders placed prior to the Cutoff Time). The Bank

then purchases that number of shares of each Fund prior to the Cutoff

time as trustee, nominee or in some other capacity for its customers.

The books of the Fund's transfer agent carry only one account for all

purchases and redemptions of Fund shares by the Bank, and reflect the

Bank as the owner of all Fund shares purchased. The Bank's books,

however, reflect its purchase of shares in the Funds as trustee,

nominee, or other capacity for its customer accounts, or as principal,

on a provisional basis.

Later in the day, at the end of the Supplemental Sweep Period, the

Bank determines the precise number of each Fund's shares needed by its

customers. Based on its determination, the Bank adjusts the provisional

purchase entries previously made on its books to reflect the net

purchase or redemption of Fund shares by each customer account (or by

the Bank in its own name) in the amount necessary to satisfy the net

purchase needs of its customers at the end of the Supplemental Sweep

Period. Appropriate final entries are made in the Bank's trust and

corporate accounting systems to reflect the previous day's transaction

activity and the respective ownership positions of the Bank and its

customers as of the previous day's Cutoff Time. The books of the

transfer agent of the respective Fund, however reflect no net change

(i.e., change in number of shares outstanding) in the record ownership

position of the Bank as a result of the Bank's adjustments; all

adjustments of Fund shares among the Bank and its various customers

would be internal bookkeeping adjustments made by the Bank.

In the event that the Bank, on a given business day, underestimated

the number of any Fund's shares which were required by its customers,

the Bank allocates any shares the Bank had previously purchased to

customer accounts which purchased Fund shares between the Posting Time

and the Cutoff Time on a pro rata basis by reflecting on the Bank's

books the redemption of Fund shares owned or purchased by the Bank and

the simultaneous purchase by its customers, from the Fund, of the

corresponding number of fund shares. The balance of each customer's

funds that was intended to be invested in the Funds during the

Supplemental Sweep Period which remain uninvested after this adjustment

process are temporarily invested in the Bank's deposits paying a rate

of interest equivalent to the net return on Fund shares for that day

(subject to certain regulatory requirements) and subsequently are

invested in Fund shares the next business day.\4\ The Bank represents

that each customer including the Plans realizes an equivalent return on

its invested funds for the day.

\4\The Bank represents that it intends to rely on section

408(b)(4) of the Act with regard to the investment of Plan assets in

deposits of the Bank. The Department expresses no opinion as to

whether the relief provided by section 408(b)(4) of the Act is

available for the investment of Plan assets in deposits of the Bank

pursuant to the arrangement described herein.

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However, if the Bank overestimated the number of Fund shares

required by its customers on a given business day, any excess Fund

shares are placed in the Bank's investment portfolio or trading

account.

The Bank represents that, in any event, customers who redeem Fund

Shares during the Supplemental Sweep Period pursuant to the

Supplemental Sweep Service are provided with immediate provisional

credit for the value of Fund shares. Such redemptions ultimately are

reflected on the Bank's books as having occurred as of the Cutoff Time

in the manner described above. Accordingly, such shares are allocated

to other customer accounts or to the Bank's own investment or trading

account, through the netting procedures. The Bank states that all such

entries are made on its own internal accounting systems effective as of

the previous day's Cutoff Time, and result in no net change in the

transfer agent's records reflecting the Bank's record ownership of Fund

shares. The Bank represents that in effect, the Bank is acting

functionally as a sub-transfer agent to effect post-Cutoff redemptions

by the Fund.

9. In summary, the Bank represents that the proposed transactions

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

4975(c)(2) of the Code because: (a) The Funds provide the Plans with a

more effective investment vehicle than the Collective Fund

[[Page 17814]] currently maintained by the Banks without any increase

in fees paid to the Bank; (b) a Second Fiduciary must authorize in

writing the investment of Plan assets in the Funds and the payment of

any fees to the Bank by the Plans and the Funds, after receiving full

written disclosure, including a prospectus for the Funds and a

statement describing the fee structure; (c) no sales fees or redemption

fees are paid by the Plans in connection with the acquisition or sale

of shares of the Funds; and (d) all dealings between the Plans and the

Funds, the Bank, or any affiliated person, are on a basis no less

favorable to the Plans than such dealings are with the other

shareholders.

FOR FURTHER INFORMATION CONTACT: Eric Berger of the Department,

telephone (202) 219-8971. (This is not a toll-free number.)

Mellon Bank, N.A. (Mellon) and Its Affiliates Located in Pittsburgh,

Pennsylvania

[Application No. D-9724]

Proposed Exemption

Section I--Exemption for Cross-Trading Between Certain Accounts

The restrictions of sections 406(a)(1)(A) and 406(b)(2) of the Act,

and the sanctions resulting from the application of section 4975 of the

Code, by reason of section 4975(c)(1)(A) of the Code, shall not apply

to (1) the purchase and sale of securities (including the stock of

Mellon Bank Corporation (MBC)) between Indexed Accounts, as defined in

Section IV(a); and (2) the purchase and sale of securities, including

the common stock of MBC, between Indexed Accounts and various large

accounts (the Large Accounts) pursuant to portfolio restructuring

programs of the Large Accounts; provided that the following conditions

and the General Conditions of Section III are met:

(a) The Indexed Account is based on an index which represents the

investment performance of a specific segment of the public market for

equity or debt securities in the United States and/or foreign

countries. The organization creating and maintaining the index must be

(1) engaged in the business of providing financial information,

evaluation, advice or securities brokerage services to institutional

clients, (2) a publisher of financial news or information, or (3) a

public stock exchange or association of securities dealers. The index

must be created and maintained by an organization independent of Mellon

and its affiliates. The index must be a generally accepted standardized

index of securities which is not specifically tailored for the use of

Mellon or its affiliates.

(b) The price for the securities is set at the current market value

for the securities on the date of the transactions. For equity

securities, the price shall be the closing price for the security on

the day of trading; unless the security was added to or deleted from an

index underlying an Indexed Account after the close of trading, in

which case the price shall be the opening price for that security on

the next business day after the announcement of the addition or

deletion. For debt securities, the price shall be the fair market value

determined as of the close of the day of trading pursuant to Rule 17a-

7(b) issued by the Securities and Exchange Commission under the

Investment Company Act of 1940.

(c) The transaction takes place within three business days of the

``triggering event'' giving rise to the cross-trade opportunity. A

triggering event is defined as:

(1) A change in the composition or weighting of the index

underlying an Indexed Account by the organization creating and

maintaining the index;

(2) A change in the overall level of investment in an Indexed

Account as a result of investments and withdrawals made on the

Account's regularly scheduled opening date; provided, however, that

Mellon does not change the level of investment in the Indexed Account

through investments or withdrawals of assets of any employee benefit

plan maintained by Mellon or its affiliates (the Mellon Plans) for

which Mellon has investment discretion; or

(3) A declaration by Mellon (recorded on Mellon's records) that a

``triggering event'' has occurred, which will be made upon an

accumulation of cash in an Indexed Account attributable to interest or

dividends on, and/or tender offers for, portfolio securities equal to

not more than .5 percent of the Indexed Account's total value.

(d) With respect to any Indexed Account that is model-driven, no

cross-trades are engaged in by the Account for 10 business days

subsequent to any change made by Mellon to the model underlying the

Account.

(e) In the event that the amount of a particular security which all

of the Indexed Accounts or Large Accounts propose to sell on a given

day is less than the amount of such security which all of the Indexed

Accounts or Large Accounts propose to buy, or vice versa, the direct

cross-trade opportunity must be allocated by Mellon among potential

buyers or sellers of the security on a pro rata basis.

(f) An Indexed Account does not participate in a cross-trade if

more than 10 percent of the assets of the Indexed Account at the time

of the proposed cross-trade are comprised of assets of Mellon Plans for

which Mellon exercises investment discretion.

(g) Prior to any proposed cross-trading by an Indexed Account or a

Large Account, Mellon provides to each employee benefit plan invested

in the Account information which describes the existence of the cross-

trading program, the ``triggering events'' which will create cross-

trade opportunities, the pricing mechanism that will be utilized for

securities purchased or sold by the Accounts, and the allocation

methods and other procedures which will be implemented by Mellon for

its cross-trading practices. Any employee benefit plan which

subsequently invests in the Indexed Account or Large Account shall be

provided the same information prior to or immediately after the plan's

initial investment in the Account.

(h) With respect to cross-trade transactions involving a Large

Account:

(1) Total assets of the Large Account are in excess of $50 million.

(2) Fiduciaries or other appropriate decisionmakers of the Large

Account who are independent of Mellon are, prior to any cross-trade

transactions, fully informed of the cross-trade technique and provide

advance written approval of the cross-trade transactions.

Such authorization shall be terminable at will by the Large Account

upon receipt by Mellon of written notice of termination. A form

expressly providing an election to terminate the authorization, with

instructions on the use of the form, must be supplied to the

authorizing Large Account fiduciary concurrent with the receipt of the

written information describing the cross-trading program. The

instructions for such form must include the following information:

(i) The authorization is terminable at will by the Large Account,

without penalty to the Large Account, upon receipt by Mellon of written

notice from the authorizing Large Account fiduciary; and

(ii) Failure to return the termination form will result in the

continued authorization of Mellon to engage in cross-trade transactions

on behalf of the Large Account.

(3) Within 45 days of the completion of the Large Account's

portfolio restructuring program, the Large Account's fiduciaries shall

be fully appraised in writing of the transaction

[[Page 17815]] results. However, if the program takes longer than three

months to complete, interim reports of the transaction results will be

made within 30 days of the end of each three month period.

(4) The Large Account transactions occur only in situations where

Mellon has been authorized to restructure all or a portion of the Large

Account's portfolio into an Indexed Account (including a separate

account based on an index or computer model) or to act as a ``trading

adviser'' in carrying out a Large Account-initiated liquidation or

restructuring of its portfolio.

(i) Mellon receives no additional direct or indirect compensation

as a result of any cross-trade transactions.

(j) Mellon does not purchase or sell any debt securities issued by

Mellon or an affiliate for the Indexed Accounts.

Section II--Exemption for the Acquisition, Holding and Disposition of

MBC Stock

The restrictions of sections 406(a)(1)(D), 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)(D) and (E) of the

Code, shall not apply to the acquisition, holding or disposition of the

common stock of MBC (the MBC Stock) by Indexed Accounts, if the

following conditions and the General Conditions of Section III are met:

(a) The acquisition or disposition of the MBC stock is for the sole

purpose of maintaining strict quantitative conformity with the relevant

index upon which the Indexed Account is based.

(b) In the event that MBC Stock is added to an index on which an

Indexed Account is based or is added to the portfolio of the Indexed

Account which tracks an index that includes MBC Stock, all acquisitions

necessary to bring the Indexed Account's holdings of MBC Stock to its

capitalization weighting in the index, other than cross-trade

transactions meeting the conditions of Section I, shall comply with

Rule 10b-18 of the Securities and Exchange Commission (SEC) under the

Securities Exchange Act of 1934, including the limitations regarding

the price paid for such stock.

(c) Subsequent to acquisitions necessary to bring the Indexed

Account's holdings of MBC Stock to its capitalization weighting in the

index pursuant to the restrictions of SEC Rule 10b-18, all aggregate

daily purchases of MBC stock, other than cross-trade purchases meeting

the conditions of Section I, shall not constitute more than the greater

of: (1) 15 percent of the stock's average daily trading volume for the

previous five days; or (2) 15 percent of the stock's trading volume on

the date of the transaction.

(d) If the necessary number of shares of MBC stock cannot be

acquired within 10 business days from the date of the event which

causes the particular Indexed Account to require MBC stock, Mellon

shall appoint a fiduciary which is independent of Mellon and its

affiliates to design acquisition procedures and monitor Mellon's

compliance with such procedures.

(e) All purchases and sales of MBC stock, other than cross-trades

meeting the conditions of Section I, shall be executed on the national

exchange on which MBC stock is primarily traded.

(f) No transactions shall involve purchases from, or sales to,

Mellon or any affiliate, officer, director or employee of Mellon or any

party in interest with respect to a plan which has invested in an

Indexed Account. This requirement does not preclude purchases and sales

of MBC stock in cross-trade transactions meeting the conditions of

Section I, provided that the Indexed Accounts are not maintained by

Mellon primarily for the investment of assets of Mellon or any

affiliate, including officers, directors or employees of Mellon other

than in connection with a Mellon Plan.

(g) No more than five (5) percent of the total amount of MBC stock

issued and outstanding at any time shall be held in the aggregate by

the Indexed Accounts which hold plan assets.

(h) MBC stock shall constitute no more than two (2) percent of the

value of any independent third-party index on which the investments of

an Indexed Account are based.

(i) A plan fiduciary independent of Mellon authorizes the

investment of such plan's assets in an Indexed Account which purchases

and/or holds MBC stock.

(j) A fiduciary independent of Mellon and its affiliates shall

direct the voting of the MBC stock held by an Indexed Account on any

matter in which shareholders of MBC stock are required or permitted to

vote.

Section III--General Conditions

(a) Mellon maintains or causes to be maintained for a period of six

years from the date of the transaction the records necessary to enable

the persons described in paragraph (b) of this Section to determine

whether the conditions of the exemption have been met, except that (1)

a prohibited transaction will not be considered to have occurred if,

due to circumstances beyond the control of Mellon, the records are lost

or destroyed prior to the end of the six-year period, and (2) no party

in interest other than Mellon shall be subject to the civil penalty

that may be assessed under section 502(i) of the Act or to the taxes

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

maintained or are not available for examination as required by

paragraph (b) below.

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

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

referred to in paragraph (a) of this Section are available at their

customary location for examination during normal business hours by--

(A) Any duly authorized employee or representative of the

Department of Labor or the Internal Revenue Service,

(B) Any fiduciary of a plan participating in an Indexed Account who

has authority to acquire or dispose of the interests of the plan, or

any duly authorized employee or representative of such fiduciary,

(C) Any contributing employer with respect to any plan

participating in an Indexed Account or any duly authorized employee or

representative of such employer, and

(D) Any participant or beneficiary of any plan participating in an

Indexed Account, or any duly authorized employee or representative of

such participant or beneficiary.

(2) None of the persons described in paragraph (b)(1)(B) through

(D) shall be authorized to examine trade secrets of Mellon, any of its

affiliates, or commercial or financial information which is privileged

or confidential.

Section IV--Definitions

(a) Indexed Account--Any Index Fund or Model-Driven Fund.

(b) Index Fund--Any investment fund, account or portfolio

sponsored, maintained, trusteed, or managed by Mellon or an affiliate

in which one or more investors invest that is designed to replicate the

capitalization-weighted composition of an independently maintained

securities index which satisfies the conditions of Section I(a) and

Section II(h).

(c) Model-Driven Fund--Any investment fund, account or portfolio

sponsored, maintained, trusteed, or managed by Mellon or an affiliate,

in which one or more investors invest which is based on computer models

using prescribed objective criteria to transform an independently

maintained securities index which satisfies the conditions of Section

I(a) and Section II(h).

(d) Opening date--The regularly-scheduled date on which investments

in [[Page 17816]] or withdrawals from an Indexed Account may be made.

(e) Large Account--An account of an investor that is either: (1) An

employee benefit plan within the meaning of section 3(3) of the Act

that has $50 million or more in total assets; or (2) an institutional

investor, other than an investment company registered under the

Investment Company Act of 1940 (i.e. a mutual fund), such as an

insurance company separate account or general account, a governmental

plan, a university endowment fund, a charitable foundation fund, or a

trust or other fund which is exempt from taxation under section 501(a)

of the Code, that has total assets in excess of $50 million. As noted

in Section I(g)(4), a ``Large Account'' shall only be an account to

which Mellon has been authorized to restructure all or a portion of the

portfolio for such account into an Indexed Account or to which Mellon

has been authorized to act as a ``trading adviser'' (as defined below)

in connection with a specific liquidation or restructuring program for

the account.

(f) Trading adviser--A person whose role is limited to arranging a

Large Account-initiated liquidation or restructuring of an equity or

debt portfolio within a stated period of time so as to minimize

transaction costs. The person must not be a fiduciary with investment

discretion for any underlying asset allocation, restructuring or

liquidation decisions for the account in connection with such

transactions.

(g) Affiliate--Any person, directly or indirectly through one or

more intermediaries, controlling, controlled by, or is under common

control with Mellon (except Mellon/McMahon Real Estate Advisors, Inc.).

Summary of Facts and Representations

1. Mellon is a national bank and a subsidiary of MBC, which is the

twenty-third largest bank holding company in the U.S. with assets of

approximately $37 billion. Mellon is licensed to operate a trust

department, which is regulated by the Office of the Comptroller of the

Currency. Within the trust department, Mellon provides a variety of

fiduciary services, including acting as trustee of employee benefit

plans subject to the Act. Currently, Mellon acts as fiduciary of

institutional accounts, including employee benefit plans, with assets

totaling approximately $481 billion. Additionally, certain affiliates

of Mellon provide trust or investment management services to various

employee benefit plans. Mellon and its affiliates are, to the extent of

the provision of such services, fiduciaries of these plans. For

purposes of this proposed exemption, Mellon does not include Mellon/

McMahon Real Estate Advisors, Inc., as an ``affiliate'' because that

entity is being sold.

2. In its capacity as fiduciary of an employee benefit plan, Mellon

may be either directed by an independent plan fiduciary or a plan

participant that has the ability to direct investments for his/her plan

account under the plan document. Alternatively, in those cases in which

Mellon manages the investments, Mellon represents that it does not

exercise any discretionary authority over whether an employee benefit

plan invests in particular Funds, such as the Mellon S&P 500 Index

Funds, except for a relatively small number of plans which subscribe to

Mellon's Portfolio Management in Funds (PMF) services (as discussed

below in Paragraph 13).

Mellon manages the different collective investment funds in various

ways to enable plan assets to be diversified to reduce risk and to be

invested in the types of investments that a particular manager for a

plan may determine is appropriate at a particular time. Index Funds and

Model-Driven Funds (the Funds) are two examples of the Bank's

collective investment funds which include plan investors.

Index and Model-Driven Funds

3. An Index Fund may be an individual or collective investment

fund, the objective of which is the replication of the performance of

an independently-maintained stock or bond index representing the

performance of a specific segment of the public market for equity or

debt securities. The Index Funds are passively managed, in that the

choice of stocks or bonds purchased and sold, and the volume purchased

and sold, are made according to predetermined third party indices

rather than according to active evaluation of the investments.

4. A Model-Driven Fund may be an individual or collective

investment fund, the performance of which is based on computer models

using prescribed objective criteria to transform an independently-

maintained stock or bond index representing the performance of a

specific segment of the public market for equity or debt securities.

The portfolio of a Model-Driven Fund is determined by the details of

the computer model, which examines structural aspects of the stock or

bond market rather than the underlying values of such securities. An

example of a Model-Driven Fund would include a fund which

``transforms'' an index, making investments according to a computer

model which uses such data as the following: (a) Earnings, dividends

and price-earning ratios for common stocks included in the index; (b)

current yields on corporate bonds and money market instruments; (c) the

duration, maturity structure, yield and sector/quality weights for

bonds included in the index; and (d) historical standard deviations and

correlations between asset classes.

Mellon represents that the process for the establishment and

operation of all Indexed Accounts which are model-driven is very

disciplined. Clear-cut rules are established for each model. Since the

Model-Driven Funds operate pursuant to pre-specified computer programs,

the rules and programs are changed only infrequently. However, to the

extent that there is any change made by Mellon to a model underlying an

Indexed Account, no cross-trades will be engaged in by the Account for

10 business days subsequent to such change. Thereafter, an Indexed

Account that is model-driven will engage in cross-trade transactions if

the cross-trade opportunity results from any ``triggering event''

described herein (see Paragraph 5 below).

Mellon currently offers more than 60 collective investment funds

that are invested according to the criteria of various third-party

indexes or are model-driven based on such indexes. For example, some

Funds track the Russell 2000 Index,\5\ while other Funds track the

Standard & Poors 500 Composite Stock Price Index (the S&P 500

Index).\6\ Most of the Funds track stock indexes, although some Funds

[[Page 17817]] track indexes of debt securities, such as the Lehman

Brothers Bond Indices.\7\

\5\The Russell 2000 Index was established and is maintained by

the Frank Russell Company, which is not an affiliate of Mellon. The

Russell 2000 Index is a subset of the larger Russell 3000 Index. The

Russell 3000 Index consists of the largest 3,000 publicly traded

stocks of U.S. domiciled corporations, as identified by the Frank

Russell Company, and includes large, medium and small stocks. The

Russell 3000 Index represents approximately 98% of the total market

capitalization of all U.S. stocks that trade on the New York and

American Stock Exchanges and in the NASDAQ over-the-counter market.

The Russell 2000 Index consists of approximately 2,000 of the

smallest stocks within the Russell 3000 Index, and is therefore a

broadly diversified index of small capitalization stocks,

representing less than 10 percent of the U.S. equity market in total

capitalization.

\6\The S&P 500 Index is composed of 500 stocks that are traded

on the New York Stock Exchange, American Stock Exchange, and the

NASDAQ National Market System. The S&P 500 is a market value-

weighted index (i.e. shares outstanding times stock price) in which

each company's influence on the Index's performance is directly

proportional to its market value.

\7\The indexes of debt securities used by Mellon for the Funds,

such as the Lehman Brothers Bond Indices, consist primarily of high-

quality fixed-income securities representing the U.S. government,

corporate, and mortgage-backed securities sectors of the bond market

in the U.S. Mellon currently has approximately 14 debt Index Funds.

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

In addition to Funds that are collective investment funds, Mellon

has investment responsibility for individual investment funds which are

separate portfolios for various client accounts, including employee

benefit plans, where the portfolio is invested in accordance with a

third-party index. Such individual investment funds and collective

investment funds are referred to herein as Indexed Accounts (see

Paragraph 6 below). Mellon states that the ability of all Indexed

Accounts to cross-trade securities with each other, or to invest in MBC

Stock when the stock is included in an index, would improve Mellon's

tracking of such indexes.

Cross Trades

5. Mellon represents that cross-trades will be made within three

business days of the ``triggering event'' giving rise to the cross-

trade opportunity. A ``triggering event'' is limited to: (i) A change

in the composition or weighting of the index underlying an Indexed

Account by the organization creating and maintaining the index; (ii) a

change in the overall investments in an Indexed Account as a result of

a net investment or withdrawal on the Account's regularly-scheduled

opening date (provided that Mellon does not change the level of

investment in the Indexed Account through investments or withdrawals of

assets of any Mellon Plans for which Mellon has investment discretion);

and (iii) a declaration by Mellon that a ``triggering event'' has

occurred upon an accumulation in the Indexed Account of cash

attributable to interest or dividends on, and/or tender offers for,

portfolio securities equal to not more than .5 percent of the value of

the Indexed Account.

Mellon states that frequent purchases and sales of securities by

the Indexed Accounts are required to accomplish portfolio balances that

conform with the particular indexes. In addition, some securities

transactions may be prompted by a client plan's request to add funds

to, or withdraw funds from, an Indexed Account. Under any of these

circumstances, Mellon's disposition of a particular security for one

Indexed Account may involve a security which may be needed by another

Account, thus presenting an opportunity to save substantial commissions

for both the liquidating Account and the acquiring Account. This saving

is enabled by a cross-trade transaction, which involves matching

Mellon's sell orders for a particular day with its buy orders for the

same day, and the execution of trades between the Accounts in off-

market transactions. Under current procedures, all securities

transactions, including cross-trades between Indexed Accounts

maintained by Mellon, are executed by a broker on behalf of a

purchasing or selling Account at the direction of Mellon, dealing with

a second broker acting on behalf of the other purchasing or selling

party.

6. Mellon proposes to take advantage of opportunities to direct the

cross-trading of securities directly between various Indexed Accounts.

Such Indexed Accounts will include: (i) Collective investment funds for

employee benefit plans, (ii) separate employee benefit plan trust

accounts that are not commingled in a collective fund, (iii) other

large fiduciary accounts such as governmental plans, university

endowment funds, charitable foundation funds and personal trusts, (iv)

common or collective trust funds containing assets of governmental

plans, university endowments, charitable foundations or personal

trusts, and (v) mutual funds and other institutional accounts for which

Mellon or an affiliate serves as an investment manager or investment

advisor.

Mellon represents that by participating in its cross-trading

program, the Accounts will benefit by not incurring the transaction

costs involved in dealing with a broker-dealer or ``market maker'' for

the particular securities to effect the transactions. Such transaction

costs include brokerage commissions and/or the market-maker's bid/offer

spread on prices for such securities. Mellon maintains that

transactions involving equity securities on the open market between

unrelated parties require brokerage commissions equal to at least two

cents per share for each sale or purchase transaction. However, the

brokerage commissions that would be paid for each proposed cross trade

of equity securities would be equal to approximately .05 cents per

share, reflecting only the necessary record-keeping costs for the

brokers. For debt securities, Mellon states that cross-trades would

produce transactions cost savings by eliminating the bid/offer spread

that normally would be paid to a broker-dealer to acquire or sell such

securities. Mellon also represents that participation in the cross-

trading program may enable the Accounts to obtain earlier opportunities

to acquire or sell certain securities. The applicant represents that

all brokers used in cross trade transactions would be unrelated to and

independent of Mellon and its affiliates.

Mellon states that the price for the securities involved in any

cross-trade will be set at the current market value for the securities

on the date of the transactions.

For equity securities, the price will be the closing price for the

security on the day of trading; unless the security was added to or

deleted from an index underlying an Indexed Account after the close of

trading, in which case the price shall be the opening price for that

security on the next business day after the announcement of the

addition or deletion.

Mellon will use independent pricing services to value all equity

securities which are cross-traded by the Indexed Accounts. The primary

service currently used by Mellon for pricing domestic equity securities

is Interactive Data Corporation, a subsidiary of Dunn & Bradstreet

Corporation. For pricing foreign equity securities, Mellon uses Morgan

Stanley & Co. or Vestek Systems. The applicable independent pricing

service provides the price in local currency rates and, if that

currency is other than U.S. dollars, also provides the U.S. Dollar

exchange rate. The equity securities are valued at the close of the

day, and thus equity security cross-trades would in all cases be

executed at the closing price received by Mellon from the relevant

independent pricing service. In addition, the same independent pricing

service will be employed to value any given equity security for both

the buy and sell sides of all cross-trades involving that equity

security. The identity of the applicable independent pricing service

for each equity security will be recorded on Mellon's records and will

be made available to any participant in the cross-trading program upon

request. If the independent pricing service for any particular equity

security is changed, a single new independent pricing service will be

selected for future pricings of that equity security.

For debt securities, the price will be the fair market value

determined as of the close of the day of trading pursuant to SEC Rule

17a-7(b) under the Investment Company Act of 1940. SEC Rule 17a-7(b)

contains four possible means of determining ``current market'' value

for either debt or equity securities depending on such factors as

whether the security is a reported security and whether its principal

market is an exchange. Mellon states that all debt securities that are

not a reported [[Page 17818]] security or traded on an exchange would

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 day of the cross-trade. Such prices would be determined in

accordance with Rule 17a-7(b)(4) on the basis of reasonable inquiry

from at least three sources that are broker-dealers or market-makers

independent of Mellon, except in those circumstances where fewer than

three independent sources exist to price a certain debt security (in

which event closing price quotations will be obtained from all

available sources).

Mellon intends that the requested exemption for cross-trade

transactions would apply, in addition to existing Indexed Accounts

currently maintained, to all Indexed Accounts which it may create in

the future which satisfy the conditions of the exemption, if granted.

7. Mellon proposes to engage in cross-trade transactions between

the Indexed Accounts and various Large Accounts that have total assets

in excess of $50 million. Mellon states that a Large Account could be

either: (i) An employee benefit plan within the meaning of section 3(3)

of the Act; or (ii) a portfolio of an institutional investor, other

than an investment company registered under the Investment Company Act

of 1940 (i.e. a mutual fund), such as an insurance company separate

account or general account, a governmental plan, a university endowment

fund, a charitable foundation fund, or a trust or other fund which is

exempt from taxation under section 501(a) of the Code.

Cross-trades between an Indexed Account and a Large Account would

occur only when the fiduciary or other appropriate decision-maker for

the Large Account, which is independent of Mellon and its affiliates,

is fully informed of the cross-trade technique, provides advance

written approval of such transactions, and is fully apprised of the

transaction results. Further, cross trades involving a Large Account

will be limited to those situations where Mellon has been authorized to

restructure all or a portion of the Large Account's assets into an

Indexed Account, or where Mellon is otherwise acting as a trading

adviser for a Large Account portfolio restructuring. Such

restructurings generally occur in connection with a Large Account

decision to invest in one of Mellon's Index or Model-Driven Funds, but

they may also involve requests for Mellon to carry out a restructuring

program independent of future investments in any of the Funds. In the

latter instance, Mellon's only role is that of a trading adviser,

carrying out a Large Account-initiated liquidation or restructuring.

When a Large Account engages Mellon to invest in a collective

investment fund that is index or model-driven or to arrange its own

passively-managed individual portfolio, the Large Account's assets must

be transformed into a portfolio that tracks a third-party index. In

implementing the transformation, Mellon is limited to recreating the

required portfolio and is not involved in any active investment

management decisions. The impetus for the investment comes from the

independent fiduciaries or other independent decision-makers for these

Large Accounts. By performing cross-trades with existing Index Accounts

where possible, Mellon would reduce the overall transactions costs by

both parties to the cross-trade. Mellon would have a similar lack of

discretion in the case of Large Accounts which request Mellon or an

affiliate to restructure a specific portfolio by liquidation. Mellon

would act as the trading advisor to the Large Account, arranging for

the securities transactions within a stated time so as to minimize

transaction costs. The opportunity to engage in cross-trades with Index

Accounts occurs only when those Accounts are required to purchase the

same securities which the Large Account is selling.

8. Mellon represents that its cross-trading program will be

effected pursuant to a proportional allocation system which will ensure

that no Indexed Account or Large Account will be favored over any other

such Account. In the event that the amount of a particular security

which all of the Indexed Accounts or Large Accounts propose to sell on

a given day is less than the amount of such security which all such

Accounts propose to buy, or vice versa, the direct cross-trade

opportunity would be allocated among all potential buyers or sellers of

the security on a pro rata basis. Thus, all of the Indexed Accounts or

Large Accounts participating in its cross-trade program will have

opportunities to participate on a proportional basis in any cross-trade

transactions during the operation of the program. This aspect of the

proposed cross-trading program would be part of the information

disclosed in writing to the fiduciaries or other decisionmakers of the

Large Accounts and to all employee benefit plans which invest in the

Index or Model-Driven Funds that are collective investment funds

maintained by Mellon or to all such plans that invest in any other

Indexed Account. In this regard, Mellon states that prior to any cross-

trading by an Indexed Account or a Large Account, each employee benefit

plan invested in the Account will be provided information which

describes the existence of the cross-trading program, the ``triggering

events'' which will create cross-trade opportunities, the pricing

mechanism that will be utilized for securities purchased or sold by the

Accounts, and the allocation methods and other procedures which will be

implemented by Mellon for its cross-trading practices. Any employee

benefit plan which subsequently invests in the Indexed Account or Large

Account will also be provided the same information prior to or

immediately after the plan's initial investment in the Account.

Acquisition, Holding and Disposition of MBC Stock

9. Mellon is also proposing that each Indexed Account be permitted

to invest in the MBC Stock if such stock is included among the

securities listed in the index utilized by the Indexed Account.\8\ For

example, MBC Stock is one of the stocks included in the S&P 500.

Because of the prohibitions of section 406 and 407 of the Act, the

Mellon S&P 500 Index Funds and other Indexed Accounts holding plan

assets which track the S&P 500 Index currently are not permitted to

invest in MBC stock. Mellon states that the exclusion of MBC Stock from

such Index Funds or other Indexed Accounts creates tracking error. To

correct the tracking error, Mellon proposes to purchase on the open

market, and hold, on behalf of all Indexed Accounts which hold plan

assets, the number of shares of MBC Stock necessary to replicate

correctly the weighting of MBC Stock in the portfolio relative to the

S&P 500 Index.\9\

\8\While certain of the debt indexes used by Mellon for the

Indexed Accounts may include debt securities issued by Mellon or an

affiliate (Mellon Debt), Mellon states that it does not acquire

Mellon Debt for any of its Indexed Accounts. Therefore, Mellon is

not requesting relief for any transactions involving Mellon Debt.

\9\In this regard, Mellon is not requesting any relief from

section 407(a) of the Act in connection with the acquisition and

holding of MBC Stock by the Mellon Plans which invest in the Mellon

S&P 500 Index Funds.

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Mellon represents that when MBC Stock is added to an index on which

an Indexed Account is based or is added to the portfolio of an Indexed

Account which tracks an index that includes MBC Stock, all acquisitions

necessary to bring the Indexed Account's holdings of MBC Stock to its

capitalization weighting in the index, other than through cross-trade

transactions meeting the conditions of Section I, will comply with the

SEC Rule 10b-18, including the limitations regarding the price paid for

such stock. Such acquisitions of [[Page 17819]] MBC Stock would occur

when an Indexed Account is first able to hold MBC Stock, such as

purchases that will occur for all Indexed Accounts that track the S&P

500 Index, or when MBC Stock is added to an Indexed Account's portfolio

as a result of the stock being added to another underlying index used

by the Account. SEC Rule 10b-18 provides a ``safe harbor'' for issuers

of securities from section 9(a)(2) of the Securities Exchange Act of

1934 and SEC Rule 10b-5 (which generally prohibits persons from

manipulating the price of a security and engaging in fraud in

connection with the purchase or sale of a security).

Mellon states that the conditions imposed by SEC Rule 10b-18 for

purchases of MBC Stock would be as follows: (a) All purchases would be

made from or through only one broker on any single day; (b) no

purchases would constitute the opening transaction in MBC Stock; (c)

purchases would not occur within one-half hour before the scheduled

close of trading on the NYSE; (d) the price would not be higher than

the current independent bid quotation or the last independent sale

price on the exchange, whichever is higher; and (e) if the purchases of

MBC Stock are not block purchases as defined by SEC Rule 10b-18(b)(4),

the total amount of purchases on any one day would not exceed the

higher of one round lot or the number of round lots closest to 25

percent of the trading volume for MBC Stock on that day.

In addition, subsequent to the initial acquisitions necessary to

bring an Indexed Account's holdings of MBC Stock to its capitalization

weighting in the index pursuant to the restrictions of SEC Rule 10b-18,

Mellon states that all aggregate daily purchases of MBC Stock will not

constitute more than the greater of either: (i) 15 percent of the

stock's average daily trading volume for the previous five days, or

(ii) 15 percent of the stock's trading volume on the date of the

transaction.

All additional purchases or subsequent sales of MBC Stock by the

Indexed Accounts that are made on a daily basis merely to track the S&P

500 Index or other appropriate index would be accomplished either

through cross-trade transactions, subject to the conditions of Section

I of the proposed exemption, or on the open market, subject to the

conditions of Section II the proposed exemption. However, daily

purchases of MBC Stock, which occur after all acquisitions of such

stock have been made in order to bring the Indexed Account's holdings

to the capitalization weighting of MBC Stock in the index, would not be

subject to the restrictions of Rule 10b-18, but would be subject to the

other conditions of Section II of this proposed exemption. In this

regard, Mellon believes that the restrictions of Rule 10b-18 are not

necessary for the volume of transactions which will be required by the

Indexed Accounts for daily tracking of an index in order to respond to

changes in the composition or weighting of MBC Stock in the index.

Mellon represents that no more than 5 percent of the total

outstanding shares of MBC Stock will be held in the aggregate by the

Indexed Accounts which hold plan assets. In addition, Mellon states

that the MBC Stock will not constitute more than 2 percent of the value

of any independent third-party index on which investments of an Indexed

Account are based.

10. Mellon will appoint an independent fiduciary for the purposes

of developing trading procedures for the initial acquisition of MBC

Stock on the open market by the Indexed Accounts that track the S&P 500

Index. The independent fiduciary will allow the Indexed Accounts to

acquire MBC Stock in the amounts necessary to track the S&P 500 Index

while minimizing the impact of the acquisitions on the market for MBC

Stock during the acquisition period. The independent fiduciary will

also monitor Mellon's compliance with the trading procedures for

accomplishing this goal.

The independent fiduciary and its principals will be completely

independent from Mellon and its affiliates. The independent fiduciary

will also be experienced in developing and operating investment

strategies for individual and collective investment funds that track

third-party indexes, such as the S&P 500 Index. In addition, Mellon

will require the independent fiduciary to represent that neither it nor

its principals, employees, or affiliates holds or controls any shares

of MBC Stock. During the exercise of the trading program by Mellon, no

principal employee of the independent fiduciary nor the fiduciary

itself will engage in any trading of any kind in MBC Stock.

Furthermore, the independent fiduciary will not act as the broker for

any purchases or sales of MBC Stock and will not receive any

commissions as a result of the trading program.

11. The independent fiduciary will have as its primary goal the

development of a trading program that minimizes the market impact of

purchases made pursuant to the initial acquisition program by the

Indexed Accounts. Thus, price increases that would be detrimental to

the interests of any employee benefit plan investors will be minimized.

The trading activities will be conducted in a low-profile, mechanical,

non-discretionary manner. In this regard, the independent fiduciary

will be required to utilize a computerized trading program that will

engage in a number of small purchases over the course of each day,

randomly timed. Such a program will allow Mellon to acquire the

necessary shares of MBC Stock for the Indexed Accounts that track the

S&P 500 Index with minimum impact on the market and in a manner that

will be in the best interests of any employee benefit plans that

maintain or participate in such Accounts.

12. The independent fiduciary will also be required to monitor

Mellon's compliance with the trading program and procedures developed

for the initial acquisition of MBC Stock. The independent fiduciary

will receive duplicate confirmation slips of all trades as well as the

``time and tape'' of all NYSE transactions in MBC Stock completed

immediately before and after each transaction and a time/price/quantity

record of all completed or attempted trades. The independent fiduciary

will be required to review the activities weekly to determine

compliance with the trading procedures and notify Mellon and the

Department should any non-compliance be detected. Should the trading

strategy need modifications due to unforeseen events or consequences,

the independent fiduciary will be required to consult with Mellon and

must approve in advance any alteration of the trading procedures. All

purchases of MBC Stock by the Indexed Accounts pursuant to the

independent fiduciary's trading program will comply with SEC Rule 10b-

18 and the conditions of the proposed exemption.

13. If Mellon provides Portfolio Management in Funds (i.e. PMF)

services to a plan, Mellon exercises some discretion in allocating and

reallocating the plan's assets among various collective investment

funds, including Mellon's S&P 500 Index Funds and other Index or Model-

Driven Funds. These allocations are based on a plan's investment

objectives, risk profile and market conditions. However, Mellon makes

the following representations with respect to the purchase, directly or

indirectly, of MBC Stock by plans utilizing PMF (PMF Plans):

(a) Mellon represents that any prohibited transactions (other

than cross-trade transactions described herein) which might occur as

a result of the discretionary allocation and reallocation of plan

assets among collective investment funds will be

[[Page 17820]] exempt from the prohibitions of section 406 of the

Act by reason of section 408(b)(8).\10\

\10\In the absence of regulations, the Department is not

prepared at this time to indicate whether section 408(b)(8) applies

to transactions described in section 406(b) of the Act. Accordingly,

the Department expresses no opinion as to whether Mellon's

discretionary allocation and reallocation services for any

collective investment funds maintained by Mellon satisfy the

requirements of section 408(b)(8) of the Act and is not proposing

any exemptive relief beyond that offered by section 408(b)(8).

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(b) Before MBC Stock is purchased by an Index or Model-Driven

Fund, the appropriate independent fiduciary for each PMF Plan which

is currently invested or could be invested in such Funds will be

furnished an explanation and a simple form to return on which

approval or disapproval of investments in the Fund including MBC

Stock could be indicated, together with a postage-paid return

envelope. If the form is not received by Mellon within 30 days,

Mellon may obtain a verbal response by telephone. If a verbal

response is obtained by telephone, Mellon will confirm the

fiduciary's decision in writing within five business days. In the

event no response is obtained from a PMF Plan fiduciary, the assets

of the plan will not be invested in any Index or Model-Driven Fund

which invests in MBC Stock and any plan assets currently invested in

such Funds at that time would be withdrawn.

(c) Each new management agreement with a PMF Plan will contain

language specifically approving or disapproving the investment in

any Index or Model-Driven Fund which might hold MBC Stock. The

fiduciary for each current PMF Plan will be informed that the

existing management agreement could be modified in the same way.

However, if the PMF Plan fiduciary does not specifically approve

language in the agreement allowing the investment of plan assets in

Funds which might hold MBC Stock, then no such investment will be

made by Mellon.

(d) Each PMF Plan will be informed on a quarterly basis of any

investment in or withdrawal from any Index or Model-Driven Fund

holding MBC Stock. The PMF Plan would be granted the election to

override Mellon's discretionary decision to invest in or withdraw

from such Funds. If the PMF Plan overrides Mellon's decision to

invest in or withdraw from the Funds, then Mellon will carry out the

plan's election as soon as possible after being notified of such

election.

14. In the event a third-party index utilized by Mellon for any

Indexed Account (in addition to the S&P 500 Index) adds MBC Stock or if

Mellon is otherwise unable to satisfy an Indexed Accounts' needs for

MBC Stock through cross-trades with other Indexed Accounts, Mellon will

acquire the necessary shares of MBC Stock on the open market. If Mellon

is required to purchase MBC Stock in the open market on behalf of any

Indexed Account in those circumstances, Mellon will determine whether

the stock can be acquired within 10 business days. If the MBC Stock

cannot be acquired within 10 business days, Mellon will appoint an

independent fiduciary to establish the procedures to be used to acquire

the MBC Stock and monitor Mellon's compliance with those procedures.

The fiduciary will be unrelated to and independent of Mellon and will

have expertise in the operation of index funds.

15. Mellon will appoint an independent fiduciary which will direct

the voting of the MBC Stock held by the Mellon S&P 500 Index Funds or

other Indexed Accounts. The independent fiduciary will be a consulting

firm specializing in corporate governance issues and proxy voting on

behalf of public and private pension funds, banks, trust companies,

money managers, insurance companies and other institutional investors

with large equity portfolios. The fiduciary will be required to

develop, and supply to Mellon, a corporate ownership manual which will

act as a guideline to the voting of proxies by institutional

fiduciaries, and their current voting guidelines. Mellon will provide

the independent fiduciary with all necessary information regarding the

Indexed Accounts that hold MBC Stock, the amount of MBC Stock held by

the Indexed Accounts on the record date for shareholder meetings of

MBC, and all proxy and consent materials with respect to MBC Stock. The

independent fiduciary will maintain records with respect to its

activities as an independent fiduciary on behalf of the Indexed

Accounts, including the number of MBC Stock shares voted, the manner in

which they were voted, and the rationale for the vote if the vote was

not consistent with the independent fiduciary's corporate ownership

manual and the current voting guidelines in effect at the time of the

vote. The independent fiduciary will supply Mellon with the information

after each shareholder meeting. The independent fiduciary will be

required to acknowledge that it will be acting as a fiduciary with

respect to the plans which invest in the Mellon S&P 500 Index Funds or

other Indexed Accounts which own MBC Stock, when voting such stock.

16. In summary, the applicant represents that the proposed cross-

trading transactions will satisfy the criteria of section 408(a) of the

Act for the following reasons: (a) An Indexed Account will buy or sell

securities only in response to various ``triggering events'' which are

not within Mellon's control or discretion; (b) a Large Account will

engage in cross trades only in situations where the investment

decisions relating to a particular portfolio restructuring program for

the Large Account are made by a fiduciary or other appropriate

decision-maker which is independent of Mellon; (c) all cross trade

transactions, including cross-trades involving MBC Stock, will occur

within three business days of the ``triggering event'' necessitating

the purchase or sale; (d) no cross-trades will be engaged in by an

Indexed Account that is model-driven for 10 business days subsequent to

any change made by Mellon to the model underlying the Account; (e) the

price for all securities will be the current market value for the

securities on the date of the transaction, which for equity securities

will be set at the closing (or opening, where appropriate) price for

the securities on the day of trading as determined by independent

pricing services, and for debt securities will be determined based on

quotations received from independent broker-dealers or market-makers as

of the close of the day pursuant to the procedures described in SEC

Rule 17a-7(b); (f) the Indexed Accounts and the Large Accounts will

save significant amounts of money on brokerage commissions; and (g)

Mellon will receive no additional compensation as a result of the

proposed cross trades nor with respect to the acquisition, holding and

disposition of MBC Stock.

The applicant further represents that the proposed MBC Stock

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

the following reasons: (a) The acquisition, holding and disposition of

MBC Stock by an Indexed Account will occur solely to maintain strict

quantitative conformity with the underlying index; (b) all purchases of

MBC Stock by the Mellon S&P 500 Index Funds or other Indexed Accounts

which occur as a result of such stock being added to an index on which

an Indexed Account is based or being added to the portfolio of the

Indexed Account which tracks an index that includes MBC Stock, will be

made on the open market and will comply with the restrictions of SEC

Rule 10b-18; (c) subsequent to the initial acquisitions necessary to

bring an Indexed Account's holdings of MBC Stock to its capitalization

weighting in the index pursuant to the restrictions of SEC Rule 10b-18,

all aggregate daily purchases of MBC Stock will not constitute more

than the greater of either (i) 15 percent of the stock's average daily

trading volume for the previous five days, or (ii) 15 percent of the

stock's trading volume on the date of the transaction; (d) no more than

5 percent of the total outstanding shares of MBC Stock will be

[[Page 17821]] held in the aggregate by the Indexed Accounts which hold

plan assets; (e) the MBC Stock will not constitute more than 2 percent

of the value of any independent third-party index on which investments

of an Indexed Account are based; (f) the initial acquisitions of MBC

Stock by the Mellon S&P 500 Index Funds will be monitored by a

fiduciary independent of Mellon in an attempt to minimize market

disturbances; and (g) a fiduciary independent of Mellon will direct the

voting of any MBC Stock held by the Indexed Accounts.

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

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

Analex Corporation (Analex), Analex Corporation Retirement Plan (the

Plan) Located in Brook Park, OH

[Application No. D-9786]

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 retroactively to the past loan (the Past Loan)

made by the Plan to Analex (the Employer) in accordance with the

following conditions:

(1) The terms and conditions of the Past Loan were at least as

favorable to the Plan as those obtainable by the Plan under similar

circumstances in arm's-length transactions with unrelated parties;

(2) The amount of the Plan's assets involved in the Past Loan

did not exceed 15% of the Plan's total assets at any time during the

transaction;

(3) The Past Loan was at all times secured by collateral which

was valued at not less than 200% of the value of the Past Loan;

(4) Prior to the disbursement under the Loan agreement, an

independent, qualified fiduciary determined on behalf of the Plan

that the Past Loan was in the best interests of the Plan as an

investment for the Plan's portfolio, and protective of the Plan and

its participants and beneficiaries;

(5) The independent, qualified fiduciary reviewed the terms and

conditions of the exemption and the Past Loan, including the

applicable interest rate, the sufficiency of the collateral, the

financial condition of the Employer and compliance with the 15% of

Plan assets maximum loan amount, prior to approving the disbursement

under the Loan agreement;

(6) The fiduciary is monitoring the Past Loan to ensure

compliance with the terms and conditions of the exemption and the

Loan agreement;

(7) The Plan suffers no loss as a result of the Past Loan; and

(8) The Past Loan will be fully repaid by May 31, 1995.

Temporary Nature of Exemption

If granted, this proposed exemption would be effective for the

period from July 12, 1994 through May 31, 1995, the date by which the

Past Loan will be repaid.

Summary of Facts and Representations

1. The Plan is a profit sharing plan with a salary reduction

feature. There were 394 Plan participants and total assets of

$9,222,172 as of December 31, 1993. The Plan provides for participant

direction with respect to employee contributions to the Plan, and

provides that an Administrative Committee will direct the investment of

Employer contributions. Donald M. Zucker of Sorin, Zucker & Warfield,

Inc., the independent, qualified fiduciary (the Independent Fiduciary),

acted on behalf of the Plan with respect to the Past Loan.

2. The Employer is a Nevada corporation maintaining its principle

place of business in Brook Park, Ohio and operating in Florida,

Colorado, Texas, California, Virginia and New Mexico. The Employer

provides engineering services to commercial and government entities.

3. On July 20, 1993, the Department published a notice of proposed

exemption for prospective exemptive relief for a series of loans to the

Employer by the Plan (58 FR 38792). The final exemption (PTE 93-65) was

published in the Federal Register on September 22, 1993 at 58 FR 49325.

The exemption was expressly conditioned on compliance with the

limitations set forth therein. Among other conditions, PTE 93-65 was

subject to the condition that the Independent Fiduciary would monitor

the Loans to ensure compliance with the terms and conditions of the

exemption and the Loans. Under the terms of PTE 93-65, the Independent

Fiduciary was also responsible for reviewing, among other things, the

financial condition of the Employer prior to approving each

disbursement under the Loan agreement.

Section 6.4 of the written Loan agreement between the Plan and the

Employer provides that the Employer must maintain at all times certain

net worth requirements. In addition, section 6.5 of the Loan agreement

requires that the Employer maintain at all times a certain ratio of

current assets to current liabilities. (The net worth test and the

current ratio test are hereinafter referred to as the Covenants.)

The Employer represents that only one loan was made to the Employer

pursuant to PTE 93-65. It is represented that a $1.3 million loan was

made on September 29, 1993 and that the outstanding balance on that

loan as of December 13, 1994 was $991,525.41. On July 12, 1994, the

Employer entered into a settlement agreement regarding certain claims

with respect to activities of Xanalex Corporation, a predecessor

corporation to the Employer, which resulted in the Employer's failure

to satisfy the Covenants.

4. The Employer now seeks a retroactive exemption for the Past Loan

by the Plan to the Employer from the point in time when the Employer

failed to satisfy the Covenants. In support of its request for

retroactive relief, the Employer and the Independent Fiduciary maintain

that the interests of the Plan and its participants and beneficiaries

were fully protected throughout the duration of the Past Loan. In this

regard, the Independent Fiduciary was engaged to act on behalf of the

Plan with respect to the Past Loan. Any disbursement under the Loan

agreement required prior approval by the Independent Fiduciary and

could not be made unless the Independent Fiduciary found that such

disbursement was appropriate and in the interests of the Plan and its

participants and beneficiaries.

As further protection for the Plan and its participants and

beneficiaries, the Past Loan was collateralized by recorded perfected

security interests in accounts receivable (the Accounts Receivable) of

the Employer. Upon entering into the Past Loan, the Independent

Fiduciary received from the Employer any and all documentation needed

to evidence the Plan's security interest in the collateral securing the

Past Loan and the Independent Fiduciary ensured that appropriate

documentation was recorded to perfect the Plan's security interest. The

Independent Fiduciary was also responsible for ensuring that, at no

time while the Past Loan was outstanding, was the fair market value of

the Accounts Receivable securing such Loan less than 200% of the

outstanding face amount of such Past Loan.

5. The Independent Fiduciary maintains that, once apprised of the

pending breach of the Covenants, it took appropriate steps to protect

the interests of the Plan and its participants and beneficiaries. In

this regard, the Independent Fiduciary represents that,

[[Page 17822]] pursuant to its request, the default interest rate was

applied to calculate interest payments due after the Covenants were

breached.\11\ In addition, the Independent Fiduciary retained

independent counsel in June, 1994 to represent the interests of the

Plan in connection with the anticipated breach of the Covenants.

\11\The interest rate applicable upon breach of the Covenants is

the greater of 9% or the Advance Rate plus 2%. The Advance Rate is

defined as the greater of 7% or the prime rate as published in the

Wall Street Journal.

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6. The Independent Fiduciary represents that the Plan suffered no

loss as a result of the loan program and no term or condition of the

Past Loan was inconsistent with the terms and conditions described in

PTE 93-65, except for the failure to satisfy the Covenants. In

addition, the Independent Fiduciary represents that payments under the

Past Loan have remained current. Finally, the Employer will pay off the

remaining balance under the Past Loan no later than May 31, 1995.

7. In summary, the applicant represents that the past transaction

meets the statutory criteria for an exemption under section 408(a) of

the Act because: (a) The terms and conditions of the Past Loan were at

least as favorable to the Plan as those obtainable by the Plan under

similar circumstances in arm's length transactions with unrelated third

parties; (b) the Plan's independent fiduciary reviewed the terms and

conditions of the proposed exemption and the Past Loan and determined

that the Loan was in the best interest of the Plan's participants and

beneficiaries; (c) the independent fiduciary reviewed and approved the

Past Loan prior to making the disbursement; (d) the Past Loan was at

all times secured by collateral which was valued at not less that 200%

of the balance of the Loan; (e) the amount of the Past Loan did not

exceed 15% of the fair market value of the Plan's assets; (f) the

Employer will pay off the balance on the Past Loan by May 31, 1995; and

(g) except for the failure to satisfy the Covenants, the Past Loan

satisfied all other conditions of PTE 93-65.

FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department,

telephone (202) 219-8971. (This is not a toll-free number.)

Washington Mortgage Corporation, Inc. (WMC) Located in Seattle,

Washington

[Application No. D-9814]

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) as follows:

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

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

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

Code, shall not apply to: 1) the sale, exchange or transfer between WMC

and its affiliates and certain employee benefit plans (the Plans) of

certain construction loans or participation interests therein to non-

party in interest entities; and 2) the sale, exchange or transfer

between WMC and its affiliates and the Plans of any construction or

permanent loan made by a Plan to a party in interest, and the resulting

extension of credit therefrom, provided that:

(a) The terms of the transactions are not less favorable to the

Plans than the terms generally available in arm's-length transactions

between unrelated parties;

(b) Such sales, exchanges or transfers are expressly approved by a

Plan fiduciary independent of WMC and its affiliates who has authority

to manage or control those Plan assets being invested in mortgages or

participation interests therein;

(c) No investment management, advisory, underwriting fee or sales

commission or similar compensation is paid to WMC or any of its

affiliates with regard to such sale, exchange or transfer;

(d) The decision to invest in a loan or a participation interest

therein is not part of an arrangement under which a fiduciary of a

Plan, acting with the knowledge of WMC or its affiliate, causes a

transaction to be made with or for the benefit of a party in interest

(as defined in section 3(14) of the Act) with respect to the Plan;

(e) At the time of its acquisition of a loan or participation

interest therein, no Plan will have more than 25% of its assets

invested in construction and permanent mortgages;

(f) WMC and its affiliates do not and will not act as fiduciaries

with regard to any Plan investing in permanent and construction loans

and interests therein as described in this proposed exemption; and

(g) WMC shall maintain or will cause to be maintained, for the

duration of any loan or participation interest therein sold to a Plan

pursuant to this exemption, such records as are necessary to determine

whether the conditions of this exemption have been met. The records

mentioned above must be unconditionally available at their customary

location for examination for purposes reasonably related to protecting

rights under the Plans, during normal business hours, by: Any trustee,

investment manager, employer of Plan participants, employee

organization whose members are covered by a Plan, participant or

beneficiary of a Plan.

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

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

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

Code shall not apply to any transactions to which such restrictions

would otherwise apply merely because WMC or any of its affiliates is

deemed to be a party in interest with respect to a Plan by virtue of

providing services to the Plan in connection with the subject loan

transactions (or because it has a relationship to such service provider

described in section 3(14)(F), (G), (H), or (I) of the Act), solely

because of the ownership of a loan or participation interest therein as

described in this exemption by such Plan.

III. Definitions. For purposes of this exemption,

(a) An ``affiliate'' of WMC includes--

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

intermediaries, controlling, controlled by, or under common control

with WMC,

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

such person, and

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

officer, director, partner or employee.

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

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

individual.

Temporary Nature of Exemption: If the proposed exemption is

granted, it will be effective only for those transactions entered into

within eight years of the date on which the Final Grant of this

proposed exemption is published in the Federal Register.

Summary of Facts and Representations

1. WMC has originated income property (commercial and multifamily)

loans since 1949 for major institutional buyers, including pension

funds, life insurance companies and thrift institutions. In 1988, WMC

was acquired by Puget Sound Bancorp as a wholly owned subsidiary.

2. Through the decade of the 1980's and until 1993, WMC and its

affiliates engaged in permanent and construction loan origination and

servicing activities involving Plans as lenders. These activities were

conducted pursuant to the descriptions contained in proposed

[[Page 17823]] and final prohibited transaction exemptions granted by

the Department. These exemptions were PTE 85-1 (50 FR 1004, January 8,

1985), and PTE 89-78 (54 FR 35951, August 30, 1989). These exemptions

were obtained to allow WMC and its bank and non-bank affiliates to

engage in loan origination, sale and service activity and other

(unrelated) banking and non-banking commercial activity with Plans,

which would otherwise be prohibited under section 406(a) of the Act and

section 4975 of the Code.\12\ PTE 85-1 does not provide for any

expiration date, and PTE 89-78 expired on August 30, 1994.

\12\PTE 85-1 exempted transactions involving permanent loans

made to non-party in interest entities. PTE 89-78 provided relief

for transactions involving construction loans made to non-party in

interest entities, and construction and permanent loans made to

parties in interest.

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3. In 1993, through a series of acquisitions involving national

financial institutions, WMC became a subsidiary of KeyCorp, one of the

largest bank holding companies in the U.S. KeyCorp owns 21 banks and

trust companies and several related financial services companies, with

more than 1,300 branch and affiliate offices in 23 states. As of

December 31, 1994, KeyCorp had assets of $64.6 billion.

4. At present, WMC maintains offices in Seattle and Tacoma,

Washington, but does not do any loan originations. Following the

expiration of PTE 89-78 on August 30, 1994, WMC did not originate any

new loans to Plans. Prior loans are now serviced elsewhere except for a

loan made by the Carpenters Retirement Trust of Western Washington,

which is being serviced by KeyCorp Mortgage, Inc., an affiliate of WMC.

The applicant represents that seven other loans were placed with Plans

by WMC or its affiliates pursuant to PTE 89-78. The applicant

represents that no Plan has suffered any loss or default with respect

to any of these loans. To allow WMC and its affiliates to resume loan

origination and servicing activities with Plans, as a subsidiary of

KeyCorp or on its own following possible acquisition by outsiders,

KeyCorp has applied for renewal of PTE 89-78 to augment the relief

afforded under PTE 85-1.

5. The proposed activities of WMC and its affiliates may be

summarized as follows:

(1) WMC works on behalf of the borrower/developer in putting

together construction and permanent financing for commercial and

multifamily residential real estate projects. The role of WMC is to

provide or arrange for all of the construction financing and to arrange

a negotiated permanent commitment, so that construction financing is

paid off when the building is completed. In some cases, WMC or its

affiliates also participate in funding the construction or permanent

loans. WMC works on behalf of the borrower/developer to secure

permanent financing alternatively by: (a) Committing directly to the

borrower for permanent financing, with the intention of later securing

a permanent lender; (b) committing to the borrower based on a

commitment for permanent financing provided by another lending

institution to WMC; or (c) securing for the borrower, directly, a

commitment from another lending institution for the permanent

financing, with such a commitment going directly from the lender to the

borrower, but assigned to WMC during the construction phase as

additional collateral and security for the construction loan.

(2) Loan servicing might be done by WMC or an affiliate. Fees paid

to the servicer would run 1/8% to 1% per annum on the outstanding

principal balance of permanent loans. Servicing fees for construction

loans are determined as a percentage of the outstanding balance of the

loans. The applicant represents that all fees and charges are set in

advance in accordance with prevailing market conditions.\13\

\13\The Department is not proposing any relief herein for the

receipt of fees beyond that which is provided by the statutory

exemption contained in section 408(b)(2) of the Act.

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(3) In conducting these permanent and construction loan

origination, sales and servicing activities, WMC and its affiliates

would not act as a fiduciary to any lending Plan. Rather, all decisions

to invest in a loan would be made by Plan fiduciaries independent of

WMC and its affiliates. In the case of loans made to parties in

interest, these fiduciaries will also be independent of the party

receiving the loan proceeds.\14\ If construction is to be performed by

a contributing employer or other party in interest, WMC would require a

written statement executed by the independent fiduciary that its

decision to invest was not influenced or controlled by the borrower or

any other party in interest.\15\

\14\The applicant represents that no loan acquired by a Plan

which is made to a party in interest will be a loan to a fiduciary

or an affiliate thereof. In this regard, the Department notes that

any such loan would involve violations of section 406(b) of the Act

for which no relief is being proposed herein.

The applicant represents that, with respect to the subject

loans, construction and other services related to the project may,

or may not, be performed by a party in interest. The Department

notes, as it did in the proposal to both PTE 85-1 and 89-78, that

where the construction on the property which secures the loan is by

a contributing employer to the Plan and a principal of such employer

exercises fiduciary authority in approving the Plan's investment in

the loan, a separate prohibited transaction under section 406(b) of

the Act may occur, which transaction would not be covered by this

proposed exemption. See also condition (d) of Part I of this

proposed exemption which has the effect of precluding relief under

section 408(a) of the Act for certain transactions undertaken for

the benefit of parties in interest.

\15\The Department is not proposing exemptive relief herein for

any violation of section 406(b) of the Act resulting from the

provision of such construction services. See footnote above.

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(4) WMC's responsibilities in the administration or servicing of

loans sold to Plans will vary depending on the loan type. For example,

construction loans will involve: (a) Releasing construction loan draws

and hold backs as various conditions of the construction loan are

satisfied; (b) adjustment of hard-line cost items in the construction

loan budget to reflect actual costs; (c) making certain the borrower

corrects any non-monetary defaults; (d) implementing borrower-requested

change orders approved by WMC staff or independent inspectors; (e)

clearing mechanics' liens placed on the property during the course of

construction; and (f) insuring general compliance by all parties with a

construction loan agreement and related agreements.

(5) Any loan in default will involve decisions by the independent

Plan fiduciary, or by WMC in accordance with pre- approved guidelines

set forth in the loan documents. The loan documents, including default

guidelines, would be approved by the independent fiduciary. A Plan,

acting through its independent fiduciary, would also retain the ability

(with WMC's consent) to transfer, assign or otherwise dispose of its

interest in any construction loan, without payment of any fee or

penalty.

(6) As to purchase of either permanent or construction loans, or

interests therein, Plans would not pay WMC an investment management,

investment advisory, sales commission or similar fee. In addition,

Plans would not pay more for any loan interest than would be paid by an

unrelated party in an arm's-length transaction.

6. WMC represents that as a result of being a party in interest

with respect to Plans by virtue of servicing by it or affiliates of the

subject loans or participations purchased thereby, WMC and its

affiliates would be prohibited from engaging in other commercial

transactions with these Plans, such as the making of loans, which

transactions have nothing to do with the mortgages or participation

interests held by the Plans. The Department has considered WMC's

request for relief for such transactions and has decided that

[[Page 17824]] because the servicing relationship is established as a

necessary result of the purchase of a mortgage or participation

interest by a Plan, subsequent transactions between the parties

otherwise prohibited by section 406(a) are not likely to present an

inherent abuse potential. Accordingly, the Department has determined

that it would be appropriate to propose the relief from section 406(a)

contained in Part II of the proposed exemption.

7. In summary, the applicant represents that the proposed

transactions satisfy the criteria contained in section 408(a) of the

Act because: (a) The Plans will pay no more for the mortgages and

participation interests therein than would be paid by an unrelated

party in an arm's-length transaction; (b) all Plan decisions to invest

in mortgages and participation interests will be made by a Plan

fiduciary independent of WMC and its affiliates; (c) at the time of its

acquisition of a loan or a participation therein, no Plan will have

more than 25% of its assets invested in construction or permanent

mortgages; (d) the terms of the construction or permanent loans will

not be less favorable to the Plans than the terms generally available

in arm's-length transactions with unrelated parties; and (e) no

investment management, advisory, underwriting fee or sales commission

will be paid to WMC or any of its affiliates with regard to such sale,

exchange or transfer.

Notice to Interested Persons: The applicant represents that notice

will be provided to all trustees of Plans currently holding loan

investments originated and/or serviced by WMC and/or its affiliates. In

addition, WMC agrees to provide a copy of the notice of proposed

exemption and any subsequent grant of such exemption to all employee

benefit plans with whom WMC may contract in the future to provide

services as described herein. Such notification will be provided prior

to WMC entering into a contract to provide such services.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz 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 31st day of March, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 95-8395 Filed 4-6-95; 8:45 am]

BILLING CODE 4510-29-P