Proposed Exemptions; Jacor Communications Inc. Retirement Plan (the Plan)

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-09844, et al.]

Proposed Exemptions; Jacor Communications Inc. Retirement Plan

(the Plan)

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 restrictions of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exemption. The applications for exemption and the comments received

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

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

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

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

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

exemption as published in the Federal Register and shall inform

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

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

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

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

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

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

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

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

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

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

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

statement of the facts and representations.

Jacor Communications Inc. Retirement Plan (the Plan), Located in

Cincinnati, Ohio

[Application No. D-09844]

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)

and 407(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 (E) of the Code shall not apply to (1) the past receipt by the

Plan of certain stock- purchase warrants (the Warrants) pursuant to the

restructuring of Jacor Communications, Inc. (Jacor), excluding that

portion of Warrants which was acquired by the Plan's Qualified Matching

Contribution Account (the QMCA, as described below); (2) the past and

proposed future holding of the Warrants by the Plan; and (3) the

[[Page 18422]]

disposition or exercise of the Warrants by the Plan; provided that the

following conditions are satisfied:

(A) With respect to all participant accounts other than the QMCA,

the Warrants were acquired pursuant to Plan provisions for

individually-directed investment of such accounts;

(B) The Plan's receipt and holding of the Warrants occurred in

connection with the restructuring of Jacor and the Warrants were made

available to all shareholders of common stock of Jacor;

(C) The Plan's receipt and holding of the Warrants resulted from an

independent act of Jacor as a corporate entity, and all holders of the

common stock of Jacor, including the Plan, were treated in the same

manner with respect to the restructuring of Jacor; and

(D) With respect to Warrants allocated to the QMCA, the authority

for all decisions regarding the holding, disposition or exercise of the

Warrants by the Plan will be exercised by an independent fiduciary

acting on behalf of the Plan, to the extent that such decisions have

not been passed through to Plan participants; and

(E) With respect to all other accounts (described below), the

decisions regarding the holding, disposition or exercise of the

Warrants have been, and will continue to be made in accordance with

Plan provisions for individually-directed investment of participant

accounts, by the individual Plan participants whose accounts in the

Plan received Warrants in connection with the restructuring.

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

January 11, 1993, except with respect to the Warrants held by the QMCA.

With respect to those Warrants, the exemption, if granted, will be

effective July 26, 1995.

Summary of Facts and Representations

1. Jacor, the Plan sponsor, has its principal place of business in

Cincinnati, Ohio. Jacor owns and operates radio stations across the

United States and is the parent company of an affiliated group of

corporations. The Plan is a defined contribution employee benefit plan

intended to satisfy the requirements of sections 401(a) and 401(k) of

the Code. The Plan provides for individual participant accounts (the

Accounts) and participant-directed investment of the Accounts among

five investment funds, one of which invests exclusively in common stock

of Jacor (the Jacor Securities Fund). Participants can also choose to

invest in the Money Market Fund (replaced by the Stable Asset Fund as

of April 1, 1994), the Bond Fund (replaced by the International Fund as

of April 1, 1994), the Balanced Fund and the Growth Fund. The various

funds can be described as follows:

(a) Money Market Fund, which invests exclusively in short-term U.S.

Treasury obligations. The objective of this Fund is to provide

stability of principal and current income consistent with that

stability;

(b) Bond Fund, which invests in U.S. government and federal agency

securities along with high quality corporate obligations. The objective

of this Fund is to provide more income than short-term obligations, but

greater stability than long-term bonds;

(c) Balanced Fund, which invests in equity securities issued by a

broad range of companies along with corporate and government bonds. The

objective of this Fund is to provide a balance between the growth

potential of stock and the current income of bonds;

(d) Growth Fund, which invests in equity securities issued by a

broad range of companies. The objective of this Fund is long-term

growth;

(e) Jacor Securities Fund, which invests in equity securities

issued by Jacor;

(f) Stable Asset Fund, which invests in public and private debt

securities and mortgage loans. This Fund provides a fixed rate of

return that is adjusted annually; and

(g) International Fund, which invests in equity securities of

foreign corporations. The objective of this Fund is to provide long-

term growth with international diversification.

2. Each participant may have as many as four Accounts under the

Plan, known as the Elective Deferral Account, the Qualified Non-

Elective Contribution Account, the QMCA and the Rollover Account. As of

December 31, 1993, there were 416 participants in the Plan, all of whom

had at least one Account with an investment in the Jacor Securities

Fund. As of that same date, the Plan held total assets of approximately

$3,390,755. The trustees of the Plan as of January 8, 1993, were Terry

S. Jacobs, R. Christopher Weber and Jon M. Berry, all of whom were

officers and shareholders of Jacor. Terry S. Jacobs resigned as trustee

and officer of Jacor effective June 7, 1993 and as of the same date was

replaced by Randy Michaels.

3. Investment Direction.

In general, all contributions (and related earnings) allocated to

any of the Accounts on or before December 31, 1991 are invested in the

Jacor Securities Fund. Contributions (and related earnings) allocated

on or after January 1, 1992 to any Account other than the QMCA are

subject to participant-directed investment. In general, all

contributions (and related earnings) allocated to the QMCA on or after

January 1, 1992 continue to be invested in the Jacor Securities

Fund.1

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1 The Plan has special provisions which provide increased

investment options to Plan participants once they attain age 55.

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In 1995, participants were given the authority to transfer all

contributions (and related earnings) allocated to the QMCA and all

other pre-1992 contributions and earnings to any of the other

investment funds available under the Plan, in accordance with the

following schedule:

(1) First Quarter of 1995--up to 25% of formerly restricted funds

(2) Second Quarter of 1995--up to 50% of formerly restricted funds

(3) Third Quarter of 1995--up to 75% of formerly restricted funds

(4) Fourth Quarter of 1995--up to 100% of formerly restricted funds

4. Jacor represents that it entered into a restructuring agreement

with Zell/Chilmark in September, 1992. Zell/Chilmark is a Delaware

limited partnership controlled by Samuel Zell and David Schulte. Zell/

Chilmark was formed to invest in and provide capital and management

support to companies that are engaged in significant recapitalizations

or corporate restructuring. At the time of Jacor's restructuring, Zell/

Chilmark had capital commitments or investments in excess of $1

billion. The Board of Directors of Jacor selected Zell/Chilmark to work

with Jacor's creditors to formulate a restructuring plan. Zell/Chilmark

was chosen because Jacor's Board believed that it would be able to

raise the cash necessary to make a substantial equity investment and

because of its experience in working with creditor groups.

5. The restructuring consisted of an equity infusion of

approximately $6 million by Zell/Chilmark and was accomplished by way

of a merger of a corporation wholly owned by Zell/Chilmark into Jacor.

As part of this process, Zell/Chilmark acquired approximately 91.44% of

Jacor's outstanding Common Stock. Upon approval by the Federal

Communications Commission of the transfer of control of Jacor to Zell/

Chilmark on April 23, 1994, Jacor's Class B Common Stock automatically

converted to Class A Common Stock (the combination of the 2 classes of

stock is now referred to as the New Common Stock). As a result of the

restructuring, on January 11, 1993, all shareholders not electing to

receive

[[Page 18423]]

cash, including the Plan, received for each share of Common Stock held

.0423618 shares of New Common Stock and .1611234 Warrants to purchase

New Common Stock. The New Common Stock and the Warrants trade on the

National Association of Securities Dealers Automated Quotation (NASDAQ)

National Exchange. The Warrants are exercisable at $8.30 per share and

expire on January 14, 2000. Jacor represents that the decision as to

whether to keep the New Common Stock and Warrants held in the Jacor

Securities Fund or to sell those securities for cash was passed through

to Plan participants for all Accounts under the Plan other than the

funds in the QMCA.2 Decisions regarding securities held in the

QMCA were made by the Trustees.

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2 The applicant explains that, although Plan participants

had no authority over the investment of pre-1992 contributions, they

were given the authority to make decisions regarding the acquisition

of employer securities for all funds in their Accounts other than

the QMCA.

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6. Along with the option of receiving New Common Stock and

Warrants, shareholders who held shares as of November 27, 1992, were

given the right to purchase additional New Common Stock (the Additional

Rights Offering) at $5.74 per share.3 Holders of New Common Stock

could purchase 0.1237 additional shares of New Common Stock for each

share of New Common Stock held immediately after the merger of the

subsidiary of Zell/Chilmark with Jacor and after certain stock sales by

creditors of Jacor (who had been issued stock in exchange for debt

obligations) to Zell/Chilmark.4 Pursuant to the Additional Rights

Offering, Jacor sold a total of 1,000,000 shares of New Common Stock.

The Plan Trustees made the decision, on behalf of the Plan, to purchase

4,457 shares of New Common Stock in the Additional Rights Offering.

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3 The Department is not providing any exemptive relief for

any prohibited transactions that may have arisen in connection with

the Plan's ability to acquire such additional shares of New Common

Stock.

4 Zell/Chilmark and creditors who retained New Common

Stock in the debt restructuring were also given the opportunity to

purchase stock in the Additional Rights Offering.

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7. Since the Warrants acquired by the Plan fail to satisfy the

definition of ``qualifying employer securities'' contained in section

407(d)(5) of ERISA, the applicant is aware of the fact that prohibited

transactions have occurred in violation of the Act. Accordingly, Jacor

represents that within 90 days of the grant of this proposed exemption,

Jacor will file Forms 5330 with the Internal Revenue Service and will

pay all applicable excise taxes due with respect to past prohibited

transactions not covered by this exemption.

8. Under the restructuring described above, the Plan received

36,038 shares of New Common Stock and 137,074 Warrants. Prior to the

restructuring, there were 9,004,093 shares of Jacor common stock, of

which 866,514 shares, 5 or approximately 9.6%, were in the Plan.

After the restructuring, there were 9,004,093 shares of New Common

Stock, so that the Plan held less than .5% of that amount. Jacor

represents that, at the time the 137,074 Warrants were issued to the

Plan, they represented 2.6% of the assets of the Plan. Since that time,

11,290 of the Warrants have been distributed to terminated

participants. As of December 31, 1993, the remaining 125,784 Warrants

represented 22.6% of the assets of the Plan. This increase is due to

the increase in the value of each Warrant from $.20 on January 11, 1993

to $6.09 on December 31, 1993. Jacor represents that the decision of

whether to hold, sell, or exercise the Warrants for all Accounts under

the Plan other than the QMCA were passed through to the Plan

participants.

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5 As part of the restructuring, 15,774 shares of Jacor

common stock were tendered by Plan participants for cash. The

remaining 850,740 shares were converted to New Common Stock in the

restructuring.

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9. To the extent that Plan participants do not have investment

authority over the Warrants, decisions regarding Warrants held in the

QMCA will be made by an independent fiduciary retained specifically for

that purpose. The Fifth Third Bank (the Bank) has been retained as an

independent fiduciary to represent the interests of the Plan with

respect to all securities issued by Jacor including the Warrants,

except to the extent that such investment authority is being exercised

by participants in the Plan. At such time that the participants in the

Plan are given full authority over all employer securities held in the

Plan, the Bank states that it will no longer have any investment

authority under the terms of its Trust Agreement. The Bank represents

that, as of February 23, 1996, participants in the Plan have full

investment authority over employer securities held by the Plan (see

rep. 3, above).

10. The Bank is a subsidiary of Fifth Third Bancorp, Inc., a bank

holding company that is headquartered in Cincinnati, Ohio. The Bank has

been in existence for over 100 years. The trust department of the Bank

has $6.6 billion of assets under management, of which $2.5 billion of

assets is held by the Bank as fiduciary of over 500 plans that are

subject to the Act. The Bank is not related to Jacor.

11. The Bank represents that it is fully aware of its duties and

responsibilities as a fiduciary under the Act. In fulfilling its

duties, the Bank reviewed the terms and conditions of the Common Stock

and Warrants issued by Jacor and reviewed the most recent financial

statements of Jacor and other material it considered appropriate to

determine the financial condition of Jacor. Based on this review, and a

review of the current market for the securities issued by Jacor, the

Bank concluded, as of July 26, 1995, that it was currently in the best

interest of the Plan's participants and beneficiaries for the Plan to

retain all securities issued by Jacor that were currently held by the

Plan and that were subject to the investment discretion of the Bank.

12. The Bank represents that it will continue to monitor the Plan's

holding of those securities issued by Jacor that are subject to the

investment discretion of the Bank. In exercising that discretion as a

fiduciary under the Act, the Bank will on an on-going basis review all

relevant financial information related to Jacor to determine whether

the Plan should continue to hold or should sell the Jacor Common Stock

and to determine whether the Plan should hold, sell or exercise the

Warrants, or let the Warrants expire without exercise.6

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6 The Bank represents that it would only let the Warrants

expire without exercise if they had no value, which could occur if

the value of the New Common Stock drops below the exercise price of

the Warrants ($8.30 per share) prior to the expiration of the

Warrants on January 14, 2000. As of February 20, 1996, the value of

the New Common Stock was $21.25. As a result, it is not likely that

the Warrants would be allowed to expire without exercise. In any

case, it is not anticipated that the Bank would be responsible for

that decision since all investment authority in connection with the

Warrants is currently with Plan participants.

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13. In summary, the applicant represents that the transactions

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

reasons: (a) the Plan's acquisition of the Warrants resulted from an

independent act of the Employer; (b) with respect to all aspects of the

restructuring, all holders of the Common Stock were treated in the same

manner, including the Plan; (c) all decisions with respect to the

Plan's acquisition, holding and control of the Warrants were made by

the individual participants whose Accounts held interests in the Jacor

Securities Fund, except with respect to the QMCA; (d) with respect to

the QMCA, the Bank, an independent fiduciary reviewed the investments

as of July 26, 1995 and determined that the Plan's continued holding of

the employer securities was

[[Page 18424]]

appropriate and in the Plan's best interest; and (e) the Bank continued

to monitor the holding of the employer securities by the QMCA until

such time as Plan participants were given full authority over the

investment, and determined whether the Plan should hold, sell or

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exercise the Warrants or let the Warrants expire without exercise.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

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

EAI Partners, L.P. (EAI), Located in Norwalk, CT

[Application No. D-10147]

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting an exemption under

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

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

2570, Subpart B (55 FR 32836, 32847, August 10, 1990).7

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7 For purposes of this proposed exemption, reference to

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

also to the corresponding provisions of the Code.

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Section I. Exemption for the In-Kind Transfer of Assets

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

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

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

through (F) of the Code, shall not apply, as of December 29, 1995, to

the in-kind transfer of assets of employee benefit plans that are

participant-directed account plans intended to satisfy section 404(c)

of the Act and as to which EAI serves as a fiduciary (the Client

Plans), including a plan established by EAI (the EAI Plan), as well as

two plans that are sponsored by affiliates of EAI, namely, the Harding

Service Corporation et al. Profit Sharing Plan and Trust (the Harding

Plan) and the Stockwood VII, Inc. 401(k) Plan (the Stockwood

Plan),8 that are held in the Small Managers Equity Fund Trust

(SMEF) maintained by EAI in exchange for shares of the EAI Select

Managers Equity Fund (the Fund), an open-end investment company

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

which Evaluation Associates Capital Markets, Inc. (EACM), a wholly

owned subsidiary of EAI, acts as investment adviser, in connection with

the partial termination of SMEF.

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\8\ The Client Plans, the EAI Plan, the Harding Plan and the

Stockwood Plan are collectively referred to herein as the Plans. In

addition, the EAI Plan, the Harding Plan and the Stockwood Plan are

collectively referred to herein as the Related Plans.

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This proposed exemption is subject to the following conditions:

(a) No sales commissions or other fees, including any fees payable

pursuant to Rule 12b-1 of the '40 Act (the 12b-1 Fees), are paid by a

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

transfer of SMEF assets.

(b) All of the assets of a Plan that are held in SMEF are

contributed by such Plan in-kind to the Fund in exchange for shares of

such Fund. A Plan not electing to invest in the Fund receives a

distribution of its allocable share of the assets of SMEF either in

cash or in-kind.

(c) Each Plan receives shares of the Fund which have a total net

asset value that is equal in value to such Plan's allocable share of

the assets of SMEF as determined in a single valuation performed in the

same manner at the close of the same business day, using independent

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

(Rule 17a-7) under the 1940 Act, as amended, and the procedures

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

such assets. Such procedures must require that all securities for which

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

price for transactions reported on a recognized securities exchange or

NASDAQ be valued based on an average of the highest current independent

bid and lowest current independent offer, as of the close of business

on the Friday preceding the weekend of the in-kind contribution of SMEF

assets to the Fund, determined on the basis of reasonable inquiry from

at least three sources that are broker-dealers or pricing services

independent of EAI.

(d) On behalf of each Plan, a second fiduciary who is independent

of and unrelated to EAI (the Second Fiduciary) receives advance written

notice of the in-kind transfer of assets of SMEF to the Fund and full

written disclosure, which includes, but is not limited to, the

following information concerning the Fund:

(1) A current prospectus for the Fund in which a Plan is

considering investing.

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

similar services that are to be paid by the Fund to EACM; the fees

retained by EACM for secondary services (the Secondary Services), as

defined in paragraph g of Section II below; and all other fees to be

charged to or paid by the Plan and by such Fund to EAI, EACM or to

unrelated parties, including the nature and extent of any differential

between the rates of the fees.

(3) The reasons why EAI considers such investment to be appropriate

for the Plan.

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

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

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

authorizes in writing the in-kind transfer of a Plan's assets invested

in SMEF to the Fund, in exchange for shares of the Fund, and the fees

received by EACM in connection with its investment advisory services to

the Fund. Such authorization by the Second Fiduciary will be consistent

with the responsibilities, obligations and duties imposed on

fiduciaries under Part 4 of Title I of the Act.

(f) EAI sends by regular mail to the Second Fiduciary of each

affected Plan, the following information:

(1) Not later than 30 days after the completion of the in-kind

transfer transaction, a written confirmation which contains--

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

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

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

and

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

in determining the value of such securities.

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

confirmation which contains--

(A) The number of SMEF units held by the Plan immediately before

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

such SMEF units; and

(B) The number of shares in the Fund that are held by the Plan

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

total dollar amount of such shares.

(g) On an ongoing basis, EAI provides a Plan investing in the Fund

with--

(1) A copy of an updated prospectus of such Fund, at least

annually; and

(2) Upon request, a report or statement (which may take the form of

the most recent financial report, the current statement of additional

information, or some other written statement) containing a description

of all fees paid by the Fund to EAI and its affiliates.

(h) As to each Plan, the combined total of all fees received by EAI

and/or its affiliates for the provision of services to the Plan, and in

connection with the provision of services to the Fund in

[[Page 18425]]

which the Plan invests, is not in excess of ``reasonable compensation''

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

(i) All dealings between a Plan and the Fund are on a basis no less

favorable to the Plan than dealings between the Fund and other

shareholders.

(j) EAI maintains for a period of six years the records necessary

to enable the persons described below in paragraph (k) 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 EAI, the records are lost or

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

interest other than EAI, 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 (k) of

this Section II; and

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

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

referred to in paragraph (j) are unconditionally available at their

customary location for examination during normal business hours by--

(A) Any duly authorized employee or representative of the

Department, the Internal Revenue Service or the Securities and Exchange

Commission (the SEC);

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

of shares of the Fund owned by such Plan, or any duly authorized

employee or representative of such fiduciary;

(C) Any contributing employer to any participating Plan or any duly

authorized employee representative of such employer; and

(D) Any participant or beneficiary of any participating Plan, or

any duly authorized representative of such participant or beneficiary.

(2) None of the persons described in paragraph (k)(1)(B)-(D) shall

be authorized to examine trade secrets of EAI, or commercial or

financial information which is privileged or confidential.

Section II. Definitions

For purposes of this proposed exemption:

(a) The term ``EAI'' means EAI Partners, L.P. and the term ``EACM''

refers to Evaluation Associates Capital Markets, Inc.

(b) An ``affiliate'' of EAI includes--

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

intermediaries, controlling, controlled by, or under common control

with EAI. (For purposes of this paragraph, the term ``control'' means

the power to exercise a controlling influence over the management or

policies of a person other than an individual.)

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

person, and

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

officer, director, partner or employee.

(c) The term ``Fund'' refers to the EAI Select Managers Investment

Fund, a diversified open-end investment company registered under the

'40 Act for which EACM serves as an investment adviser and may also

provide some other ``Secondary Service'' (as defined below in paragraph

(g) of this Section II) which has been approved by the Fund.

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

pricing all purchases and redemptions of Fund shares, calculated by

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

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

and other assets belonging to the Fund, less the liabilities chargeable

to the portfolio, by the number of outstanding shares.

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

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

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

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

(f) The term ``Second Fiduciary'' means a fiduciary of a plan who

is independent of and unrelated to EAI. For purposes of this exemption,

the Second Fiduciary will not be deemed to be independent of and

unrelated to EAI if--

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

controlled by, or is under common control with EAI;

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

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

partner or employee of EAI (or is a relative of such persons;

(3) Such Second Fiduciary directly or indirectly receives any

compensation or other consideration for his or her own personal account

in connection with any transaction described in this proposed

exemption. However, with respect to the Related Plans (i.e., the EAI

Plan, the Harding Plan and the Stockwood Plan), the Second Fiduciary

may receive compensation from EAI in connection with the transaction

contemplated herein, but the amount or payment of such compensation may

not be contingent upon or be in any way affected by the Second

Fiduciary's ultimate decision regarding whether the Related Plans may

participate in such transaction.

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

partner or employee of EAI (or relative of such persons), is a director

of such Second Fiduciary, and if he or she abstains from participation

in the choice of a Client Plan's investment adviser, the approval of

any such purchase or sale between a Client Plan and the Fund, and the

approval of any change of fees charged to or paid by the Client Plan,

the transaction described in Section I above, then paragraph (f)(2) of

this Section II, shall not apply.

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

investment advisory or similar service which is provided by EACM to the

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

brokerage services provided by EAI Securities Inc. (EAISI) to the Fund.

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

December 29, 1995.

Summary of Facts and Representations

Description of the Parties

1. The parties involved in the subject transaction are described as

follows:

(a) EAI is a Delaware limited partnership maintaining its principal

executive office in Norwalk, Connecticut. EAI provides investment

consulting services to a number of employee benefit plan clients

through SMEF, a collective investment fund. As of October 1, 1995, EAI

had approximately $216 million of Plan assets under management in SMEF,

of which $62 million was held for participant-directed plans.

(b) SMEF, a collective investment fund established by EAI, has been

organized to comply with Revenue Ruling 81-100. SMEF is trusteed by

Boston Safe Deposit and Trust Company. Following the in-kind transfer

transaction that is described herein, SMEF has continued to exist

albeit with reduced assets.

(c) The Fund was organized on September 27, 1995 as a Massachusetts

business trust. It is registered as a no-load, open-end investment

company with the SEC under the '40 Act. Shares of beneficial interest

are being offered and sold pursuant to a registration statement under

the Securities Exchange Act of 1933 Act, as amended.

(d) EACM, a wholly owned subsidiary of EAI, manages the Fund and

[[Page 18426]]

negotiates investment advisory contracts and contracts for Secondary

Services. EACM also serves as the investment adviser to the Fund and

will receive investment advisory fees from the Fund.

(e) EAISI, a wholly owned subsidiary of EAI, serves as the

distributor of shares of the Fund but it does not receive any

compensation from the Fund.

(f) The Plans which are covered by the subject transaction include

certain Client Plans that are participant-directed account plans within

the meaning of section 404(c) of the Act for which EAI formerly served

as a fiduciary through its management of Plan assets that had been

invested in SMEF. Also covered by the subject transaction are the EAI

Plan as well as Plans that are sponsored by the Harding Services

Corporation (Harding) and Stockwood VII, Inc. (Stockwood), which are

affiliates of EAI.9 EAI formerly provided investment management

services to the Related Plans by reason of their investment in SMEF

through the end of 1995 but it did not charge the Related Plans any

fees with respect to such services. The EAI Plan, the Harding Plan and

the Stockwood Plan are participant-directed, defined contribution

plans.

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9 Specifically, EAI and EACM both have officers and

directors and, in the case of EAI, equity holders who are officers,

directors and affiliates of Harding and Stockwood.

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As of September 30, 1995, the participant, asset breakdown and the

identities of the trustees of the Related Plans were as follows:

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

No.

Related plans participants Total assets Trustees

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

EAI Plan....................................... 121 $11,877,063 Elke Bartel, Jeanne Gustafson and

Malin Zergiebel.

Harding Plan................................... 99 9,800,000 Kurt Borowsky and Frank Richardson.

Stockwood Plan................................. 10 371,000 Kurt Borowsky and Frank Richardson.

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

It is represented that none of the Related Plans is a party in interest

with respect to the other within the meaning of section 3(14) of the

Act.

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

been retained by EAI to serve as the Second Fiduciary for the Related

Plans. In such capacity, WTC was hired to approve the in-kind transfer

of the assets of the Related Plans that had been invested in SMEF to

the Fund, in exchange for shares of the Fund. WTC, the primary

subsidiary of Wilmington Trust Corporation, was established in 1903.

WTC is wholly independent of EAI and its affiliates.

As of December 31, 1994, WTC exercised discretionary authority over

approximately $26.5 billion of fiduciary assets, including

approximately $14.8 billion of the assets of plans covered by the Act

as well as non-qualified plans. Also as of December 31, 1994, WTC

served as directed trustee, agent or custodian with respect to more

than $5 billion of assets of plans covered by the Act and nonqualified

employee benefit plans.

Description of the Transaction

2. Prior to December 29, 1995, EAI required the Plans involved

herein to withdraw their assets from SMEF. It then provided these Plans

with the opportunity to contribute their withdrawn SMEF assets to the

Fund in exchange for shares of the Fund. The principal reason for the

in-kind transfer of the Plans' assets that had been invested in SMEF to

the Fund was an SEC ruling pertaining to section 3(c)(1) of the '40

Act.10 In that ruling, the SEC opined that each participant in a

Plan providing for participant-directed investments would be counted

for purposes of subjecting a collective investment fund, such as SMEF,

to reporting and disclosure requirements applicable to open-end

companies. In accordance with the SEC interpretation, EAI believed that

the assets of the affected Plans had to be removed from SMEF prior to

January 1, 1996.

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\10\ See Latham & Watkins, SEC No-Action Letter, 1994 SEC No

Act. LEXIS 910 (December 28, 1994).

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In addition, EAI believed that the interests of these Plans would

be appropriately served by use of a mutual fund, such as the Fund.

According to EAI, mutual funds are under the supervision of the SEC,

which places a greater emphasis on participant disclosure and which

provides a mechanism for approval of disclosure documentation for the

Fund. Moreover, EAI noted that mutual funds would afford Plan sponsors

and participants with easier monitoring of investments since

information concerning investment performance of the Fund would be

available in daily newspapers of general circulation.

Accordingly, EAI requests retroactive exemptive relief from the

Department with respect to the in-kind transfer of the assets of

certain Plans that had been invested in SMEF, in exchange for shares of

the Fund. The in-kind transfer transaction occurred on December 29,

1995 in connection with the partial termination of SMEF. If granted,

the proposed exemption would be effective as of December 29,

1995.11

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\11\ EAI is not requesting an exemption with respect to the

investment in the Fund by the EAI Plan, the Harding Plan or the

Stockwood Plan. EAI represents that the Related Plans may acquire or

sell share of the Fund pursuant to Prohibited Transaction Exemption

(PTE) 77-3 (42 FR 18734, April 8, 1977). PTE 77-3 permits the

acquisition or sale of shares of a registered, open-end investment

company by an employee benefit plan covering only employees of such

investment company, employees of the investment adviser or principal

underwriter for such investment company, or employees of any

affiliated person (as defined therein) of such investment adviser or

principal underwriter, provided certain conditions are met. The

Department expresses no opinion on whether any transactions between

the Fund and the Related Plans would be covered by PTE 77-3.

Similarly, EAI is not requesting exemptive relief with respect

to future acquisitions or sales of shares of the Fund by the Client

Plans. EAI represents that such transactions would be covered under

PTE 77-4 (42 FR 18732, April 8, 1977). In pertinent part, PTE 77-4

permits the purchase and sale by an employee benefit plan of shares

of a registered open-end investment company when a fiduciary with

respect to the plan is also the investment adviser of the investment

company. However, again, the Department expresses no opinion on

whether any transactions between the Client Plans and the Fund would

be covered by PTE 77-4.

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3. Plan assets formerly invested in SMEF that were exchanged for

shares of the Fund occurred in two simultaneous phases. First, EAI

obtained written approvals from all Second Fiduciaries with respect to

the in-kind transfer. EAI then transferred to each Plan its allocable

share of all assets of SMEF. It is represented that such assets

consisted of marketable securities and cash balances. Second, the

distributed assets were transferred by the Plan to the Fund, and, in

exchange, the Fund issued to each Plan an appropriate number of shares

of the Fund. These shares had an aggregate value equal to the aggregate

value of each Plan's allocable share of SMEF assets that were

transferred to the Fund.

4. With respect to the initial disclosures provided to each Second

Fiduciary, EAI represents that prior to

[[Page 18427]]

investing in the Fund, it obtained the affirmative written approval of

a Second Fiduciary of a Plan who was generally the Plan's named

fiduciary, trustee or sponsoring employer. In the case of the Related

Plans, WTC was retained for this purpose. EAI provided each Second

Fiduciary with a current prospectus for the Fund. The disclosure

statement described the fees for investment advisory or similar

services, the fees for Secondary Services and all other fees to be

charged to, or paid by, a Plan (and by such Fund) to EACM or to

unrelated parties, including the nature and extent of any differential

between the rates of the fees. In addition, the disclosure statement

specified the reasons why EAI considered an investment in the Fund was

appropriate for a Plan.

On the basis of such information, the Second Fiduciary authorized

the investment of Plan assets in the Fund through an in-kind transfer

of assets received from SMEF. Such authorization was given by the

Second Fiduciary to EAI in writing.

5. EAI represents that the in-kind transfer transaction was

conducted over the weekend of December 29, 1995 in accordance with Rule

17a-7 under the '40 Act and the procedures established by the Fund

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

Rule 17a-7 provides an exemption from section 17(a) of the '40 Act,

which prohibits, among other things, principal transactions between an

investment company and its investment adviser or affiliates of the

investment adviser.

Among the conditions of Rule 17a-7 12 is the requirement that

the transaction be effected at the ``independent current market price''

for the security involved. In this regard, the ``current market price''

for specific types of SMEF assets involved in the in-kind transfer was

determined as follows:

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\12\ Rule 17a-7 also includes the following requirements: (a)

the transaction must be consistent with the investment objectives

and policies of the Fund, as described in its registration

statement; (b) the security that is the subject of the transaction

must be one for which market quotations are readily available; (c)

no brokerage commissions or other remuneration may be paid in

connection with the transaction; and (d) the Fund's board of

directors (i.e., those directors who are independent of the Fund's

investment adviser) must adopt procedures to ensure that the

requirements of Rule 17a-7 are followed, and determine no less

frequently than quarterly that the transactions during the preceding

quarter were in compliance with such procedures.

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(a) If the security was a ``reported security'' as the term is

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

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

the consolidated transaction reporting system (the Consolidated System)

for December 29, 1995; or if there were no reported transactions in the

Consolidated System that day, the average of the highest current

independent bid and the lowest current independent offer for such

security (reported pursuant to Rule 11Ac1-1 under the '34 Act), as of

the close of business on December 29, 1995; or

(b) If the security was not a reported security, and the principal

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

exchange on December 29, 1995; or if there were no reported

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

current independent bid and lowest current independent offer on such

exchange as of the close of business on December 29, 1995; or

(c) If the security was not a reported security and was quoted in

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

bid and lowest current independent offer reported on Level 1 of NASDAQ

as of the close of business on December 29, 1995 or

(d) For all other securities, the average of the highest current

independent bid and lowest current independent offer as of the close of

business on December 29, 1995, determined on the basis of reasonable

inquiry.

6. As stated above, the in-kind transfer transaction occurred over

the weekend of December 29, 1995, using the market values as of the

preceding Friday. The value of SMEF was determined by the custodian and

portfolio accountant for the Fund in coordination with EAI. Securities

listed on the exchange were valued at their closing prices on that

Friday. Other securities were valued based on the average of current

independent bid and ask quotations as of that Friday obtained from

three independent brokers (or under a method otherwise in accordance

with Rule 17a-7). Any fees charged by independent brokers were the

responsibility of EAI. The contribution of securities was completed by

the opening of business on January 2, 1996, such that Plans whose SMEF

assets were contributed to the Fund held shares of the Fund which had

the same aggregate value as their units in SMEF as of the preceding

Friday. No sales commissions or other fees, including 12b-1 Fees, were

paid by the Plans in connection with the purchase of Fund shares

through the in-kind transfer of a Plan's assets that were invested in

SMEF.

7. Following the in-kind transfer transaction, EAI provided each

affected Plan with a written confirmation statement on January 31,

1996. This statement set forth (a) the number of SMEF units held by the

Plan immediately before the conversion, the related per unit value and

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

shares of the Fund that are held by the Plan following the conversion,

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

such shares.

In addition, on January 31, 1996, EAI provided each affected Plan

with written confirmation of (a) the identity of each security that was

valued for purposes of the transaction in accordance with Rule 17a-

7(b)(4); (b) the price of each such security for purposes of the

transaction; and (c) the identity of each pricing service or market

maker consulted in determining the value of such securities.

Representations of the Second Fiduciary for the Related Plans Regarding

the In-Kind Transfer

8. As stated above, WTC was retained by EAI as the Second Fiduciary

to oversee the in-kind transfer transaction on behalf of the EAI Plan,

the Stockwood Plan and the Harding Plan. In such capacity, WTC

represented that it understood and accepted the duties,

responsibilities and liabilities in acting as a fiduciary with respect

to the Related Plans including those duties, responsibilities and

liabilities that are imposed on fiduciaries under the Act.

WTC stated that it considered the effect and the implications of

the transaction on the Related Plans as well as other Plan clients of

EAI which had invested in SMEF. WTC noted that although SMEF would

continue to exist after December 31, 1995, it would be maintained for

Plans that were not participant-directed. Thus, WTC explained that the

in-kind transfer transaction was being offered to certain Plans

invested in SMEF on terms that were comparable to and no less favorable

than the terms that would have been reached among unrelated parties.

WTC represented that the in-kind transfer transaction was in the

best interest of the Related Plans and their participants and

beneficiaries for the following reasons: (a) In terms of the investment

policies and objectives pursued, the Fund substantially replicates SMEF

and thus the impact of the transaction on a Related Plan and its

participants would be de minimis; (b) the Fund would probably continue

to experience relative investment performance similar in nature to SMEF

given the continuity of investment objectives and policies, management

oversight and portfolio management personnel; (c) the in-kind transfer

[[Page 18428]]

transaction would not adversely affect the cash flows, liquidity or

investment diversification of a Related Plan; (d) the benefits to be

derived by the Related Plans and their participants investing in the

Fund (e.g., broader distribution permitted of the Fund to different

types of plans impacting positively on the asset size of the Fund and

resulting in cost savings to shareholders) would more than offset the

impact of minimum additional expenses that might be borne by the

Related Plans.

In opining on the appropriateness of the in-kind transfer

transaction, WTC represented that it conducted an overall review of the

Related and their respective Plan documents. WTC also stated that it

examined the total investment portfolios for the Related Plans to

determine whether or not the Related Plans were in compliance with

their investment objectives and policies. Further, WTC stated that with

respect to the Related Plans, it examined their overall liquidity

requirements and reviewed the concentration of their assets that had

been invested in SMEF as well as the portion of SMEF that comprised

their assets. Finally, WTC represented that it reviewed the

diversification provided by the investment portfolios of the Related

Plans. Based upon its review and analysis of the foregoing, WTC

represented that the in-kind transfer transaction would not adversely

affect the total investment portfolios of the Related Plans or

compliance by the Related Plans with their stated investment

objectives, policies, cash flows, liquidity positions or

diversification requirements.

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

EAI with the confirmation statements described in Representation 7. In

addition, WTC stated that it supplemented its findings following review

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

in-kind transfer transaction had resulted in the receipt by the Related

Plans of shares of the Fund equal in value to of each Related Plan's

pro rata share of assets of SMEF on the conversion date.

Ongoing Disclosures and Other Exemptive Conditions

9. On an annual basis, EAI will provide each affected Plan with a

copy of an updated prospectus for the Fund. Upon request, the Plan will

be provided with a report or statement (which may take the form of the

most recent statement of additional information, or some other written

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

EACM.

In addition, as to each individual Plan, the combined total of all

fees received by EAI and/or its affiliates for the provision of

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

to the Fund will not be in excess of ``reasonable compensation'' within

the meaning of section 408(b)(2) of the Act. Further, all dealings by

or between the Plans and the Fund will remain on a basis which is at

least as favorable to the Plans as such dealings are with other

shareholders of the Fund.

10. In summary, EAI represents that the in-kind transfer

transaction described herein satisfies the statutory criteria for an

exemption under section 408(a) of the Act because:

(a) A Second Fiduciary authorized in writing, such in-kind transfer

prior to the transaction and only after such Second Fiduciary received

full written disclosure of information concerning the Fund.

(b) Each Plan received shares of the Fund in connection with the

in-kind transfer of assets from SMEF to the Fund which were equal in

value to the Plan's allocable share of assets that had been invested in

SMEF on the date of the transfer as determined in a single valuation

performed in the same manner and at the close of the business day,

using independent sources in accordance with procedures established by

the Fund which complied with Rule 17a-7 of the '40 Act, as amended, and

the procedures established by the Fund pursuant to Rule 17a-7 for the

valuation of such assets.

(c) Within 30 days following the completion of the in-kind transfer

transaction, EAI provided the Second Fiduciary of each affected Plan

with written confirmation containing (1) the identity of the security

that was valued for purposes of the transaction in accordance with Rule

17a-7(b)(4) of the '40 Act, (2) the price of the security involved in

the transaction; and (3) the identity of the pricing service or market

maker consulted in determining the value of such securities.

(d) Within 90 days following the in-kind transfer, EAI mailed to

the Second Fiduciary of each Plan, written confirmation containing (1)

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

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

such SMEF units; and (2) the number of shares in the Fund that were

held by the Plan following the transfer, the related per share net

asset value and the total dollar amount of such shares.

(e) As to each Plan, the combined total of all fees received by EAI

and/or its affiliates for the provision of services to the Plans, and

in connection with the provision of services to the Fund will not be in

excess of ``reasonable compensation'' within the meaning of section

408(b)(2) of the Act.

(f) No sales commissions were paid by a Plan in connection with the

acquisition of shares of the Fund.

(g) With respect to investments in a Fund by the Plans, each Second

Fiduciary received full and detailed written disclosure of information

concerning the Fund, including a current prospectus and a statement

describing the fee structure, and such Second Fiduciary authorized, in

writing, the investment of the Plan's assets in the Fund and the fees

paid by the Fund to the EACM.

(h) EAI will provide ongoing disclosures to Second Fiduciaries of

Plans to verify the fees charged by the EACM to the Fund.

(i) All dealings by or between the Plans and the Fund have been and

will remain on a basis which is at least as favorable to the Plans as

such dealings are with other shareholders of the Fund.

Notice to Interested Persons

Notice of the proposed exemption will be given to Second

Fiduciaries of Plans that have investments in SMEF and from whom

approval was sought for the in-kind transfer of Plan assets to the

Fund. Such notice will be provided to interested persons by first class

mail within 14 days following the publication of the notice of pendency

in the Federal Register. Such notice will include a copy of the notice

of proposed exemption as published in the Federal Register as well as a

supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),

which shall inform interested persons of their right to comment on and/

or to request a hearing. Comments and requests for a public hearing are

due within 44 days of the publication of the notice of proposed

exemption in the Federal Register.

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

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

Pension Plan of Roper Hospital, Inc. (the Plan) Located in Charleston,

South Carolina

[Application No. D-10163]

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

[[Page 18429]]

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

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

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

the Act and the sanctions resulting from the application of section

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

the Code, shall not apply to the proposed cash sale (the Sale) by the

Plan of Separate Investment Account Group Annuity Policy No. GA-4619

(the Policy) maintained by New England Mutual Life Insurance Company

(NEL) to Roper Health System, Inc. (the Hospital), the Plan sponsor and

a party in interest with respect to the Plan, provided the following

conditions are satisfied: (a) The Sale is a one-time transaction for

cash; (b) the Plan receives no less than the greater of the fair market

value of the Policy at the time of the Sale, or $494,130; and (c) the

Plan does not pay any commissions or other expenses in connection with

the transaction.

Summary of Facts and Representations

1. The Hospital is a non-profit corporation with its principal

office at Charleston, South Carolina. The Hospital sponsors the Plan,

which is a defined benefit plan which had 2,431 participants and assets

of approximately $22,936,604 as of December 31, 1994. Wachovia Bank of

South Carolina, N.A. (the Bank) is the Plan's trustee. The Finance

Committee of the Board of Trustees of the Hospital (the Finance

Committee), however, has investment discretion with respect to the

Policy. The Finance Committee consists of officers of the Hospital.

2. In order to better serve the retirement goals of its employees,

the Board of Trustees of the Hospital (the Board) has determined to

restructure its retirement program. To that end, the Board has approved

the termination of the Plan effective as of September 30, 1995. In

place of the Plan, the Board has approved the adoption of a tax-

deferred savings plan under section 403(b) of the Code and an annuity

plan under section 403(a) of the Code. Pursuant to the termination

agreement (the Agreement), any assets remaining in the Plan after all

benefit liabilities have been satisfied in accordance with the Act will

be allocated and distributed to Plan participants in accordance with

the allocation formulas specified in the Agreement. Accordingly, it is

the Hospital's intent that the assets in the Plan be liquidated and

distributed or applied for the benefit of participants and

beneficiaries of the Plan. The applicant represents that pursuant to

the terms of the Agreement participants' accrued benefits (although not

surplus assets) were distributed on or about December 15, 1995.

Distribution of the surplus assets, which will include the proceeds

from the sale of the Policy to the Hospital (if the exemption proposed

herein is granted), will not occur until later in 1996.

3. Commencing in March of 1987 and continuing until March of 1988,

the Plan's prior trustees (the Prior Trustees), who consisted of

individuals who were officers of the Hospital, invested a total of

$1,398,064 in the Policy maintained by NEL. NEL maintains a separate

investment fund under the Policy known as the Developmental Properties

Account (the DPA). The DPA is invested in income-producing properties

throughout the United States. During the early 1990's, the DPA declined

significantly in value due to the recession and general downturn in the

real estate market, both of which adversely affected virtually all real

estate investment funds. The DPA currently is ``frozen'', meaning that

no withdrawal requests are being honored by NEL. In fact, withdrawal

requests have not been honored by NEL since June 30, 1991. Since that

date, the Policy has declined in value by approximately $909,316. The

Hospital first became aware that the DPA had been frozen at the same

time as other investors, on or about November 15, 1991, through the

1991 Third Quarter Report provided by NEL, and without any opportunity

to liquidate the Plan's investment. Accordingly, despite the DPA's

decline in value, the Plan has been forced to continue to hold the

Policy.13 As of December 31, 1995, the fair market value of the

Plan's interest in the DPA was $494,130. The fair market value was

determined by NEL by multiplying the Plan's percentage ownership in the

DPA by the aggregate fair market value of the assets of the DPA.

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13 The Department notes that the decisions to acquire and

hold the Policy are governed by the fiduciary responsibility

requirements of Part 4, Subtitle B, Title I of the Act. In this

regard, the Department is not herein proposing relief for any

violations of Part 4 which may have arisen as a result of the

acquisition and holding of the Policy issued by NEL.

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4. The applicant states that Mr. Fred Hyder of NEL has represented

that at least one investor in the DPA sold its interest in the DPA to

an unrelated buyer for one-third of its fair market value as determined

by NEL. The investor was a retirement plan that had been terminated by

the sponsoring employer. The trustee of the retirement plan was forced

to sell its interest in the DPA to an unrelated buyer well below its

stated fair market value in order to make distributions to participants

upon termination. Mr. Hyder also indicated that in his opinion there is

very little activity in the secondary market due to the inability of a

DPA investor to sell its interest in the DPA to an unrelated buyer for

its stated fair market value.

5. The Hospital has offered to purchase the Plan's interest in the

DPA for the greater of its current fair market value as determined by

NEL (without any diminution in value as described in rep. 4, above), or

$494,130. Under Section V of the Policy, the Plan cannot sell its

interest in the DPA without the consent of NEL (which consent cannot be

unreasonably withheld). However, NEL has agreed to the transfer of the

Plan's interest in the DPA to the Hospital, provided the exemption

proposed herein is granted. The applicant represents that the Finance

Committee has determined that the sale of the Policy to the Hospital is

in the best interests of the Plan and its participants and

beneficiaries because the sale will allow the Bank to liquidate the

Plan's investment in the DPA for the investment's current fair market

value and to distribute or apply the proceeds from the sale to

participants and beneficiaries in accordance with the Agreement. If the

exemption proposed herein is denied, there is no viable purchaser for

the DPA other than the Hospital. In addition, the Finance Committee

represents that if the exemption were denied, then the Plan would be

required to continue as a wasting trust solely for the purpose of

holding the Policy until it can be liquidated, which is unlikely to

occur in the near future.

6. The fair market value of the Policy will be determined by the

value reported by NEL as of the end of the quarter preceding the date

of sale. There will be no reduction in this value as described in rep.

4, above. Copley Real Estate Advisors (Copley), an indirect subsidiary

of NEL, acts as an asset manager and advisor to NEL with respect to the

DPA. Copley selects qualified appraisal firms to conduct annual outside

appraisals on the properties which make up the DPA. At quarterly dates

between annual appraisals, Copley's asset management group prepares

internal valuations. Copley represents that the internal valuations are

based on the work that is completed by the outside appraiser and the

same basic valuation methods used by the outside appraisers are used

for the internal valuation. The Hospital represents that the valuations

reported by NEL provide a reliable indication of the fair market value

of the Policy and

[[Page 18430]]

the DPA. NEL and Copley are independent of the Hospital and the Bank.

7. In summary, the applicant represents that the proposed

transaction satisfies the criteria contained in section 408(a) of the

Act because: (a) The Sale is a one-time transaction for cash, and the

Plan will pay no commissions or other expenses in connection with the

Sale; (b) the Plan will receive cash for the Policy in an amount not

less than the greater of the fair market value of the Policy as of the

date of the Sale, or $494,130; (c) the fair market value of the Policy

will be established by NEL, a party unrelated to the Plan and the

Hospital; and d) the Sale will remove the Policy, which has been

declining in value and is illiquid, from the Plan.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

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

First Virginia Banks, Inc., Located in Falls Church, Virginia

[Application Nos. D-10175 thru D-10177]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

Section I--Transactions

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

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

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

shall not apply to the following transactions provided that all of the

conditions set forth in Section II below are met:

(a) The cash sale on December 23, 1994 of certain variable rate

certificates of deposit (CDs) issued by Merrill Lynch National Bank,

Salt Lake City, Utah (the Merrill Lynch CDs) by forty (40) employee

benefit plans, Keogh plans and individual retirement accounts (IRAs),

for which First Knoxville Bank in Knoxville, Tennessee (the Bank)

serves as a fiduciary, to First Virginia Banks, Inc. (First Virginia),

a party in interest or disqualified person with respect to such plans

and IRAs;

(b) The cash sale on various dates during 1995 of certain fixed

rate CDs issued by various unrelated financial institutions (the Fixed

Rate CDs) by eighteen (18) employee benefit plans, Keogh plans and

IRAs, for which the Bank serves as a fiduciary to First Virginia, a

party in interest or disqualified person with respect to such plans and

IRAs; and

(c) The proposed cash sale of certain additional fixed rate CDs

issued by various unrelated financial institutions (the Additional

Fixed Rate CDs) by approximately twenty-one (21) employee benefit

plans, Keogh plans and IRAs, for which the Bank serves as a fiduciary,

to First Virginia, a party in interest or disqualified person with

respect to such plans and IRAs.

Section II--Conditions

(a) Each sale is a one-time transaction for cash;

(b) Each plan or IRA (hereafter referred to as ``Plan'') receives

an amount which is equal to the greater of (i) the face amount of the

CDs owned by the Plan, plus accrued but unpaid interest, at the time of

sale, or (ii) the fair market value of the CDs owned by the Plan as

determined by an independent, qualified appraiser at the time of the

sale;

(c) The Plans do not pay any commissions or other expenses with

respect to the sale of such CDs;

(d) The Bank, as trustee of the Plans, determines that the sale of

the CDs is in the best interests of each Plan and its participants and

beneficiaries at the time of the transaction;

(e) The Bank takes all appropriate actions necessary to safeguard

the interests of the Plans and their participants and beneficiaries in

connection with the transactions;

(f) Each Plan receives a reasonable rate of interest on the CDs

during the period of time such CDs are held by the Plan;

(g) The Bank or an affiliate maintains for a period of six years

the records necessary to enable the persons described below in

paragraph (h) 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 or affiliate, 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 or affiliate 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 (h)

below; and

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

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

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

their customary location for examination during normal business hours

by--

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

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

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

duly authorized employee or representative of such fiduciary, and

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

authorized employee or representative of such participant or

beneficiary;

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

shall be authorized to examine trade secrets of the Bank, or commercial

or financial information which is privileged or confidential.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective

as of December 23, 1994, for the transactions described in Section I(a)

above, and the various appropriate sale dates in 1995 for the

transactions described above in Section I(b).

Summary of Facts and Representations

1. The Bank is a wholly-owned subsidiary of First Virginia. The

Bank, formerly called the First National Bank of Knoxville, was

acquired by First Virginia in June 1994. The Bank serves as trustee,

directed trustee, or custodian of various small employee benefit plans,

Keogh plans and IRAs (collectively, the Plans). The Bank, as trustee,

has investment discretion for the assets of the Plans.

The Bank represents that following its acquisition by First

Virginia, a number of problems surfaced upon review of the investment

portfolios of the Plans regarding their acquisition and holding of

certain CDs, as discussed below.14

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\14\ The Department is expressing no opinion in this proposed

exemption regarding whether the acquisition and holding of the CDs

by the Plans violated any of the fiduciary responsibility provisions

of Part 4 of Title I of the Act.

The Department notes that section 404(a) of the Act requires,

among other things, that a fiduciary of a plan act prudently, solely

in the interest of the plan's participants and beneficiaries, and

for the exclusive purpose of providing benefits to participants and

beneficiaries when making investment decisions on behalf of a plan.

Section 404(a) of the Act also states that a plan fiduciary should

diversify the investments of a plan so as to minimize the risk of

large losses, unless under the circumstances it is clearly prudent

not to do so.

In this regard, the Department is not providing any opinion as

to whether a particular category of investments or investment

strategy would be considered prudent or in the best interests of a

plan as required by section 404 of the Act. The determination of the

prudence of a particular investment or investment course of action

must be made by a plan fiduciary after appropriate consideration to

those facts and circumstances that, given the scope of such

fiduciary's investment duties, the fiduciary knows or should know

are relevant to the particular investment or investment course of

action involved, including the plan's potential exposure to losses

and the role the investment or investment course of action plays in

that portion of the plan's investment portfolio with respect to

which the fiduciary has investment duties (see 29 CFR 2550.404a-1).

The Department also notes that in order to act prudently in making

such investment decisions, a plan fiduciary must consider, among

other factors, the availability, risks and potential return of

alternative investments for the plan. Thus, a particular investment

by a plan, which is selected in preference to other alternative

investments, would generally not be prudent if such investment

involves a greater risk to the security of a plan's assets than

comparable investments offering a similar return or result.

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[[Page 18431]]

The Merrill Lynch CDs

2. On October 18, 1993, the Bank, in its capacity as a fiduciary of

certain Plans, purchased the Merrill Lynch CDs through the brokerage

firm of Dunham & Associates Investment Counsel, Inc. (Dunham) of San

Diego, California. The Bank states that Dunham did not provide any

investment advice as a fiduciary regarding the investments made by the

Bank in the Merrill Lynch CDs for the Plans.

There were 40 Plans involved in the purchase of the Merrill Lynch

CDs by the Bank. Of these 40 Plans, approximately 32 Plans had only one

participant covered by the Plan. The Plan with the largest number of

participants was the Collier Development Company Profit Sharing Plan

(the Collier P/S Plan), which had 83 participants and beneficiaries.

The Collier P/S Plan had $101,149 in total assets, of which $26,000 or

approximately 26 percent was invested in the Merrill Lynch CDs. The

Plan with the largest amount of assets was the Theodore Haase, M.D.,

IRA (the Haase IRA) which had total assets of $1,172,511, at the time

of the transactions. The Haase IRA had $21,000 invested in the Merrill

Lynch CDs, which represented approximately two (2) percent of its total

assets. The Plan with the largest investment in the Merrill Lynch CDs

was the Gordon S. Hutchins IRA, which had such CDs with a face amount

of $99,000. This amount represented approximately 64 percent of such

Plan's total assets.

The percentage of a Plan's total assets represented by investments

in the Merrill Lynch CDs varied from as little as one (1) percent [e.g.

the Mulford Enterprises Profit Sharing Plan] to as much as 92 percent

[e.g. the Audrey Denton IRA]. However, most of the Plans had less than

25 percent of their total assets invested in the Merrill Lynch CDs.

3. The Merrill Lynch CDs were issued by Merrill Lynch National Bank

in Salt Lake City, Utah, with a total face value of $1,995,000, and are

scheduled to mature on October 18, 1998. The Merrill Lynch CDs owned by

the Plans had a total face value of $894,500. The Bank states that the

interest rate on the Merrill Lynch CDs was fixed at 5.00 percent per

annum for the first year. However, the interest rate in the subsequent

years until maturity on October 18, 1998, is a stated interest rate

offset by the current six-month London Interbank Offered Rate (LIBOR)

as follows: (i) years two and three--8.50 percent per annum minus six-

month LIBOR; and (ii) years four and five--10.50 percent minus six-

month LIBOR.

4. The Bank represents that the information provided by Dunham to

the Bank prior to the Bank's purchase of the Merrill Lynch CDs on

behalf of the Plans indicated that there was no early withdrawal

penalty. However, the Bank states that when it requested to redeem the

Merrill Lynch CDs without a withdrawal penalty, the request was

declined by Dunham, who indicated that such CDs could not be redeemed

prior to maturity, with or without penalty.

5. The Bank represents that the fair market value of the Merrill

Lynch CDs was significantly below their face value as of December 1994.

The Bank states that the significant decline in the fair market value

of the Merrill Lynch CDs was attributable to two factors: (i) the fact

that the interest rate on the CDs dropped to 2.54 percent (8.50 percent

minus LIBOR), effective for the six-month period beginning October 18,

1994; 15 and (ii) rising interest rates in the marketplace for

comparable fixed income investments of the same duration, as measured

by various interest rate indexes at the time.

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

\15\ In this regard, the applicant states that the six-month

LIBOR rate was 3.375 percent on October 18, 1993, the date on which

the Merrill Lynch CDs were acquired, and 6.9375 percent on December

13, 1994, prior to the sale of such CDs to the Holding Company

discussed herein. The interest paid originally on the Merrill Lynch

CDs was 5.00 percent as of October 18, 1993, and 2.54 percent as of

December 13, 1994.

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

Therefore, the Bank made a determination that it would be in the

best interests of the Plans to sell the CDs to the Holding Company to

avoid the investment losses which would result to the Plans from any

sale on the open market.

6. Davenport & Company of Virginia, Inc. (Davenport), an

independent qualified appraiser located in Richmond, Virginia,

appraised the Merrill Lynch CDs as having a fair market value of

approximately $70.75 per $100 of face value, as of December 23, 1994.

Davenport's analysis described the Merrill Lynch CDs as ``inverse

floaters'' paying below market interest rates at the time of the

transaction. Davenport states that the Merrill Lynch CDs are a

``derivative type of security'' which involves a complicated pricing

process to determine market value. Davenport represents that dealers

trading such securities use data from the interest rate swap market and

various interest rate forecasts to determine their bid prices. In

addition, Davenport notes that since the Merrill Lynch CDs are traded

over-the-counter and are not listed on an exchange, dealers have

different options as to how to value such securities. Davenport

concluded that as a result of the then current interest rates, as

measured by LIBOR and other indexes at the time of the transaction, and

market data concerning interest rate forecasts, there were few dealers

or other buyers interested in purchasing the Merrill Lynch CDs without

a significant discount on their face value.

7. On December 23, 1994, the Holding Company purchased the Merrill

Lynch CDs from the Plans for cash at their full face value, an amount

which was significantly above the fair market value of the CDs at that

time as determined by Davenport. In addition, the Holding Company paid

the Plans interest at the originally stated rate of 5.00 percent per

annum through the date of purchase, even though the Merrill Lynch CDs

began earning interest at an annual rate of 2.54 percent on October 18,

1994. The Plans did not pay any commissions or other expenses with

respect to the transactions.

The Bank states that it engaged in the transaction on behalf of the

Plans for the following reasons: (i) the purchase of the Merrill Lynch

CDs by the Holding Company provided the Plans with full access to the

total face value of the CDs, without any withdrawal penalty, and

avoided the investment loss which would have occurred from a sale of

the CDs on the open market; (ii) as a result of the transaction, the

Plans had the funds immediately available for either reinvestment at

the current higher market interest rates or for distribution to the

Plan participants and beneficiaries, as appropriate; (iii) the interest

rate of 5.00 percent per annum paid on the CDs by the Holding Company

was significantly higher than the effective interest rate of 2.54

percent per annum being paid on the CDs at the time of the transaction;

and (iv) since the Merrill Lynch CDs could not be redeemed prior to

maturity, such CDs became effectively an illiquid

[[Page 18432]]

investment which was unsuitable for the Plans.

Certain Fixed Rate CDs

8. On various dates prior to June 1994, the Bank, in its capacity

as a fiduciary of certain Plans, purchased the Fixed Rate CDs through

brokerage firms unrelated to the Bank and its affiliates. The Bank

states that these brokerage firms did not provide any investment advice

as a fiduciary regarding the investments made by the Bank in the Fixed

Rate CDs for the Plans. There were approximately forty-three (43)

different Fixed Rate CDs held by such Plans as of December 1994.

There were 18 Plans involved in the purchase of the Fixed Rate CDs

by the Bank. Of these 18 Plans, approximately 13 Plans had only one

participant covered by the Plan. The Plan with the largest number of

participants was the Farragut Ditching Profit Sharing Plan (the

Farragut P/S Plan), which had approximately 50 participants and

beneficiaries and total assets of $694,803 at the time of the

transactions. The Farragut P/S Plan had $196,000 invested in the Fixed

Rate CDs, which represented approximately 28 percent of its total

assets. The Plan with the largest amount of total assets was the Jayne

C. Tilley IRA (the Tilley IRA), which had approximately $989,733 at the

time of the transactions. The Plan with the largest investment in the

Fixed Rate CDs was also the Tilley IRA, which had such CDs with a face

amount of $209,000. This amount represented approximately 21 percent of

such Plan's total assets at the time of the transactions.

The percentage of a Plan's total assets represented by investments

in the Fixed Rate CDs varied from as little as one (1) percent [e.g.

the Dean Cox IRA] to as much as 96 percent [e.g. the National Fuel

SEP]. However, most of the Plans had less than 30 percent of their

total assets invested in the Fixed Rate CDs.

9. The Fixed Rate CDs were issued by various financial

institutions, all of which were unrelated to the Bank and its

affiliates. These financial institutions were: (a) First USA Bank, in

Wilmington, Delaware; (b) Bluebonnet Savings Bank, FSB, in Dallas,

Texas; (c) State Bank of India, in New York, New York; (d) Columbia

First Bank, in Arlington, Virginia; (e) Amerifed Bank, FSB, in Joliet,

Illinois; (f) Home Savings of America, in Los Angeles, California; (g)

FNB Boston, in Boston, Massachusetts; (h) Provident Bank, in

Cincinnati, Ohio; (i) Home Federal Bank of Tennessee, FSB, in

Knoxville, Tennessee; (j) Investors Thrift and Loan, in Monterey,

California; (k) Greenwood Trust Company, in New Castle, Delaware; and

(l) Merrill Lynch National Bank, in Salt Lake City, Utah.

The Fixed Rate CDs held by the Plans had a total face value of

$1,199,150, with maturity dates ranging from May 1995 to January 1999.

The Bank states that the interest rates on these CDs was fixed in each

case for the entire length of the CDs. The interest rates paid on the

Fixed Rate CDs ranged from 4.80 percent per annum for the CD issued by

Amerifed Bank [with a par value of $10,000 and maturity on August 18,

1995] to 6.25 percent per annum for the CD issued by FNB Boston [with a

par value of $20,100 and maturity on January 1, 1999]. However,

subsequent to the purchase of the Fixed Rate CDs by the Plans, the Bank

learned that these CDs could not be redeemed prior to maturity, with or

without penalty.

10. The Bank represents that the fair market value of each of the

Fixed Rate CDs was below its face value during 1995. The Bank states

that the decline in the fair market value of the Fixed Rate CDs was

attributable to rising interest rates in the marketplace for comparable

fixed income investments of the same duration, as measured by various

interest rate indexes at the time.

Therefore, the Bank made a determination that it would be in the

best interests of the Plans to sell the Fixed Rate CDs to the Holding

Company prior to their maturity to avoid any investment losses which

could result to the Plans from a sale of such CDs on the open market.

11. Davenport also appraised each of the Fixed Rate CDs as having a

fair market value which was below its face value at the time of the

subject transactions in 1995. These valuations ranged from

approximately $91.658 per $100 of face value, as of March 14, 1995, for

the Fixed Rate CD issued by Greenwood Trust [which pays 5.00 percent

per annum and is due to mature on September 28, 1998], to approximately

$99.216 per $100 face value, as of April 19, 1995, for the Fixed Rate

CD issued First USA Bank [which paid 6.15 percent per annum and matured

on May 29, 1995].

Davenport's analysis was based on information from brokerage firms

and banks that trade such CDs. Davenport represents that the Fixed Rate

CDs are not as liquid as other fixed income securities due to a number

of factors including par amount, lack of issuer recognition, limited

secondary market, lack of knowledge of the issuers financial strength

and their non-rated status. Davenport states that dealers that trade

such CDs usually demand yields between 50-70 basis points above the

yield for comparable U.S. Treasury securities to account for these

factors, despite the U.S. Government guarantee for CDs with face

amounts under $100,000. Davenport's analysis estimated that bids for

the Fixed Rate CDs would require an average yield of approximately 60

basis points above the yield for comparable U.S. Treasury securities,

before deducting approximately $7.50 per $1,000 face amount as an

average commission for an open market transaction. Davenport's

conclusions regarding the market value of the Fixed Rate CDs supported

the Bank's determinations to sell these CDs to the Holding Company.

12. On various dates during 1995, the Holding Company purchased the

Fixed Rate CDs from the Plans for cash prior to maturity at their full

face value, an amount which was above the fair market value of the CDs

at that time as determined by Davenport. The Bank states that these

transactions occurred on the following dates: (i) 10 Fixed Rate CDs

were sold on March 14, 1995; (ii) one Fixed Rate CD was sold on March

31, 1995; (iii) three Fixed Rate CDs were sold on April 7, 1995; (iv)

two Fixed Rate CDs were sold on April 19, 1995; (v) one Fixed Rate CD

was sold on April 27, 1995; (vi) three Fixed Rate CDs were sold on May

26, 1995; (vii) four Fixed Rate CDs were sold on June 1, 1995; (viii)

three Fixed Rate CDs were sold on June 2, 1995; (ix) one Fixed Rate CD

was sold on August 2, 1995; (x) five Fixed Rate CDs were sold on August

7, 1995; (xi) four Fixed Rate CDs were sold on August 8, 1995; and

(xii) six Fixed Rate CDs were sold on August 11, 1995. In each case,

the Holding Company paid the Plans any accrued but unpaid interest at

the stated fixed rate for the CD through the date of purchase. The

Plans did not pay any commissions or other expenses with respect to the

transactions.

The Bank states that it engaged in these transactions on behalf of

the Plans for the following reasons: (i) The purchase of the Fixed Rate

CDs by the Holding Company provided the Plans with full access to the

total face value of the CDs, without any withdrawal penalty, and

avoided the investment loss which would have occurred from a sale of

the CDs on the open market; (ii) as a result of the transaction, the

Plans had the funds immediately available for either reinvestment at

the current higher market interest rates or for distribution to the

Plan participants and beneficiaries, as appropriate; and (iii) since

the Fixed Rate CDs could not be redeemed prior to maturity, such CDs

became effectively illiquid investments which were unsuitable for the

Plans.

[[Page 18433]]

Additional Fixed Rate CDs

13. On various dates prior to June 1994, the Bank, in its capacity

as a fiduciary of certain Plans, purchased the Additional Fixed Rate

CDs through brokerage firms unrelated to the Bank and its affiliates.

The Bank states that these brokerage firms did not provide the Bank

with any investment advice as a fiduciary regarding the investments in

the Additional Fixed Rate CDs made for the Plans. There are

approximately sixteen (16) different Additional Fixed Rate CDs held by

such Plans.

There were 21 Plans involved in the purchase of the Additional

Fixed Rate CDs by the Bank. Of these 21 Plans, approximately 16 Plans

currently have only one participant covered by the Plan. The Plan with

the largest number of participants is the Bandit Lites Profit Sharing

Plan (the Bandit Lites P/S Plan), which has approximately 37

participants and beneficiaries. The Bandit Lites P/S Plan has

approximately $240,935 in total assets, of which $53,000 or

approximately 21 percent of such assets are invested in the Additional

Fixed Rate CDs. The Plan with the largest amount of assets is the

Douglas G. Slater IRA (the Slater IRA), which has approximately

$2,454,803. The Plan with the largest investment in the Additional

Fixed Rate CDs is also the Slater IRA, which has such CDs with a face

amount of $383,000. This amount represents approximately 15.5 percent

of such Plan's total assets.

The percentage of a Plan's total assets represented by investments

in the Additional Fixed Rate CDs varies from as little as two (2)

percent [e.g. the Donald Campbell SEP-IRA] to as much as 87 percent

[e.g. the William Myers IRA]. However, most of the Plans have less than

30 percent of their total assets invested in the Additional Fixed Rate

CDs.

14. The Additional Fixed Rate CDs were issued by various financial

institutions unrelated to the Bank and its affiliates (see list in

Paragraph 9 above). The Additional Fixed Rate CDs held by the Plans

have a total face value of $875,150, with maturity dates ranging from

June 1996 until January 1999. The Bank states that the interest rates

on these CDs are fixed in each case for the entire length of the CDs.

The interest rates on the Additional Fixed Rate CDs range from 5.00

percent per annum for the CD issued by Bluebonnet Savings Bank [with a

par value of $10,000 and maturity on June 14, 1996] to 5.50 percent per

annum for the CD issued by Provident Bank [with a par value of $19,000

and maturity on December 10, 1997].

The Bank represents that at the time the Additional Fixed Rate CDs

were purchased, the Bank believed that there was no early withdrawal

penalty. However, the Bank states that it subsequently learned that

these CDs cannot be redeemed prior to maturity, with or without

penalty.

15. The Bank proposes to sell the Additional Fixed Rate CDs to the

Holding Company for cash prior to their maturity at an amount equal to

the greater of either: (i) The face amount of such CDs, plus accrued

interest; or (ii) the fair market value of such CDs, plus accrued

interest, as determined by an independent, qualified appraiser at the

time of the transaction.

Davenport has provided an opinion as to the market value of the

Additional Fixed Rate CDs, as of September 21, 1995. Davenport's

valuations for these CDs as of such date ranged from approximately

$95.112 per $100 of face value for the Additional Fixed Rate CD issued

by Greenwood Trust [which pays 5.00 percent per annum and is due to

mature on September 29, 1998], to approximately $98.28 per $100 of face

value for the Additional Fixed Rate CD issued by Bluebonnet Savings

Bank [which pays 5.00 percent per annum and is due to mature on June

14, 1996].

The Bank states that it wants to engage in the proposed

transactions on behalf of the Plans for the following reasons: (i) The

purchase of the Additional Fixed Rate CDs by the Holding Company would

provide the Plans with full access to the total face value of the CDs,

without any withdrawal penalty, and would avoid the possibility of

investment losses that may occur in a sale of the CDs on the open

market; (ii) as a result of the transaction, the Plans will have the

funds immediately available for either reinvestment at any higher

market interest rates currently available at the time of the proposed

transaction or for distribution to the Plan participants and

beneficiaries, as appropriate; and (iii) since the Additional Fixed

Rate CDs cannot be redeemed prior to maturity, such CDs are effectively

illiquid investments which are unsuitable for the Plans.

Therefore, the Bank believes that it would be in the best interests

of the Plans to sell certain of the Additional Fixed Rate CDs to the

Holding Company prior to their maturity. The Bank states that the Plans

will not pay any commissions or other expenses with respect to the

sale.

16. In summary, the Bank represents that the subject transactions

satisfy the statutory criteria of section 408(a) of the Act because:

(a) Each sale has been and will be a one-time transaction for cash; (b)

each Plan has received or will receive an amount which is equal to the

greater of (i) the face amount of the CDs owned by the Plan, plus

accrued but unpaid interest, at the time of sale, or (ii) the fair

market value of the CDs owned by the Plan as determined by an

independent, qualified appraiser at the time of the sale; (c) the Plans

have not paid and will not pay any commissions or other expenses with

respect to the sales of the CDs; (d) the Bank, as trustee of the Plans,

has determined and will determine that each sale of the CDs was or will

be in the best interests of the Plan and its participants and

beneficiaries at the time of the transaction; (e) the Bank has taken

and will take all appropriate actions necessary to safeguard the

interests of the Plans and their participants and beneficiaries in

connection with the transactions; and (f) each Plan has received and

will receive a reasonable rate of interest on the CDs during the period

of time such CDs were or are held by the Plan.

Notice to Interested Persons

The applicant states that notice of the proposed exemption shall be

made by first class mail to the appropriate Plan fiduciaries within

fifteen days following the publication of the proposed exemption in the

Federal Register. This notice shall include a copy of the notice of

proposed exemption as published in the Federal Register and a

supplemental statement (see 29 CFR 2570.43(b)(2)) which informs

interested persons of their right to comment on and/or request a

hearing with respect to the proposed exemption. Comments and requests

for a public hearing are due within forty-five days following the

publication of the proposed exemption in the Federal Register.

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

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

First Security Group Life Insurance Plan (the Plan) Located in Salt

Lake City, Utah

[Application No. L-10178]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and in accordance with the

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

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

of sections 406 (a) and (b) of the Act shall not apply to the

reinsurance of risks and the receipt of

[[Page 18434]]

premiums therefrom by First Security Life Insurance Company of Arizona

(FSLIA) from the insurance contracts sold by Minnesota Mutual Life

Insurance Company (MM) or any successor insurance company to MM which

is unrelated to First Security Corporation (FSC), to provide life

insurance benefits to participants in the Plan, provided the following

conditions are met:

(a) FSLIA--

(1) Is a party in interest with respect to the Plan by reason of a

stock or partnership affiliation with FSC that is described in section

3(14) (E) or (G) of the Act,

(2) Is licensed to sell insurance or conduct reinsurance operations

in at least one of the United States or in the District of Columbia,

(3) Has obtained a Certificate of Authority from the Insurance

Commissioner of its domiciliary state which has neither been revoked

nor suspended, and

(4)(A) Has undergone an examination by an independent certified

public accountant for its last completed taxable year immediately prior

to the taxable year of the reinsurance transaction; or

(B) Has undergone a financial examination (within the meaning of

the law of its current domiciliary State, Arizona) by the Insurance

Commissioner of the State of Arizona within 5 years prior to the end of

the year preceding the year in which the reinsurance transaction

occurred.

(b) The Plan pays no more than adequate consideration for the

insurance contracts;

(c) No commissions are paid with respect to the direct sale of such

contracts or the reinsurance thereof; and

(d) For each taxable year of FSLIA, the gross premiums and annuity

considerations received in that taxable year by FSLIA for life and

health insurance or annuity contracts for all employee benefit plans

(and their employers) with respect to which FSLIA is a party in

interest by reason of a relationship to such employer described in

section 3(14) (E) or (G) of the Act does not exceed 50% of the gross

premiums and annuity considerations received for all lines of insurance

(whether direct insurance or reinsurance) in that taxable year by

FSLIA. For purposes of this condition (d):

(1) the term ``gross premiums and annuity considerations received''

means as to the numerator the total of premiums and annuity

considerations received, both for the subject reinsurance transactions

as well as for any direct sale or other reinsurance of life insurance,

health insurance or annuity contracts to such plans (and their

employers) by FSLIA. This total is to be reduced (in both the numerator

and the denominator of the fraction) by experience refunds paid or

credited in that taxable year by FSLIA.

(2) all premium and annuity considerations written by FSLIA for

plans which it alone maintains are to be excluded from both the

numerator and the denominator of the fraction.

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

will be effective August 1, 1993.

Preamble

On August 7, 1979, the Department published a class exemption

[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44 FR 46365] which

permits insurance companies that have substantial stock or partnership

affiliations with employers establishing or maintaining employee

benefit plans to make direct sales of life insurance, health insurance

or annuity contracts which fund such plans if certain conditions are

satisfied.

In PTE 79-41, the Department stated its views that if a plan

purchases an insurance contract from a company that is unrelated to the

employer pursuant to an arrangement or understanding, written or oral,

under which it is expected that the unrelated company will subsequently

reinsure all or part of the risk related to such insurance with an

insurance company which is a party in interest with respect to the

plan, the purchase of the insurance contract would be a prohibited

transaction.

The Department further stated that as of the date of publication of

PTE 79-41, it had received several applications for exemption under

which a plan or its employer would contract with an unrelated company

for insurance, and the unrelated company would, pursuant to an

arrangement or understanding, reinsure part or all of the risk with

(and cede part or all of the premiums to) an insurance company

affiliated with the employer maintaining the plan. The Department felt

that it would not be appropriate to cover the various types of

reinsurance transactions for which it had received applications within

the scope of the class exemption, but would instead consider such

applications on the merits of each individual case.

Summary of Facts and Representations

1. FSC is incorporated under the laws of the State of Delaware and

is a regional bank holding company with banking subsidiaries in six

western states. In addition, it has ten other subsidiaries, including a

leasing company, a mortgage company, a life insurance company (FSLIA),

an insurance agency company, a discount securities brokerage company,

two financial services companies, and two companies providing technical

and logistical services to other FSC subsidiaries.

2. FSLIA is a corporation organized under the laws of Arizona with

its principal administrative offices in Salt Lake City, Utah. FSLIA was

originally organized in Texas in August, 1954 and operated as a life

insurance company domiciled in that State until 1991. On December 20,

1991, FSLIA moved its corporate domicile from Texas to Arizona. FSLIA

has always been a wholly owned subsidiary of FSC and is currently

licensed to underwrite life insurance business in Arizona. FSLIA is

primarily engaged in the businesses of: (i) Fully underwriting credit

life and disability insurance indirectly to the general public through

an unrelated insurance underwriter; and (ii) reinsurance of credit life

and disability policies sold by other insurance companies.

3. The Plan is sponsored by FSC and most of its subsidiaries. The

Plan is composed of two parts, the First Security Basic Group Term Life

Insurance Plan, and the First Security Add-on Group Life Insurance Plan

(which provides both optional add-on employee coverage and optional

dependent coverage. It is a welfare benefit plan providing life

insurance on the lives of all employees who are regularly scheduled to

work 25 hours per week, as well as add-on life insurance on the lives

of such employees and life insurance on the lives of the dependents of

such employees who voluntarily elect to have and pay for the coverage.

The Basic Term Life Insurance Plan had 7,044 participants as of

September 30, 1995, and the Add-on Group Life Insurance Plan had 3,333

participants with coverage on their own lives and 2,698 participants

with dependent coverage as of that date. Premiums for basic coverage

are paid for by the employers, while premiums for add-on and dependent

insurance are wholly paid for by the employees through payroll

deduction. The premiums are transferred twice monthly to a VEBA, from

which they are remitted monthly to the direct insurer.

4. The life insurance is currently underwritten by MM, an

unaffiliated insurance carrier. The life insurance benefits under the

Plan are provided by MM and reinsured on a 50% basis by FSLIA, i.e.,

FSLIA receives 50% of the premiums paid and pays 50% of the claims

under the MM policy. The

[[Page 18435]]

reinsurance contract between FSLIA and MM was entered into effective

August 1, 1993, and was actually implemented in stages between that

date and December 31, 1993. The applicants have requested that this

proposed exemption apply to any successor company to MM that is also

unrelated to FSC should FSC decide to insure this life insurance

coverage with another carrier under the same kind of arrangement.

5. The applicants represent that the subject transaction has not

and will not in any way affect the cost to the insureds of the group

life insurance contracts, and the Plan has paid and will pay no more

than adequate consideration for the insurance. Also, Plan participants

are afforded insurance protection from MM, one of the largest and most

experienced group insurers in the United States, at competitive rates

arrived at through arm's-length negotiations. MM is rated A++ by the

A.W. Best Company, whose insurance ratings are widely used in financial

and regulatory circles. MM has assets in excess of $8.5 billion and

reserves set aside for group life and accident and health policies of

nearly $346 million. MM will continue to have the ultimate

responsibility in the event of loss to pay insurance benefits to the

employee's beneficiary.16 The applicants represent that FSLIA is a

sound, viable company which does a substantial amount of business

outside its affiliated group of companies. FSLIA is substantially

dependent upon insurance customers that are unrelated to itself and its

affiliates for premium revenue.

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\16\ The applicants represent that any successor to MM would be

a legal reserve life insurance company with assets of not less than

$500,000,000, and thus be of such a size as to afford similar

protection and responsibility.

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

6. The applicants represent that the subject reinsurance

transaction has met and will continue to meet all of the conditions of

PTE 79-41 covering direct insurance transactions:

(a) FSLIA is a party in interest with respect to the Plan (within

the meaning of section 3(14)(G) of the Act) by reason of stock

affiliation with FSC, which maintains the Plan.

(b) FSLIA is licensed to do business in Arizona;

(c) FSLIA has been audited by the independent certified public

accounting firm of Deloitte & Touche for each of its fiscal years since

1992 and has therefore undergone such an examination for each completed

taxable year of the reinsurance transaction.

(d) FSLIA has received Certificates of Authority from its

respective domiciliary states (first Texas, then Arizona) which have

been audited or reviewed annually since its organization and which have

neither been revoked nor suspended.

(e) The Plan has paid and will pay no more than adequate

consideration for the insurance. The subject transaction has not and

will not in any way affect the cost to the insureds of the group life

insurance transaction.

(f) No commissions have been or will be paid with respect to the

direct insurance or the reinsurance agreements between MM (or any

successor thereto) and FSC and FSLIA.

(g) For each taxable year of FSLIA, the ``gross premiums and

annuity considerations received'' in that taxable year for group life

and health insurance (both direct insurance and reinsurance) for all

employee benefit plans (and their employers) with respect to which

FSLIA is a party in interest by reason of a relationship to such

employer described in section 3(14)(E) or (G) of the Act have not

exceeded and will not exceed 50% of the ``gross premiums and annuity

considerations received'' by FSLIA from all lines of insurance in that

taxable year. Most of the premium income of FSLIA comes from

reinsurance, but some is credit life insurance written on a direct

basis. FSLIA is principally in the business of reinsurance. The

applicants represent that the premiums for the Plan insurance have

never exceeded 18.8% of FSLIA's total premiums. In 1995, the premium

income of FSLIA came from the following sources in the following

amounts:

(1) MM reinsurance on the subject Plan group policy: $559,209.

(2) Reinsurance of credit life insurance sold to individual

customers of FSC group--

(A) American Bankers Credit reinsurance: $1,463,747

(B) Central States of Omaha Visa Credit reinsurance: $807,049

(C) Balboa Credit reinsurance on commercial loans: $154,000.

Thus, more than 81% of FSLIA's premiums for 1995 were derived from

insurance (or reinsurance thereon) sold to entities other than FSC and

its affiliated group.

7. In summary, the applicants represent that the subject

transaction has met and will continue to meet the criteria of section

408(a) of the Act because: a) Plan participants and beneficiaries are

afforded insurance protection by MM, one of the largest and most

experienced group insurers in the United States, at competitive market

rates arrived at through arm's-length negotiations; b) FSLIA is a

sound, viable insurance company which does a substantial amount of

public business outside its affiliated group of companies; and c) each

of the protections provided to the Plan and its participants and

beneficiaries by PTE 79-41 has been and will continue to be met under

the subject reinsurance transaction.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

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

Chicago Trust Company (Chicago Trust) Located in Chicago, IL

[Application No. D-10222]

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting an exemption under

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

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

2570, Subpart B (55 FR 32836, 32847, August 10, 1990).17

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17 For purposes of this proposed exemption, reference to

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

also to the corresponding provisions of the Code.

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Section I. Exemption for the In-Kind Transfer of Assets

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

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

application of section 4975 of the Code by reason of section 4975(c)(1)

(A) through (F) shall not apply, effective September 21, 1995, to the

in-kind transfer to any diversified open-end investment company (the

Fund or Funds) registered under the Investment Company Act of 1940 (the

'40 Act) to which Chicago Trust or any of its affiliates (collectively,

Chicago Trust) serves as investment adviser and/or may provide other

services, of the assets of various employee benefit plans (the Client

Plans), including plans established or maintained by Chicago Trust (the

In-House Plans; collectively, the Plans) that are either held in

certain collective investment funds (the CIF or CIFs) maintained by

Chicago Trust as trustee, investment manager, in exchange for shares of

such Funds, provided that the following conditions are met:

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

each affected In-House Plan or Client Plan and who is independent of

and unrelated to Chicago Trust, as defined in paragraph (h) of Section

III below, receives advance written notice of the in-kind transfer of

assets of the CIFs in exchange

[[Page 18436]]

for shares of the Funds and the disclosures described in paragraph (f)

of Section II below.

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

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

kind transfer of assets of an In- House Plan or a Client Plan in

exchange for shares of the Funds, the investment of such assets in

corresponding portfolios of the Funds, and, in the case of a Client

Plan, the fees received by Chicago Trust pursuant to its investment

advisory agreement with the Funds. Such authorization by the Second

Fiduciary is to be consistent with the responsibilities, obligations

and duties imposed on fiduciaries by Part 4 of Title I of the Act.

(c) No sales commissions or redemption fees are paid by an In-House

Plan or a Client Plan in connection with the in-kind transfers of

assets of the CIFs in exchange for shares of the Funds.

(d) All or a pro rata portion of the assets of an In-House Plan or

a Client Plan held in the CIFs are transferred in-kind to the Funds in

exchange for shares of such Funds. A Plan not electing to participate

in the Funds receives a cash payment representing a pro rata portion of

the assets of the terminating CIF before the final liquidation takes

place.

(e) The CIFs receive shares of the Funds that have a total net

asset value equal in value to the assets of the CIFs exchanged for such

shares on the date of transfer.

(f) The current value of the assets of the CIFs to be transferred

in-kind in exchange for shares is determined in a single valuation

performed in the same manner and at the close of business on the same

day, using independent sources in accordance with the procedures set

forth in Rule 17a-7(b) (Rule 17a-7) under the '40 Act, as amended from

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

pronouncement and the procedures established pursuant to Rule 17a-7 for

the valuation of such assets. Such procedures must require that all

securities for which a current market price cannot be obtained by

reference to the last sale price for transactions reported on a

recognized securities exchange or NASDAQ be valued based on an average

of the highest current independent bid and lowest current independent

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

of the CIF transfers determined on the basis of reasonable inquiry from

at least three sources that are broker-dealers or pricing services

independent of Chicago Trust.

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

transfer of assets of the CIFs in exchange for shares of the Funds,

Chicago Trust sends by regular mail to the Second Fiduciary, who is

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

unrelated to Chicago Trust, as defined in paragraph (h) of Section III

below, a written confirmation that contains the following information:

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

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

Act;

(2) The price of each such assets for purposes of the transaction;

and

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

in determining the value of such assets.

(h) Not later than 90 days after completion of each in-kind

transfer of assets of the CIFs in exchange for shares of the Funds,

Chicago Trust sends by regular mail to the Second Fiduciary, who is

acting on behalf of each affected In-House Plan or Client Plan and who

is independent of and unrelated to Chicago Trust, as defined in

paragraph (h) of Section III below, a written confirmation that

contains the following information:

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

before the in-kind transfer (and the related per unit value and the

aggregate dollar value of the units transferred); and

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

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

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

(i) The conditions set forth in paragraphs (c), (d), (e), (p) and

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

satisfied.

Section II. Exemption for the Receipt of Fees From Funds

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

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

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

4975(c)(1)(A) through (F) of the Code shall not apply, effective

September 21, 1995, to (1) the receipt of fees by Chicago Trust from

the Funds for investment advisory services to the Funds; and (2) the

receipt or retention of fees by Chicago Trust from the Funds for acting

as custodian or shareholder servicing agent to the Funds, as well as

any other services provided to the Funds which are not investment

advisory services (i.e., the Secondary Services), in connection with

the investment of shares in the Funds by the Client Plans for which

Chicago Trust acts as a fiduciary, provided that--

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

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

are paid in connection with the redemption of such shares by the Client

Plans to the Funds.

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

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

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

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

investor at that time.

(c) Chicago Trust, any of its affiliates or their officers or

directors do not purchase from or sell to any of the Client Plans

shares of any of the Funds.

(d) For each Client Plan, the combined total of all fees received

by Chicago Trust for the provision of services to such Plan, and in

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

the Client Plans may invest, is not in excess of ``reasonable

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

(e) Chicago Trust does not receive any fees payable, pursuant to

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

transactions involving the Funds.

(f) A Second Fiduciary who is acting on behalf of a Client Plan and

who is independent of and unrelated to Chicago Trust, as defined in

paragraph (h) of Section III below, receives in advance of the

investment by a Client Plan in any of the Funds a full and detailed

written disclosure of information concerning such Fund including, but

not limited to--

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

which such Client Plan is considering investing;

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

other similar services, any fees for Secondary Services, as defined in

paragraph (i) of Section III below, and all other fees to be charged to

or paid by the Client Plan and by such Funds to Chicago Trust,

including the nature and extent of any differential between the rates

of such fees;

(3) The reasons why Chicago Trust may consider such investment to

be appropriate for the Client Plan;

(4) A statement describing whether there are any limitations

applicable to Chicago Trust with respect to which assets of a Client

Plan may be invested in the Funds, and, if so, the nature of such

limitations;

(5) A copy of the proposed exemption and/or a copy of the final

exemption, if

[[Page 18437]]

granted, upon the request of the Second Fiduciary; and

(6) The last date as of which consent to an in-kind transfer may be

given by the Second Fiduciary, along with the disclosure that if

consent is not given by that date, the Second Fiduciary will be deemed

to have withheld consent to an in-kind transfer.

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

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

(1) The investment of assets of the Client Plan in shares of the

Fund, in connection with the transaction set forth in Section II;

(2) The Funds in which the assets of the Client Plan may be

invested; and

(3) The fees received by Chicago Trust in connection with

investment advisory services and Secondary Services provided to the

Funds; such authorization by the Second Fiduciary to be consistent with

the responsibilities obligations, and duties imposed on fiduciaries by

Part 4 of Title I of the Act.

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

II, is terminable at will by the Second Fiduciary of a Client Plan,

without penalty to such Client Plan. Such termination will be effected

by Chicago Trust selling the shares of the Funds held by the affected

Client Plan within one business day following receipt by Chicago Trust,

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

the option of the Second Fiduciary, of written notice of termination

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

below; provided that if, due to circumstances beyond the control of

Chicago Trust, the sale cannot be executed within one business day,

Chicago Trust shall have one additional business day to complete such

sale.

(i) The Client Plans do not pay any Plan-level investment advisory

fees to Chicago Trust with respect to any of the assets of such Client

Plans which are invested in shares of the Funds. This condition does

not preclude the payment of investment advisory fees by the Funds to

Chicago Trust under the terms of an investment advisory agreement

adopted in accordance with section 15 of the '40 Act or other agreement

between Chicago Trust and the Funds or the retention by Chicago Trust

of fees for Secondary Services paid to Chicago Trust by the Funds.

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

Funds to Chicago Trust regarding investment advisory services that

Chicago Trust provides to the Funds over an existing rate for such

services that had been authorized by a Second Fiduciary of a Client

Plan, in accordance with paragraph (g) of this Section II, Chicago

Trust will, at least 30 days in advance of the implementation of such

increase, provide a written notice (which may take the form of a proxy

statement, letter, or similar communication that is separate from the

prospectus of the Fund and which explains the nature and amount of the

increase in fees) to the Second Fiduciary of each Client Plan invested

in a Fund which is increasing such fees. Such notice shall be

accompanied by the Termination Form, as defined in paragraph (j) of

Section III below;

(k) In the event of an (1) addition of a Secondary Service, as

defined in paragraph (h) of Section III below, provided by Chicago

Trust to the Funds for which a fee is charged or (2) an increase in the

rate of any fee paid by the Funds to Chicago Trust for any Secondary

Service that results either from an increase in the rate of such fee or

from the decrease in the number or kind of services performed by

Chicago Trust for such fee over an existing rate for such Secondary

Service which had been authorized by the Secondary Fiduciary in

accordance with paragraph (g) of this Section II, Chicago Trust will,

at least 30 days in advance of the implementation of such Secondary

Service or fee increase, provide a written notice (which may take the

form of a proxy statement, letter, or similar communication that is

separate from the prospectus of the Funds and which explains the nature

and amount of the additional Secondary Service for which a fee is

charged or the nature and amount of the increase in fees) to the Second

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

adding a service or increasing fees. Such notice shall be accompanied

by the Termination Form, as defined in paragraph (j) of Section III

below.

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

times specified in paragraphs (j) and (k) of this Section II, which

expressly provides an election to terminate the authorization,

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

regarding the use of such Termination Form including statements that--

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

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

by Chicago Trust selling the shares of the Funds held by the Client

Plans requesting termination within the period of time specified by the

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

Chicago Trust from the Second Fiduciary of the Termination Form or any

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

beyond the control of Chicago Trust, the sale of shares of such Client

Plan cannot be executed within one business day, Chicago Trust shall

have one additional business day to complete such sale; and

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

on behalf of the Client Plan will be deemed to be an approval of the

additional Secondary Service for which a fee is charged or increase in

the rate of any fees and will result in the continuation of the

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

Chicago Trust to engage in the transactions on behalf of the Client

Plan;

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

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

begins after the grant of this proposed exemption is published in the

Federal Register and continuing for each calendar year thereafter;

provided that the Termination Form need not be supplied to the Second

Fiduciary, pursuant to this paragraph, sooner than six months after

such Termination Form is supplied pursuant to paragraphs (j) and (k) of

this Section II, except to the extent required by said paragraphs (j)

and (k) of this Section II to disclose an additional Secondary Service

for which a fee is charged or an increase in fees;

(n)(1) With respect to each of the Funds in which a Client Plan

invests, Chicago Trust will provide the Second Fiduciary of such Plan--

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

Fund;

(B) A report or statement (which may take the form of the most

recent financial report, the current statement of additional

information, or some other written statement) which contains a

description of all fees paid by the Fund to Chicago Trust within 15

days of such document's availability; and

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

invests, in the event such Fund places brokerage transactions with

Chicago Trust or any adviser or sub-adviser to a Fund or any of their

affiliates (collectively, Related Party Brokerage), Chicago Trust will

provide the Second Fiduciary of such Client Plan at least annually with

a statement specifying--

(A) The total, expressed in dollars, attributable to each Fund's

investment portfolio which represent Related Party Brokerage;

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

attributable to each Fund's investment portfolio other than Related

Party Brokerage;

[[Page 18438]]

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

per share, paid for Related Party Brokerage by each Fund; and

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

per share, paid by each Fund for brokerage other than Related Party

Brokerage.

(o) All dealings between the Client Plans and any of the Funds are

on a basis no less favorable to such Client Plans than dealings between

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

the Client Plans.

(p) Chicago Trust maintains for a period of 6 years the records

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

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

exemption have been met, except that--

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

occurred if, due to circumstances beyond the control of Chicago Trust,

the records are lost or destroyed prior to the end of the 6 year

period; and

(2) No party in interest, other than Chicago Trust, shall be

subject to the civil penalty that may be assessed under section 502(i)

of the Act, or to the taxes imposed by section 4975(a) and (b) of the

Code, if the records are not maintained, or are not available for

examination as required by paragraph (q) of Section II below.

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

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

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

Section II above are unconditionally available at their customary

location for examination during normal business hours by--

(A) Any duly authorized employee or representative of the

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

Securities and Exchange Commission (the SEC);

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

acquire or dispose of shares of any of the Funds owned by such Client

Plan, or any duly authorized employee or representative of such

fiduciary; and

(C) Any participant or beneficiary of the Plans or duly authorized

employee or representative of such participant or beneficiary.

(2) None of the persons described in paragraph (q)(1)(B) and

(q)(1)(C) of Section II shall be authorized to examine trade secrets of

Chicago Trust, or commercial or financial information which is

privileged or confidential.

Section III. Definitions

For purposes of this proposed exemption,

(a) The term ``Chicago Trust'' means Chicago Trust Company and any

affiliate of Chicago Trust, as defined in paragraph (b) of this Section

III.

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

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

intermediaries, controlling, controlled by, or under common control

with the person;

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

such person; and

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

officer, director, partner, or employee.

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

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

individual;

(d) The terms ``Fund or Funds'' mean any diversified open-end

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

Chicago Trust serves as investment adviser and may also provide

custodial or other services such as Secondary Services as approved by

such Funds.

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

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

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

and statement of additional information, and other assets belonging to

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

each portfolio, by the number of outstanding shares.

(f) The term ``Plan'' means any ``employee benefit pension plan''

within the meaning of section 3(2) of the Act or any ``plan'' within

the meaning of section 4975(e)(1) of the Code. The term ``Plan''

includes any plan maintained by an entity other than Chicago Trust

(referred to collectively herein as the ``Client Plans'') and any of

the following Plans sponsored or maintained by Chicago Trust (referred

to collectively as the ``In-House Plans''): the Chicago Trust Pension

Plan, the Chicago Trust Savings and Profit Sharing Plan, the Celite

Employees' Thrift Plan, the Celite Hourly Retirement Savings 401(k)

Plan, the Celite Employees' Retirement Plan and the Heads & Threads

Savings and Profit Sharing Plan.

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

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

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

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

(h) The term ``Second Fiduciary'' means a fiduciary of a plan who

is independent of and unrelated to Chicago Trust. For purposes of this

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

and unrelated to Chicago Trust if--

(1) Such Second Fiduciary directly or indirectly controls is

controlled by or is under common control with Chicago Trust;

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

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

partner or employee of Chicago Trust (or is a relative of such

persons); and

(3) Such Second Fiduciary directly or indirectly receives any

compensation or other consideration in connection with any transaction

described in this exemption; provided, however, that nothing shall

prevent a Second Fiduciary's receipt of its customary fees from a Plan

or the Plan's sponsoring employer for serving as a fiduciary to such

Plan.

If an officer, director, partner, or employee of Chicago Trust (or

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

and if he or she abstains from participation in the choice of the

Plan's investment manager/adviser, the approval of any purchase or sale

by the Plan of shares of the Funds, and 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

(h)(2) of Section III above, shall not apply.

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

investment advisory or similar service, which is provided by Chicago

Trust to the Funds, including but not limited to custodial, accounting,

brokerage, administrative, or any other service.

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

Second Fiduciary of a Client Plan, at the times specified in paragraphs

(j), (k), and (m) of Section II above, which expressly provides an

election to the Second Fiduciary to terminate on behalf of the Plans

the authorization, described in paragraph (g) of Section II. Such

Termination Form is to be used at will by the Second Fiduciary to

terminate such authorization without penalty to the Client Plan and to

notify Chicago Trust in writing to effect such termination not later

than one business day following receipt by Chicago Trust of written

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

circumstances beyond the control of Chicago Trust, the sale cannot be

executed within one business day,

[[Page 18439]]

Chicago Trust shall have one additional business day to complete such

sale.

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

as of September 21, 1995.

Summary of Facts and Representations

Description of the Parties

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

described as follows:

(a) Chicago Trust, a trust company chartered under the laws of the

State of Illinois, maintains its principal office at 171 North Clark

Street, Chicago, Illinois. Chicago Trust is a wholly owned subsidiary

of the Allegheny Corporation (Allegheny) whose principal place of

business is at Park Avenue Plaza, New York, NY. As of December 31,

1995, Chicago Trust had approximately $6 billion in consolidated assets

and it engages in two principal lines of business, directly or through

subsidiaries. In this regard, Chicago Trust is the largest real estate

title insurer in the world. In addition, Chicago Trust provides

trustee, investment management and related services, primarily to high

net worth individuals, families, tax-qualified pension and profit

sharing plans (including plans subject to provisions of the Act),

individual retirement accounts and insurance companies. As of December

31, 1995, Chicago Trust managed approximately $1.3 billion of client

assets.

(b) The Client Plans consist of 351 separate employee benefit plan

clients of Chicago Trust.18 Of those Client Plans, 239 are

employee pension benefit plans as defined in section 3(2) of the Act or

Plans covering only partners or proprietors and their spouses, as

described in 29 CFR 2510.3-3 (b) and (c). The Client Plans also consist

of 112 individual retirement accounts With respect to the Client Plans,

Chicago Trust may serve as trustee, either with or without investment

discretion, or as an ``investment manager'' within the meaning of

section 3(38) of the Act. Chicago Trust may also provide ``Plan-level''

administrative services to the Client Plans that include maintaining

custody of Plan assets, maintaining Plan records, preparing periodic

reports of Plan assets and participant accounts, effecting participant

investment directions, processing participant loans and accounting for

contributions, payment of benefits and other receipts and

distributions. Chicago Trust does not have any ownership in or common

ownership with any broker-dealer.

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\18\ Although the Client Plans may also include participant-

directed plans subject to the provisions of section 404(c) of the

Act, the Department is not providing, nor is the applicant

requesting, exemptive relief for such Client Plans to the extent

such transactions are covered under section 404(c) of the Act.

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Chicago Trust is compensated for its Plan-level investment

management services according to a percentage of assets under

management formula. Its fees for Plan-level administrative services are

separately negotiated with each Client Plan for which such services are

performed.

(c) The In-House Plans consist of various plans that are sponsored

by Chicago Trust and its affiliates. In this regard, Chicago Trust is

the sponsoring employer of the Chicago Trust Company Pension Plan and

the Chicago Trust Company Savings and Profit Sharing Plan

(collectively, the Chicago Trust Plans). Celite Corporation, a third-

tier subsidiary of Allegheny, is the sponsoring employer of the Celite

Employees Thrift Plan, the Celite Hourly Retirement Savings 401(k)

Plan, the Celite Hourly Retirement Plan and the Celite Employees

Retirement Plan (collectively, the Celite Plans). Heads and Threads, a

division of Allegheny, is the sponsoring employer of the Heads and

Threads Profit Sharing and Savings Plan (the Heads and Threads Plan).

Each of these plans is an ``employee pension benefit plan within the

meaning of section 3(2) of the Act. Collectively, the Chicago Trust

Plans, the Celite Plans and the Heads and Threads Plan are referred to

herein as the ``In-House Plans.'' The following table shows the

participant breakdowns and asset totals for the In-House Plans as of

December 31, 1995.

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

No.

Plans participants Total assets

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

Chicago Trust:

Pension................................... 10,880 $86,639,464

Savings and Profit Sharing................ 6,938 222,865,196

Celite:

Employees Thrift.......................... 204 10,702,672

Hourly Ret. Savings....................... 257 2,385,675

Hourly Retirement......................... 326 7,747,333

Employees Retirement...................... 275 10,308,572

Heads & Threads:

Profit Sharing and Savings................ 196 11,800,983

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

Chicago Trust is trustee for each In-House Plan and also performs,

at the Plan-level, related services for each In-House Plan. These

services include maintaining custody of plan assets, maintaining plan

records, preparing periodic reports of plan assets and participant

accounts, effecting participant investment directions, processing

participant loans and accounting for contributions, payments of

benefits and other receipts and distributions. Chicago Trust's

compensation from the In-House Plans for the performance of these Plan-

level services is limited to the reimbursement of direct expenses.

(d) The CIFs, which are maintained pursuant to several declarations

of trust, are the primary investment vehicles used by Chicago Trust in

its investment management of plan assets of the In-House Plans and the

Client Plans. The Chicago Trust Company Investment Trust for Employee

Benefit Plans (the Investment Trust), which was created by a

Declaration of Trust dated January 17, 1968 and restated several times,

most recently as of January 31, 1994, is organized as a group trust

within the meaning of Revenue Ruling 81-100, 1981-1 CB 326. The

Investment Trust formerly included the assets of the Balanced Fund, the

Core Equity Fund and the Fixed Income Fund, three CIFs which were

terminated on September 21, 1995. The Investment Trust presently holds

the assets of the Capital Appreciation Fund, the Growth Fund, the Index

Fund, the International Equity Fund and the US Government Fund.

Chicago Trust also utilizes its Safety of Principal Fund in the

management of employee benefit plan assets. The Safety of Principal

Fund is a vehicle which is permitted to invest in stated return

contracts, certificates of deposit, institutional money market funds

and certain other obligations. It is maintained pursuant to a

declaration of trust dated April 24, 1985, titled the ``Chicago Trust

Stated Principal Value Investment Trust for Employee Benefit Plans,''

and is organized as a ``group trust'' within the meaning of Revenue

Ruling 81-100, 1981-1 CB 326.

Until it was terminated on September 21, 1995, Chicago Trust

utilized its Short Term Investment Fund in the management of employee

benefit plan assets. The Short Term Investment Fund was a money-market

vehicle which was maintained pursuant to a declaration of trust dated

July 22, 1981, titled the ``Chicago Trust Company Short Term Investment

Fund for Employee Benefit Plans'' which established the Short Term

Investment Fund as a ``group trust'' within the meaning of Revenue

Ruling 81-100, 1981-1 CB 326.

Under section 3.02 of the respective Declarations of Trust which

established the Investment Trust, the Safety of Principal Fund and the

Short Term Investment Fund, Chicago Trust has had exclusive management

and control of the assets of the CIFs. Chicago Trust has

[[Page 18440]]

charged no fee for its investment advisory services to these CIFs, but

it has received reimbursement for its expenses. No CIF has imposed a

minimum investment or maximum limit on investments in it by an In-House

Plan or a Client Plan.

(e) The Funds constitute a Delaware business trust organized on

September 10, 1993 and registered as an open-end, management investment

company under the provisions of the '40 Act. The Funds are managed by a

Board of Trustees, a majority of whose members are persons independent

of Chicago Trust. At present, the Funds offer seven separate,

diversified series of shares of mutual fund portfolios. They are the

Chicago Trust Growth & Income Fund, the Chicago Trust Intermediate

Fixed Income Fund, the Chicago Trust Intermediate Municipal Bond Fund,

the Chicago Trust Money Market Fund, the Montag & Caldwell Growth Fund,

the Montag & Caldwell Balanced Fund and the Chicago Trust Talon Fund.

Each Fund comprising the Funds is subject to a separate advisory

agreement and pays an investment advisory fee to its respective

investment adviser. Chicago Trust is the investment adviser to the

Chicago Trust Growth & Income Fund, the Chicago Trust Intermediate

Fixed Income Fund, the Chicago Trust Intermediate Municipal Bond Fund

and the Chicago Trust Money Market Fund and it receives investment

advisory fees, respectively, of 0.70 percent, 0.55 percent, 0.60

percent and 0.40 percent of average daily net assets. Montag &

Caldwell, a registered investment adviser which is a wholly-owned

subsidiary of Chicago Trust, is the investment adviser to the Montag &

Caldwell Growth Fund and the Montag & Caldwell Balanced Fund. For

services rendered, Montag & Caldwell receives investment advisory fees

of 0.80 percent and 0.75 percent of average daily net assets from the

Growth Fund and Balanced Fund.

In addition, Chicago Trust is the investment adviser to the Chicago

Trust Talon Fund and it receives an investment advisory fee of 0.80

percent of average daily net assets from this Fund. Pursuant to a sub-

advisory agreement, Chicago Trust pays, out of its investment advisory

fee, a subadvisory fee to Talon Asset Management, Inc. (Talon), an

unrelated investment adviser, to manage this Fund, subject to Chicago

Trust's supervision. Talon's subadvisory fee ranges from 0.40 percent

to 0.75 percent of daily net assets.

The Funds maintain a written ``distribution and services plan''

pursuant to Rule 12b-1 of the '40 Act. Under the plan of distribution,

each Fund (other than the Chicago Trust Money Market Fund) can charge a

fee of 0.25 percent of average daily net assets. This fee is paid by

the Chicago Trust Funds to parties other than Chicago Trust or its

affiliates to finance activities that will result in the marketing or

distribution of shares of the Funds.

The minimum investment for an In-House Plan or a Client Plan in a

Fund is $1,000 for the Chicago Trust Money Market Fund and $500 for

each other Fund. No Fund imposes a maximum limit on investments in it

by a Client Plan or an In-House Plan.

(f) Cole Taylor Bank of Chicago, Illinois (Cole Taylor) has been

retained by Chicago Trust to serve as the Second Fiduciary for the In-

House Plans currently investing in the Funds. Cole Taylor, which was

established in 1929, is independent of and unrelated to Chicago Trust

and each of its affiliates.

As of December 31, 1995, Cole Taylor exercised discretionary

investment authority over approximately $362,601,000 of fiduciary

assets, including approximately $171,511,000 of assets of employee

benefit plans covered by the Act and non-qualified employee benefit

plans. As of December 31, 1995, Cole Taylor also served as directed

trustee, agent or custodian with respect to approximately $238,131,900

of assets of employee benefit plans covered by the Act and non-

qualified employee benefit plans.

Description of the Transactions

2. Chicago Trust requests retroactive exemptive relief with respect

to the in-kind transfer of all or a pro rata portion of an In-House

Plan's or a Client Plan's assets from the terminating CIFs identified

above to the Funds, in exchange for shares of the Funds. In addition,

Chicago Trust requests retroactive exemptive relief for the receipt of

fees from the Funds in connection with the investment of assets of

Client Plans for which the Bank acts as a trustee, investment manager,

or custodian, in shares of the Funds in instances where Chicago Trust

is an investment adviser, custodian, and shareholder servicing agent

for the Funds.19 The exemptive relief provided for the receipt of

fees would cover the Client Plans only, specifically those Plans for

which Chicago Trust exercises investment discretion as well as Client

Plans where investment decisions are made a Second Fiduciary.20 If

granted, the exemption would be effective as of September 21, 1995.

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\19\ Chicago Trust is not requesting an exemption for

investments in the Funds by the In-House Plans. Chicago Trust

represents that the In-House Plans may acquire or sell shares of the

Funds pursuant to Prohibited Transaction Exemption (PTE) 77-3 (42 FR

18734, April 8, 1977). PTE 77-3 permits the acquisition or sale of

shares of a registered, open-end investment company by an employee

benefit plan covering only employees of such investment company,

employees of the investment adviser or principal underwriter for

such investment company, or employees of any affiliated person (as

defined therein) of such investment adviser or principal

underwriter, provided certain conditions are met. The Department

expresses no opinion on whether any transactions with the Funds by

the In-House Plans would be covered by PTE 77-3.

20 Chicago Trust is not requesting exemptive relief for

the provision of sweep services to Client Plans. Chicago Trust

represents that since both the CIFs and the Funds employ daily

valuations, there is no need for sweep services.

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

3. Although Chicago Trust has maintained CIFs in which In-House

Plans and Client Plans have invested as investment options in

accordance with requirements under Federal or state banking laws that

apply to collective investment trusts, it decided to terminate certain

of its CIFs and offer to the Plans participating in such CIFs

appropriate interests in certain Funds as alternative investments.

Chicago Trust believes that the interests of the Plans invested in the

CIFs would be better served by investment in shares of the Funds.

According to Chicago Trust, by investing in the Funds, a Plan would be

afforded daily valuations reported in newspapers of general circulation

and increased liquidity.

To avoid the potentially large brokerage expenses that would

otherwise be incurred, Chicago Trust proposes that from time-to-time,

the assets of its remaining CIFs (or similar future CIFs 21) be

transferred in-kind to corresponding portfolios of the Funds in

exchange for shares of such Funds. No brokerage commissions or other

fees or expenses (other than customary transfer charges paid to parties

other than Chicago Trust or its affiliates) would be charged to the

CIFs in connection with the in-kind transfers of assets into the Funds

and the acquisition of shares of the Funds by the CIFs. In addition, no

12b-1 Fees would be paid to Chicago Trust or its affiliates in

connection with such transactions.

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\21\ For example, CIFs acquired through mergers with or

acquisitions of other Banks.

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4. On September 21, 1995, Chicago Trust made in-kind transfers of

assets of the In-House Plans and the Client Plans that had been held in

the Balanced Fund, the Core Equity Fund, the Fixed Income Fund and the

Short-Term Investment Fund, in exchange for shares of the Funds. The

affected CIFs had the same investment characteristics as their

[[Page 18441]]

corresponding Fund portfolios. The shares of such Funds were equal in

value to the CIF assets exchanged. All in-kind transfers were effected

as of a single valuation date. Following the in-kind transfers, each

CIF was terminated in accordance with the provisions of the applicable

Declarations of Trust and law. Any remaining assets in the CIFs from

which the in-kind transfers were made were converted into cash. No in-

kind transfers were made from the Capital Appreciation Fund, the Growth

Fund, the International Equity Fund, the Safety of Principal Fund or

the U.S. Government Fund. As stated above, these CIFs were to be

continued.

Fund shares received by the terminated CIF were distributed to the

accounts of the In-House Plans and the Client Plans, in proportion to

such Plans' investment in the CIFs, so that each In-House Plan or

Client Plan would be credited with Fund shares that were equal in value

to its pro rata share of the CIFs assets which were transferred. A Plan

not electing to participate in the Funds received a cash payment

representing a pro rata portion of the assets of the terminating CIF

before the final liquidation took place.

A single lot of each in-kind security on the records of the CIF was

established. The cost-basis of each in-kind security was the market

value on the conversion date. The trade date of each in-kind

transaction was the actual date the security was received by the

custodian bank. The same custodian bank would hold the assets of the

Funds and the CIFs. The in-kind securities were valued using the same

pricing vendor and methodologies as the Fund and in accordance with the

valuation procedures described in Rule 17a-7(b) under the '40 Act, as

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

pronouncement. In this regard, Chicago Trust represents that the

``current market price'' for specific types of CIF securities involved

in the transaction was determined as follows:

(a) If the security was a ``reported security'' as the term is

defined in Rule 11Aa3-1 under the '34 Act, the last sale price with

respect to such security reported in the consolidated transaction

reporting system (the Consolidated System); or if there were no

reported transactions in the Consolidated System that day, the average

of the highest current independent bid and the lowest current

independent offer for such security (reported pursuant to Rule 11Ac1-1

under the '34 Act), as of the close of business on the CIF valuation

date.

(b) If the security was not a reported security, and the principal

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

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

that day, the average of the highest current independent bid and lowest

current independent offer on such exchange as of the close of business

on the CIF valuation date.

(c) If the security was not a reported security and was quoted in

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

bid and lowest current independent offer reported on Level 1 of NASDAQ

as of the close of business on the CIF valuation date.

(d) For all other securities, the average of the highest current

independent bid and lowest current independent offer as of the close of

business, determined on the basis of reasonable inquiry. (For

securities in this category, Chicago Trust represents that it obtained

quotations from at least three sources that were either broker-dealers

or pricing services independent of and unrelated to Chicago Trust and,

where more than one valid quotation was available, used the average of

the quotations to value the securities, in conformance with

interpretations by the SEC and practice under Rule 17a-7.)

The same vendor performing fund accounting for the CIFs performed

fund accounting for the Funds. The number of Fund shares to be issued

was computed by dividing the total transferred fund market value by the

net asset value of the Fund at the close of business on the conversion

date. The number of shares of the Funds issued was allocated to the

holders of the predecessor CIFs in the same proportion as the holdings

in the CIFs.22

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\22\ At the Plan account level, the conversion was reported in

this manner--Assume a Client Plan held 1,000 units of the Core

Equity Fund. On April 1, the Client Plan account showed a

disposition of the 1,000 units valued at $6.50 with proceeds of

$6,500. On the same date, the account showed a purchase of 684.211

shares at $9.50 per share of the Chicago Trust Growth & Income

Mutual Fund for a total cost of $6,500 the same amount as the

disposition of the Core Equity Fund.

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No in-kind transfer was made except in accordance with pre-

established objective procedures which were approved by the Board of

Directors of the Funds which provided that such in-kind transfers

would: (a) Consist solely of assets which were consistent with the

investment objectives, policies and restrictions of the transferee

Fund; (b) satisfy the applicable requirements of the '40 Act and the

Code; and (c) consist of assets which had a readily ascertainable

market value (determined as of the close of business on the effective

date of such in-kind transfer by reference to independent sources in

accordance with the valuation procedures described in Rule 17a-7, are

liquid and are not subject to restrictions on resale). Non-conforming

assets were sold on the open market through an unaffiliated brokerage

firm and the proceeds of such sale were transferred in cash.

In addition, no in-kind transfer was made unless an In-House Plan

or a Client Plan was represented by a Second Fiduciary who was

independent of and unrelated to Chicago Trust. Such Second Fiduciary

was required to give written approval of the in-kind transfer in

advance following such fiduciary's receipt of written notice of the in-

kind transfer transaction and disclosure of the following information:

(a) A current prospectus of the Funds; (b) a description of the fees,

including investment advisory fees and all other fees to be charged to

or paid by the Plan and by the Funds to Chicago Trust, including the

nature and extent of any differential between the rates of such fees;

(c) the reasons why Chicago Trust considered the in-kind transfer to be

appropriate for the In-House Plan or the Client Plan; (d) a description

of any limitations applicable to the in-kind transfer of assets from

the CIFs to the Funds; and (e) the last date as of which consent to an

in-kind transfer could be given by the Second Fiduciary, along with the

disclosure that if consent was not given by that date, the Second

Fiduciary would be deemed to have withheld consent to an in-kind

transfer with respect to an In-House Plan or a Client Plan. Any

approval by a Second Fiduciary was terminable at will by the Second

Fiduciary, without penalty to an In-House Plan or a Client Plan

invested in shares of any of the Funds.

Following the in-kind transfers, Chicago Trust sent the Second

Fiduciary of the In-House Plans as well as Second Fiduciaries of the

Client Plans, written confirmations of the transactions. In this

regard, not later than 30 days after each in-kind transfer, Chicago

Trust sent a Second Fiduciary written confirmation of the identity of

assets that were valued for purposes of the in-kind transfer in

accordance with Rule 17a-7(b)(4), the price determined for such assets

and the identity of each pricing services or market maker consulted in

determining their value.23 In addition, no later than

[[Page 18442]]

90 days after an in-kind transfer, Chicago Trust sent each Second

Fiduciary written confirmation of (a) the number of CIF units held by

an In-House Plan or a Client Plan before the in-kind transfer (and the

related per unit value and the aggregate dollar value of the units

transferred); and (b) the nu

This text is long and has been trimmed here. Open the source document for the complete record.