Grant of Individual Exemptions; PaineWebber Incorporated

DEPARTMENT OF LABOR

[Prohibited Transaction Exemption 96-59; Exemption Application No. D-

09818, et al.]

Grant of Individual Exemptions; PaineWebber Incorporated

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of

Labor (the Department) 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).

Notices were published in the Federal Register of the pendency

before the Department of proposals to grant such exemptions. The

notices set forth a summary of facts and representations contained in

each application for exemption and referred interested persons to the

respective applications for a complete statement of the facts and

representations. The applications have been available for public

inspection at the Department in Washington, D.C. The notices also

invited interested persons to submit comments on the requested

exemptions to the Department. In addition the notices stated that any

interested person might submit a written request that a public hearing

be held (where appropriate). The applicants have represented that they

have complied with the requirements of the notification to interested

persons. No public comments and no requests for a hearing, unless

otherwise stated, were received by the Department.

The notices of proposed exemption were issued and the exemptions

are being granted solely by the Department because, 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 proposed to the Secretary

of Labor.

Statutory Findings

In accordance with section 408(a) of the Act and/or section

4975(c)(2) of the Code and the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon

the entire record, the Department makes the following findings:

(a) The exemptions are administratively feasible;

(b) They are in the interests of the plans and their participants

and beneficiaries; and

(c) They are protective of the rights of the participants and

beneficiaries of the plans.

PaineWebber Incorporated (PaineWebber), Located in New York, NY

[Prohibited Transaction Exemption 96-59; Exemption Application No. D-

09818]

EXEMPTION

Section I. Covered Transactions

The restrictions of section 406(a) of the Act and the sanctions

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

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

effective August 18, 1995, to the purchase or redemption of shares by

an employee benefit plan, a plan described in section 403(b) of the

Code (the Section 403(b) Plan), an individual retirement account (the

IRA) or a retirement plan for a self-employed individual (the Keogh

Plan) (collectively referred to herein as the Plans) in the PaineWebber

Managed Accounts Services Portfolio Trust (the Trust) established in

connection with such Plans' participation in the PaineWebber PACE

Program (the PACE Program).

In addition, the restrictions of 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)(E) and (F) of the Code, shall not

apply, effective August 18, 1995, to (a) the provision, by PaineWebber

Managed Accounts Services (PMAS), a division of PaineWebber, of asset

allocation and related services to an independent fiduciary of a Plan

(the Independent Fiduciary) or to a directing participant (the

Directing Participant) in a Plan that is covered under and permits

participant selection as contemplated by the provisions of section

404(c) of the Act (the Section 404(c) Plan), which may result in the

selection by the Independent Fiduciary or the Directing Participant of

portfolios of the Trust (the Portfolios) in the PACE Program for the

investment of Plan assets; and (b) the provision of investment

management services by Mitchell Hutchins Asset Management, Inc.

(Mitchell Hutchins) to the PACE Money Market Investments Portfolio of

the Trust.

This exemption is subject to the conditions set forth below in

Section II.

Section II. General Conditions

(a) The participation of each Plan in the PACE Program is approved

by an Independent Fiduciary or, if applicable, Directing Participant.

(b) As to each Plan, the total fees paid to PMAS and its affiliates

constitute no more than reasonable compensation and do not include the

receipt of fees pursuant to Rule 12b-1 under the Investment Company Act

of 1940 (the '40 Act) by PMAS and its affiliates in connection with the

transactions.

(c) No Plan pays a fee or commission by reason of the acquisition

or redemption of shares in the Trust.

(d) The terms of each purchase or redemption of Trust shares remain

at least as favorable to an investing Plan as those obtainable in an

arm's length transaction with an unrelated party.

(e) PMAS provides written documentation to an Independent Fiduciary

or a Directing Participant of its recommendations or evaluations based

upon objective criteria.

(f) Any recommendation or evaluation made by PMAS to an Independent

Fiduciary or Directing Participant is implemented only at the express

direction of such fiduciary or participant.

(g) PMAS provides investment advice in writing to an Independent

Fiduciary or Directing Participant with respect to

[[Page 40001]]

all Portfolios made available under the Plan.

(h) With the exception of the PACE Money Market Investments

Portfolio, any sub-adviser (the Sub-Adviser) appointed by Mitchell

Hutchins to exercise investment discretion with respect to a Portfolio

is independent of PaineWebber and its affiliates.

(i) The quarterly fee that is paid by a Plan to PMAS for asset

allocation and related services rendered to such Plan under the PACE

Program (i.e., the outside fee) is offset by such amount as is

necessary to assure that Mitchell Hutchins retains 20 basis points as a

management fee from any Portfolio (with the exception of the PACE Money

Market Investments Portfolio from which Mitchell Hutchins retains an

investment management fee of 15 basis points) containing investments

attributable to the Plan investor. However, the quarterly fee of 20

basis points that is paid to Mitchell Hutchins for administrative

services is retained by Mitchell Hutchins and is not offset against the

outside fee.

(j) With respect to its participation in the PACE Program prior to

purchasing Trust shares,

(1) Each Independent Fiduciary receives the following written or

oral disclosures from PaineWebber:

(A) A copy of the prospectus (the Prospectus) for the Trust

discussing the investment objectives of the Portfolios comprising the

Trust; the policies employed to achieve these objectives; the corporate

affiliation existing between PaineWebber, PMAS, Mitchell Hutchins and

their affiliates; the compensation paid to such entities; any

additional information explaining the risks of investing in the Trust;

and sufficient and understandable disclosures relating to rebalancing

of investor accounts.

(B) Upon written or oral request to PaineWebber, a Statement of

Additional Information supplementing the Prospectus, which describes

the types of securities and other instruments in which the Portfolios

may invest, the investment policies and strategies that the Portfolios

may utilize and certain risks attendant to those investments, policies

and strategies.

(C) An investor questionnaire.

(D) A written analysis of PMAS's asset allocation recommendation of

specific Portfolios.

(E) A copy of the agreement between PMAS and such Plan relating to

participation in the PACE Program.

(F) Upon written request to Mitchell Hutchins, a copy of the

respective investment advisory agreements between Mitchell Hutchins and

the Sub-Advisers.

(G) Copies of the proposed exemption and grant notice describing

the exemptive relief provided herein.

(2) In the case of a Section 404(c) Plan, the Independent Fiduciary

will--

(A) Make copies of the foregoing documents available to Directing

Participants.

(B) Allow Directing Participants to interact with PaineWebber

Investment Executives and receive information relative to the services

offered under the PACE Program, including the rebalancing feature, and

the operation and objectives of the Portfolios.

(3) If accepted as an investor in the PACE Program, an Independent

Fiduciary of a Section 403(b) Plan, an IRA or a Keogh Plan, is required

to acknowledge, in writing to PMAS, prior to purchasing Trust shares

that such fiduciary has received copies of the documents described in

paragraph (j)(1) of this Section II.

(4) With respect to a Section 404(c) Plan, written acknowledgement

of the receipt of such documents is provided by the Independent

Fiduciary (i.e., the Plan administrator, trustee, investment manager or

named fiduciary). Such Independent Fiduciary will be required to

represent in writing to PMAS that such fiduciary is--

(A) Independent of PaineWebber and its affiliates;

(B) Knowledgeable with respect to the Plan in administrative

matters and funding matters related thereto, and;

(C) Able to make an informed decision concerning participation in

the PACE Program.

(5) With respect to a Plan that is covered under Title I of the

Act, where investment decisions are made by a trustee, investment

manager or a named fiduciary, such Independent Fiduciary is required to

acknowledge, in writing, receipt of such documents and represent to

PMAS that such fiduciary is

(A) Independent of PMAS and its affiliates;

(B) Capable of making an independent decision regarding the

investment of Plan assets;

(C) Knowledgeable with respect to the Plan in administrative

matters and funding matters related thereto; and

(D) Able to make an informed decision concerning participation in

the PACE Program.

(k) As applicable, subsequent to its participation in the PACE

Program, each Independent Fiduciary receives the following written or

oral disclosures with respect to its ongoing participation in the PACE

Program:

(1) Written confirmations of each purchase or redemption

transaction by the Plan with respect to a Portfolio.

(2) Telephone access to quotations from PaineWebber of such Plan's

account balance.

(3) A monthly statement of account from PaineWebber specifying the

net asset value of the Plan's investment in such account. Such

statement is also anticipated to include cash flow and transaction

activity during the month, unrealized gains or losses on Portfolio

shares held; and a summary of total earnings and capital returns on the

Plan's PACE Portfolio for the month and year-to-date.

(4) The Trust's semi-annual and annual report which will include

financial statements for the Trust and investment management fees paid

by each Portfolio.

(5) A written quarterly monitoring report that includes (a) a

record of the Plan's PACE Program portfolio for the quarter and since

inception, showing the rates of return relative to comparative market

indices (illustrated in a manner that reflects the effect of any fees

for participation in the PACE Program actually incurred during the

period); (b) an investment outlook summary containing market

commentary; and (c) the Plan's actual PACE Program portfolio with a

breakdown, in both dollars and percentages, of the holdings in each

portfolio. The quarterly monitoring report will also contain an

analysis and an evaluation of a Plan investor's account to assist the

investor to ascertain whether the Plan's investment objectives have

been met and recommending, if required, changes in Portfolio

allocations.

(6) A statement, furnished at least quarterly or annually,

specifying--

(A) The total, expressed in dollars, of each Portfolio's brokerage

commissions that are paid to PaineWebber and its affiliates;

(B) The total, expressed in dollars, of each Portfolio's brokerage

commissions that are paid to unrelated brokerage firms;

(C) The average brokerage commissions per share that are paid by

the Trust to brokers affiliated with PaineWebber, expressed as cents

per share; and

(D) The average brokerage commissions per share that are paid by

the Trust to brokers unrelated to PaineWebber and its affiliates,

expressed as cents per share for any year in which brokerage

commissions are paid to PaineWebber by the Trust Portfolios in which a

Plan's assets are invested.

[[Page 40002]]

(7) Periodic meetings with a PaineWebber Investment Executive (or

the appropriate PaineWebber representative) by Independent Fiduciaries

to discuss the quarterly monitoring report or any other questions that

may arise.

(l) In the case of a Section 404(c) Plan where the Independent

Fiduciary has established an omnibus account in the name of the Plan

(the Undisclosed Account) with PaineWebber, depending upon the

arrangement negotiated by the Independent Fiduciary with PMAS, certain

of the information noted above in subparagraphs (k)(1) through (k)(7)

of this Section II may be provided by PaineWebber to the Directing

Participants or to the Independent Fiduciary for dissemination to the

Directing Participants.

(m) If previously authorized in writing by the Independent

Fiduciary, the Plan investor's account is automatically rebalanced on a

periodic basis to the asset allocation previously prescribed by the

Plan or participant, as applicable, if the quarterly screening reveals

that one or more Portfolio allocations deviates from the allocation

prescribed by the investor by the agreed-upon formula threshold.

(n) The books and records of the Trust are audited annually by

independent, certified public accountants and all investors are sent

copies of an audited financial report no later than 60 days after the

close of each Trust fiscal year.

(o) PaineWebber maintains, for a period of six years, the records

necessary to enable the persons described in paragraph (p) of this

Section II 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 PaineWebber

and/or its affiliates, the records are lost or destroyed prior to the

end of the six year period; and

(2) No party in interest other than PaineWebber 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 (p)(1) of this Section II below.

(p)(1) Except as provided in subparagraph (p)(2) of this paragraph

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

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

this Section II are unconditionally available at their customary

location 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 a participating Plan or any duly authorized

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.

(p)(2) None of the persons described above in paragraphs (p)(1)(B)-

(p)(1)(D) of this paragraph (p) are authorized to examine the trade

secrets of PaineWebber or Mitchell Hutchins or commercial or financial

information which is privileged or confidential.

Section III. Definitions

For purposes of this exemption:

(a) The term ``PaineWebber'' means PaineWebber Incorporated and any

affiliate of PaineWebber, as defined in paragraph (b) of this Section

III.

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

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

intermediaries, controlling, controlled by, or under common control

with PaineWebber.

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

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

officer, director or a 5 percent partner or owner.

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

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

individual.

(d) The term ``Independent Fiduciary'' means a Plan fiduciary which

is independent of PaineWebber and its affiliates and is either

(1) A Plan administrator, trustee, investment manager or named

fiduciary of a Section 404(c) Plan or a Section 403(b) Plan;

(2) A participant in a Keogh Plan;

(3) An individual covered under a self-directed IRA which invests

in Trust shares;

(4) An employee, officer or director of PaineWebber and/or its

affiliates covered by an IRA not subject to Title I of the Act;

(5) A trustee, Plan administrator, investment manager or named

fiduciary responsible for investment decisions in the case of a Title I

Plan that does not permit individual direction as contemplated by

Section 404(c) of the Act; or

(e) The term ``Directing Participant'' means a participant in a

Plan covered under the provisions of section 404(c) of the Act, who is

permitted under the terms of the Plan to direct, and who elects to so

direct, the investment of the assets of his or her account in such

Plan.

(f) The term ``Plan'' means a pension plan described in 29 CFR

2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, a plan

described in section 4975(e)(1) of the Code, and in the case of a

Section 404(c) Plan, the individual account of a Directing Participant.

EFFECTIVE DATE: This exemption will be effective as of August 18, 1995.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption, refer to

the notice of proposed exemption (the Notice) published on March 22,

1996 at 61 FR 11882.

Written Comments

The Department received one written comment with respect to the

Notice and no requests for a public hearing. The comment was submitted

by PaineWebber, PMAS and Mitchell Hutchins (collectively, the

Applicants). Their comment is broken down into the areas discussed

below.

(1) Section 403(b) Plan Participation. In addition to IRAs, Keogh

Plans, Section 404(c) Plans and other types of employee benefit plans

that will participate in the PACE Program, the Applicants represent

that they wish to offer shares in the Trust to Plans that are described

in section 403(b) of the Code. Therefore, the Applicants have requested

that the Department include references to Section 403(b) Plans in the

exemptive language set forth in Section I, in the conditional language

set forth in Sections II(j)(3) and III(d)(1) and in Representation 6 of

the Summary of Facts and Representations (the Summary). The Department

has revised the Notice accordingly.

(2) Available Portfolios. Section II(g) of the Notice states that

PMAS will provide investment advice in writing to an Independent

Fiduciary or a Directing Participant with respect to all available

Portfolios offered by the Trust. The Applicants note, however, that, in

the case of a Section 404(c) Plan, an Independent Fiduciary will

determine the initial array of Portfolios among which the Directing

Participants may allocate Plan assets, and that such fiduciary may

decide to include less than all of the Portfolios in that array.

Therefore, the Applicants have requested that the Department revise

Section II(g) of the Notice as follows to

[[Page 40003]]

make it clear that ``available'' Portfolios are those that will be

selected by the Independent Fiduciary under such circumstances:

(g) PMAS provides investment advice in writing to an Independent

Fiduciary or Directing Participant with respect to all Portfolios

made available under the Plan.

The Department has made the change requested by the Applicants.

(3) Independent Fiduciary Role. With respect to a Section 404(c)

Plan, Section II(j)(4) of the Notice states that written

acknowledgement of the receipt of initial disclosures from PaineWebber

will be provided by the Independent Fiduciary who may be the Plan

administrator, trustee, investment manager or the named fiduciary, as

the recordholder of Trust shares. The Applicants wish to clarify that

because the trustee of a trust is generally the legal owner of trust

assets, the Plan trustee rather than the Independent Fiduciary is the

actual recordholder of Trust shares. Therefore, the Applicants request

that the Department revise Section II(j)(4) of the Notice to read as

follows:

(4) With respect to a Section 404(c) Plan, written

acknowledgement of the receipt of such documents is provided by the

Independent Fiduciary (i.e., the Plan administrator, trustee,

investment manager or named fiduciary).

The Department has amended the Notice in this regard.

(4) Directing Participant Disclosure. Section II(l) of the Notice

states, in relevant part, that if an Independent Fiduciary of a Section

404(c) Plan has established an Undisclosed Account with PaineWebber,

certain disclosures will be provided by PaineWebber to the Directing

Participants or to the Independent Fiduciary for dissemination to the

Directing Participants, depending upon the arrangement negotiated with

PMAS. In an effort to reflect the manner in which that information will

be distributed or made available to Directing Participants and/or to

the Independent Fiduciaries of Section 404(c) Plans, the Applicants

request that the Department modify Section II(l) of the Notice.

The Department has amended Section II(l) of the Notice to read as

follows:

(l) In the case of a Section 404(c) Plan where the Independent

Fiduciary has established an omnibus account in the name of the Plan

(the Undisclosed Account) with PaineWebber, depending upon the

arrangement negotiated by the Independent Fiduciary with PMAS,

certain of the information noted above in subparagraphs (k)(1)

through (k)(7) of this Section II may be provided by PaineWebber to

the Directing Participants or to the Independent Fiduciary for

dissemination to the Directing Participants.

(5) Description of Paine Webber Group and PaineWebber.

Representation 1(a) of the Summary, states, in part, that the Paine

Webber Group is a member of all principal securities and commodities

exchanges in the United States and the National Association of

Securities Dealers, Inc. It is also represented that Paine Webber Group

holds memberships or associate memberships on several principal foreign

securities and commodities exchanges. Although the Applicants furnished

this information to the Department, they wish to clarify that these

representations pertain to PaineWebber rather than to the Paine Webber

Group. Therefore, they request that the Department make appropriate

changes to the Summary.

The Department has revised the language in Representation 1(b) of

the Summary as follows:

PaineWebber is a member of all principal securities and

commodities exchanges in the United States and the National

Association of Securities Dealers, Inc. It also holds memberships or

associate memberships on several principal foreign securities and

commodities exchanges.

(6) Net Asset Value Per Share. In pertinent part, Representation 2

of the Summary states that with the exception of the PACE Money Market

Investments Portfolio, shares in the Trust were initially offered to

the public by PaineWebber at a net asset value of $10 per share and

that shares in the PACE Money Market Investments Portfolio are being

offered to the public at a net asset value of $1.00 per share. The

Applicants wish to clarify that with the exception of the PACE Money

Market Investments Portfolio in which shares are offered to the public

at a net asset value of $1.00 per share, shares in the other Portfolios

were initially offered to the public at a net asset value of $12 per

share.

Accordingly, the Department has revised the sixth and seventh

sentences of Representation 2 to read as follows:

With the exception of the PACE Money Market Investments

Portfolio, shares in each of the Portfolios were initially offered

to the public at a net asset value of $12 per share. Shares in the

PACE Money Market Investments Portfolio are offered to the public at

a net asset value of $1.00 per share.

(7) Minimum Investments. The second paragraph of Representation 3

of the Summary states, in part, that the minimum initial investment for

a prospective investor in the PACE Program is $10,000. The Applicants

note, however, that the minimum initial investment threshold for an

investor is currently $25,000 and not $10,000. For Plan investors and

Uniform Gift or Transfer to Minors Accounts, the Applicants wish to

clarify that the minimum initial investment is presently $10,000.

The Department has revised part of Representation 3 to read as

follows:

* * * The minimum initial investment in the PACE Program

currently is $25,000 (except for Plans and Uniform Gift or Transfer

to Minors Accounts, for which the minimum initial investment is

currently $10,000).

(8) Valuation of Portfolio Shares. Footnote 10 of the Summary

states, in part, that the net asset value of shares in the PACE Money

Market Investments Portfolio is determined as of 12 p.m. each business

day. To indicate that the net asset value of all Portfolio shares,

including shares of the PACE Money Market Investments Portfolio, is

being determined as of the close of regular trading on the New York

Stock Exchange (currently 4 p.m., Eastern Time) each business day, the

Applicants request that the Department modify Footnote 10 of the

Summary.

The Department has modified Footnote 10 to read as follows:

The net asset value of each Portfolio's shares is determined as

of the close of regular trading on the New York Stock Exchange (the

NYSE) (currently, 4 p.m., Eastern Time) each business day. Each

Portfolio's net asset value per share is determined by dividing the

value of the securities held by the Portfolio plus any cash or other

assets minus all liabilities by the total number of Portfolio shares

outstanding.

In addition, the Applicants have requested that Footnote 16 of the

Summary be revised to incorporate the following language:

* * * The net asset value of each Portfolio's shares is

determined as of the close of regular trading on the NYSE

(currently, 4 p.m. Eastern Time) each business day. PaineWebber may,

in the future, impose a minimum dollar threshold on rebalancing

transactions in order to avoid de minimus transactions.

(9) Payment of Redemption Proceeds. Representation 14 of the

Summary states, in part, that a Portfolio will be required to transmit

redemption proceeds for credit to an investor's account within 5

business days after receipt. Similarly, Representation 17 of the

Summary sets forth the same time frame for the payment of the outside

fee as well as the applicable fee if additional funds are invested

during a calendar quarter. Because Federal Securities laws currently

require PaineWebber to settle its obligations within three business

days, the Applicants have requested that the

[[Page 40004]]

Department revise the Summary to reflect the current timing of such

payments.

The Department does not object to these necessary revisions and has

deleted references to the five business day requirement and inserted

the phrase ``three business days'' in the fourth sentence of paragraph

one of Representation 14, in the first sentence of paragraph two of

Representation 17 and in the first sentence of paragraph three of

Representation 17.

(10) Brokerage Commission Information. Representation 22(i) of the

Summary states, in part, that on a quarterly and annual basis,

PaineWebber will provide written disclosures to an Independent

Fiduciary or, if applicable, a Directing Participant regarding

brokerage commissions that are paid to PaineWebber and/or its

affiliates or to unrelated parties. The Applicants have requested that

the Department revise this representation to reflect that brokerage

commission information will be provided to the Independent Fiduciary

and, depending on the arrangement negotiated between the Independent

Fiduciary of a Section 404(c) Plan and PMAS, to a Directing

Participant. The Applicants state that the language set forth in the

Summary appears to indicate that PaineWebber will provide such

information under all circumstances to Independent Fiduciaries and

where applicable, to Directing Participants only.

The Department has revised paragraph (i) of Representation 22 to

read, in part, as follows:

(i) On a quarterly and annual basis, PaineWebber will provide

written disclosures to an Independent Fiduciary and, depending on

the arrangement negotiated with PMAS, a Directing Participant, with

respect to (1) the total, expressed in dollars, of each Portfolio's

brokerage commissions that are paid to PaineWebber and its

affiliates; * * *

After giving full consideration to the entire record, the

Department has decided to grant the exemption subject to the

modifications or clarifications described above. The Applicants'

comment letter has been included as part of the public record of the

exemption application. The complete application file, including all

supplemental submissions received by the Department, is made available

for public inspection in the Public Documents Room of the Pension and

Welfare Benefits Administration, Room N-5638, U.S. Department of Labor,

200 Constitution Avenue, NW., Washington, DC 20210.

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

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

The Everett Clinic Profit Sharing Plan and 401(k) Employee Savings Plan

and Trust (the Plan), Located in Everett, Washington

[Prohibited Transaction Exemption 96-60; Exemption Application No. D-

10171]

Exemption

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 following transactions between the Plan and the

Everett Clinic (the Employer), a party in interest with respect to the

Plan: (1) The exchange of cash and real property (Parcel B) owned by

the Plan for other real property (Parcel C) owned by the Employer; (2)

the grant by the Employer to the Plan of a perpetual easement to run

with the land on the Plan's Parcel B to be exchanged and on the

Employer's property (Parcel E); (3) the modification and extension of

an existing lease (the New Lease) of improved real property by the Plan

to the Employer, so as to include Parcel C and, effective January 1,

1997, a parking lot owned by the Employer (Parcel D) to be contributed

gratuitously 1 to the Plan; and (4) the potential future purchase

of the leased premises by the Employer pursuant to the terms of an

option agreement contained in the New Lease.

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\1\ The Department notes the Employer's representation that its

contribution of Parcel D to the Plan will not be a prohibited

transaction under the Department's regulation at 29 CFR 2509.94-3

because the contribution will not be made pursuant to any legal

obligation of the Employer to contribute. The Plan is a profit-

sharing plan which provides for a fully discretionary annual

contribution by the Employer. It is represented that Parcel D will

be contributed to the Plan on December 31, 1996 for the 1996 Plan

Year and that no contribution has been declared for the 1996 Plan

Year; therefore, the Employer has no existing obligation to

contribute any amounts to the Plan. However, the Department

expresses no opinion herein as to whether the Employer's

contribution of Parcel D to the Plan is fully discretionary.

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This exemption is subject to the following conditions:

(1) The Plan is represented in all the transactions by a qualified,

independent fiduciary;

(2) The terms and conditions of the transactions are at least as

favorable to the Plan as those the Plan could obtain in comparable

arm's length transactions with unrelated parties;

(3) Under the purchase agreement (the Purchase Agreement) with

respect to the exchange of Parcel B for Parcel C, the Plan pays to the

Employer an amount no more than the difference between the fair market

values of Parcel B and Parcel C as of the date of the exchange, as

established by a qualified, independent appraiser, with the Plan

receiving full market value for Parcel B (notwithstanding its being

transferred subject to an easement);

(4) The rent paid to the Plan under the New Lease is and continues

to be no less than the fair market rental value of the leased premises,

as established by a qualified, independent appraiser;

(5) The rent is adjusted every three years, based upon an updated

independent appraisal, but never falls below the fair market rental

amount initially established;

(6) The New Lease is a triple net lease under which the Employer as

the tenant is obligated for all operating expenses, including

maintenance, repairs, taxes, insurance, and utilities;

(7) The independent fiduciary expressly approves any improvements

over $100,000 to the leased premises and any renewal of the New Lease

beyond the initial term;

(8) The New Lease contains a two-way option agreement enabling the

Plan to sell the leased premises to the Employer (or the Employer to

purchase the leased premises from the Plan), in the event the

independent fiduciary determines that such a sale is in the best

interests of the Plan, for cash in an amount which is the greater of:

(a) the original acquisition cost of the premises to the Plan plus

expenses, or (b) the fair market value of the premises as of the date

of the sale, as established by a qualified, independent appraiser

selected by the independent fiduciary;

(9) At all times, the fair market value of the leased premises

represents no more than 25% of the total assets of the Plan;

(10) The independent fiduciary determines that all of the

transactions are appropriate for and in the best interests of the Plan

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

(11) At all times, the independent fiduciary monitors and enforces

compliance with the terms and conditions of the Purchase Agreement, the

New Lease, and the exemption; and

(12) The Plan incurs no commissions, costs, fees, nor other

expenses relating to any of the transactions.

EFFECTIVE DATE: This exemption is effective as of June 1, 1996.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption, refer to

the notice of proposed exemption published on June 4, 1996 at 61 FR

28237.

[[Page 40005]]

Written Comments

The Department received one written comment with respect to the

notice of proposed exemption and no requests for a public hearing. The

written comment was submitted by the trustees of the Plan (the

Trustees) and concerns a clarification of the notice of proposed

exemption. The Summary of Facts and Representations, Section 9,

Paragraph 2 (page 28240, column 3) states:

The income from the Current Lease has provided the Plan with a

stable and favorable rate of investment return (over 9% per annum

for the period covering the 1980's and the first half of the 1990's,

ranking in the top 5% of the Independent Consultants Cooperative

database).

The Trustees desired to make the observation that this representation

inaccurately understates the performance of the real estate. A letter

dated November 16, 1995, from Wurts, Johnson & Company (Wurts,

Johnson), investment consultants to the First Interstate Bank of

Washington N.A., the independent fiduciary for the Plan, indicates that

the rate of return to the Plan of ``over 9% per annum'' is actually for

the five-year period ending June 30, 1995. Extending the return

analysis back to January 1, 1983 for a 12-year period ending December

31, 1994, Wurts, Johnson found that the annual rate of return was

12.8%. Moreover, the most recent report from Wurts, Johnson shows that

the annual rate of return for the five-year period ending December 31,

1995 was 14.1%. This rate is significantly higher than that for the

five-year period ending June 30, 1995 due to a significant increase in

the value of the real estate subsequent to June 30, 1995.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,

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

The SUP Welfare Plan (the Plan), Located in San Francisco,

California

[Prohibited Exemption Transaction 96-61; Exemption Application No. L-

10221]

Exemption

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

Act shall not apply to the sale by the Plan of the remaining term of a

one-hundred year pre-paid leasehold interest (the Interest) to the

Sailors' Union of the Pacific Building Corporation, 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 pays no commissions or other expenses in connection with the sale;

(c) the Plan receives the greater of $438,000 or the fair market value

of the Interest as of the date of the sale; and (d) the fair market

value of the Interest has been determined by a qualified, independent

appraiser.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption, refer to

the notice of proposed exemption published on June 4, 1996 at 61 FR

28241.

Written Comments: The Department received three written comments

(and no hearing requests) with respect to the proposed exemption. Two

of the comments were in favor of granting the exemption as proposed.

The third commentator disagreed with the Plan's trustees' decision to

eliminate its housing program, and also expressed concern that the

transaction would have negative impact on the participants' paychecks

and affect their retirement plan.

The applicant responded to this comment by stating that the

trustees' decision to terminate the housing benefit does not involve

the merits of the subject transaction. Nonetheless, the applicant

states that the trustees did act prudently and in the best interest of

all participants and beneficiaries in terminating the housing benefit.

Over the past 40 years, the number of jobs available for West Coast

unlicensed deck hands has declined from several thousand to about a

hundred. There is a substantial possibility that further shrinkage will

occur if Congress fails to enact a maritime subsidy program. As the

declining contribution base squeezes the Plan's finances, the applicant

represents that the Plan's trustees properly chose to marshal the

Plan's assets to provide benefits to the maximum number of eligible

participants for as long as possible. The applicant further states that

the elimination of the housing benefit will have no impact on any

participant's paycheck, nor will it affect any retirement plan.

The Department has considered the entire record, including the

comments submitted and the applicant's response thereto, and has made a

final determination to grant the exemption as proposed.

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

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

General Information

The attention of interested persons is directed to the following:

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

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

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

person from certain other provisions to which the exemptions does not

apply and the general fiduciary responsibility provisions of section

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

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

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

accordance with section 404(a)(1)(B) of the Act; nor does it affect the

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) These exemptions are supplemental to and not in derogation of,

any other provisions of the Act and/or the Code, including statutory or

administrative exemptions and transactional rules. Furthermore, the

fact that a transaction is subject to an administrative or statutory

exemption is not dispositive of whether the transaction is in fact a

prohibited transaction; and

(3) The availability of these exemptions is subject to the express

condition that the material facts and representations contained in each

application accurately describes all material terms of the transaction

which is the subject of the exemption.

Signed at Washington, D.C., this 26th day of July, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 96-19482 Filed 7-30-96; 8:45 am]

BILLING CODE 4510-29-P