Proposed Exemptions; Pikeville National Bank

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10079, et al.]

Proposed Exemptions; Pikeville National Bank

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

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

date of publication of this Federal Register Notice. Comments and

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

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

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

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

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

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

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

addressed and include a general description of the evidence to be

presented at the hearing.

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

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

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

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

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

Proposed Exemption. The applications for exemption and the comments

received will be available for public inspection in the Public

Documents Room of Pension and Welfare Benefits Administration, U.S.

Department of Labor, Room N-5507,

[[Page 57462]]

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.Pikeville National Bank &

Trust Company; Trust Company of Kentucky; and First American Bank

(collectively, the Banks) Located in Pikeville and Ashland, Kentucky

[Application Numbers D-10079 through D-10082]

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

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: (1) the cash sales on

December 28, 1994 and January 13, 1995, of certain collateralized

mortgage obligations (CMOs) and other mortgage-backed securities

(collectively, the Securities) held by eighty-nine (89) employee

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

for which the Banks act as trustee (the Plans) to Pikeville National

Corporation (PNC), a party in interest with respect to the Plans; (2)

the ``makewhole'' payments made by PNC to the Plans on January 20,

1995, in connection with the sale of certain Securities by the Plans on

the open market on November 2, 1994; and (3) the proposed additional

``makewhole'' and interest payments to be made by PNC to the Plans, as

of the date the exemption is granted, as a result of: (i) the

additional amounts owed to such Plans based on the amortized cost of

the Securities at the time of the transactions in situations where the

amortized cost exceeded the outstanding principal balance of the

Securities (plus a reasonable rate of interest on such amounts), and

(ii) the additional accrued but unpaid interest on the Securities which

was owed to the Plans at the time of the sale to PNC on December 28,

1994 (plus a reasonable rate of interest on such amounts); provided

that the following conditions are met:

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

(b) Each Plan has received or will receive a total amount for the

Securities owned by the Plan, including the sale proceeds and

``makewhole'' payments for transactions that occurred either on the

open market or with PNC, which is equal to the greater of: (i) the

outstanding principal balance for each Security owned by the Plan, plus

accrued but unpaid interest, at the time of the sale; (ii) the

amortized cost for each Security owned by the Plan on the date of the

sale, plus accrued but unpaid interest, as determined by the Banks; or

(iii) the fair market value of each Security owned by the Plan as

determined by the Banks from broker-dealers or pricing services

independent of the Banks at the time of the sale;

(c) With respect to the ``makewhole'' payments made by PNC to the

Plans on January 20, 1995, the Plans receive a reasonable rate of

interest for the period from November 2, 1994 (the date of the sale of

certain Securities on the open market) until January 20, 1995 (the date

such payments were made), to the extent this amount is not already

accounted for under the additional ``makewhole'' payments which are due

for the Securities based on the amounts referred to above in Item

(3)(i);

(d) The Plans did not pay any commissions or other expenses with

respect to the transactions;

(e) The Banks, as trustee of the Plans, determined that the sale of

the Securities was in the best interests of each of the Plans and their

participants and beneficiaries at the time of the transaction;

(f) The Banks took all appropriate actions necessary to safeguard

the interests of the Plans and their participants and beneficiaries in

connection with the transactions; and

(g) Each Plan received a reasonable rate of return on the

Securities during the period of time that it held the Securities.

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

as of December 28, 1994, and January 13, 1995, for the sales of the

Securities made to PNC, and as of January 20, 1995, for the

``makewhole'' payments made by PNC in connection with the sale of the

Securities to an unrelated party on November 2, 1994. In addition, this

proposed exemption will be effective for the additional ``makewhole''

and interest payments due to the Plans as of the date such payments are

made to the affected Plans.

Summary of Facts and Representations

1. The Banks are wholly-owned subsidiaries of PNC, a bank holding

company organized under federal and Kentucky laws which is located at

208 North Mayo Trail in Pikeville, Kentucky. The Banks are: (a) the

Pikeville National Bank and Trust Company, located at 208 North Mayo

Trail in Pikeville, Kentucky; (b) the Trust Company of Kentucky,

located at 1544 Winchester Avenue in Ashland, Kentucky; and (c) the

First American Bank, located at 1544 Winchester Avenue in Ashland,

Kentucky. The Banks offer traditional banking services (e.g. checking,

savings, loans and trusts) to both individuals and entities in their

localities.

2. The Banks serve as trustees for the Plans and have investment

discretion for either some or all of the assets of such Plans. The

Plans consist of a total of eighty-nine (89) plans, including various

profit sharing plans, money purchase pension plans, 401(k) plans,

simplified employee benefit plans (SEPs), Keogh plans and IRAs. The

Plans that are employee benefit plans covered under Title I of the Act,

such as the profit sharing and money purchase pension plans, are

maintained by small businesses in the Pikeville and Ashland, Kentucky

areas. All of these Plans have fewer than 100 participants.\1\

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\1\ Examples of some of these Plans are: (i) the Sandy Valley

Explosive Co., 401(k) Plan, which had 28 participants and total

assets of $90,398 as of September 30, 1994; (ii) the Corbin Coal

Co., Inc. Profit Sharing Plan, which had 9 participants and total

assets of $440,772 as of September 30, 1994; and (iii) the Baird,

Baird, Baird & Jones P.S.C. Retirement Plan, which had 49

participants and total assets of $2,539,844 as of September 30,

1994.

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[[Page 57463]]

Some of the Plans are Keogh plans (a/k/s HR 10 plans) and IRAs

which are not employee benefit plans covered under the Act.\2\ Of the

eighty-nine (89) Plans involved in the subject transactions by the

Banks, twenty-nine (29) are IRAs and ten (10) are Keogh plans.

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\2\ Pursuant to 29 CFR 2510.3-2(d) and 2510.3-3(b), the IRAs and

Keogh plans would not be employee benefit plans under of Title I of

the Act. However, such plans are subject to the provisions of Title

II of the Act and, specifically, the prohibited transaction

provisions of section 4975 of the Code.

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3. The Banks represent that at various times during the period from

July 1992 until January 1994, assets of the Plans were invested in the

Securities. The Securities were purchased from broker-dealers that were

independent of the Plans and their sponsoring employers as well as the

Banks and their affiliates.

The Securities are collateralized mortgage obligations (i.e. CMOs)

and other mortgage-backed securities. The Securities are investment

products through which investors purchase interests in pools of

residential mortgage loans. In general, investors in these securities

receive payments of principal and interest or, in some cases, either

principal or interest only, depending upon the type of security

purchased. Interest payments change monthly in relation to a specific

index, such as the London Interbank Offered Rate (LIBOR) or the U.S.

Federal Reserve's Cost of Funds Index (COFI), contained in a formula

used to calculate the interest rate for such securities. Principal

payments on the Securities vary in amount and timing depending upon how

quickly the outstanding principal amounts on the underlying mortgages

held in the mortgage pools are prepaid by the obligors. The repayment

of principal and interest on the underlying mortgages in the various

pools is usually guaranteed by U.S. Government Agencies, such as the

Federal Home Loan Mortgage Corporation (FHLMC or ``Freddie Mac'') or

the Federal National Mortgage Association (FNMA or ``Fannie Mae'').

4. The Securities consisted of twenty-six (26) separate securities.

All of the Securities were CMOs or Real Estate Mortgage Investment

Conduits (REMICs), except for one ``structured'' note issued by the

Federal Home Loan Bank (FHLB) and three fixed coupon notes issued by

FNMA, which were backed by pools of residential mortgages.

The CMOs are described as follows: (a) FHLMC REMIC--Planned

Amortization Class (PAC) Series 1059, Class F, CUSIP #312905MB5; (b)

FHLMC REMIC--PAC Series 1459, Class P, CUSIP #312914DV3; (c) FHLMC

REMIC--PAC Series 1551, Class E, CUSIP #312916XX2; (d) FHLMC REMIC--

Targeted Amortization Class (TAC) Series 1580, Class H, CUSIP

#3133TOA7; (e) FNMA REMIC--Scheduled Amortization Class Series 1993-

168, Class N, CUSIP #31359DQH9; (f) General Electric (GE) Capital

Mortgage Services REMIC--PAC Series 1993-13, Class A6, CUSIP

#36157LSB5; (g) FHLMC REMIC--Z Tranche Series 1393, Class J, CUSIP

#312912SQ2; (h) FHLMC REMIC--Z Tranche Series 1411, Class ZA, CUSIP

#312912X45; (i) FHLMC REMIC--Inverse Floater Series 1438, Class F,

CUSIP #312913TJ5; (j) FHLMC REMIC--Inverse Floater Series 1625, Class

SB, CUSIP #3133T22Q2; (k) FHLMC REMIC--Inverse Floater Series 1660,

Class S, CUSIP #3133T3QK7; (l) FHLMC REMIC--Inverse Floater Series

1665, Class S, CUSIP #3133T3RD2; (m) FNMA REMIC--Inverse Floater Series

1993-102, Class S, CUSIP #31359AR43; (n) FNMA REMIC--Inverse Floater

Series 1993-115, Class SE, CUSIP #31359BDT1; (o) FNMA REMIC--Inverse

Floater Series 1993-185, Class SH, CUSIP #31359DU50; (p) FNMA REMIC--

Inverse Floater Series G93-31, Class SD, CUSIP #31359DZW6; (q) FHLMC

REMIC--Inverse Floater Series 1385, Class S, CUSIP #312912KK3; (r) FNMA

REMIC--Z Tranche Series 1992-123, Class Z, CUSIP #31358N4F6; (s) FNMA

REMIC--Inverse Floater Series 1992-129, Class S, CUSIP #31358N7D8; (t)

FNMA REMIC--Inverse Floater Series G93-14, Class S, CUSIP #31358TX87;

(u) FNMA REMIC--Principal Only (PO) Series 1993-161, Class GC, CUSIP

#31359BXX0; and (v) GE Capital Mortgage Services REMIC--Inverse Floater

Series 1993-17, Class A20, CUSIP #36157LUY2.

The other Securities that were not CMOs are described as follows:

(a) FHLB Structured Note, CUSIP #313389FC7, an inverse floater indexed

bond with a coupon formula based on six-month LIBOR; (b) FNMA Note,

CUSIP #31359CAL9, a fixed coupon note paying 6.43 percent annually, due

to mature on January 13, 2004, but callable on or after January 13,

1997; (c) FNMA Medium Term Note, CUSIP #31364AJ37, a fixed coupon note

paying 6.17 percent annually, due to mature on December 2, 2003, but

callable on or after December 2, 1996; and (d) FNMA Medium Term Note,

CUSIP #31364AVX7, a fixed coupon note paying 6.80 percent annually, due

to mature on October 23, 2002, but callable on or after October 23,

1995.

Of the twenty-six (26) Securities, twenty-four (24) had their

underlying mortgages guaranteed by either the FNMA, FHLMC, or FHLB. The

Banks represent that most of the CMOs would be considered ``guaranteed

governmental mortgage pool certificates'' (see 29 CFR 2510.3-

101).3 The Banks state that it is unclear whether the Securities

that are not CMOs would be so considered because they are debt, rather

than equity, instruments issued by a U.S. Government agency. However,

the Banks state that all of the Securities are ``publicly-offered

securities'' (see 29 CFR 2510.3-101(a)(2) and (b)).4

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3 In this regard, under 29 CFR 2510.3-101(i), if a plan

acquires a ``guaranteed governmental mortgage pool certificate'',

the plan's assets would include the certificate but not any of the

mortgages underlying such certificate. A ``guaranteed governmental

mortgage pool certificate'' is a certificate (i) that is backed by,

or evidences an interest in, specified mortgages or participation

interests, and (ii) whose interest and principal payments are

guaranteed by the Government National Mortgage Association (GNMA),

FHLMC (i.e. ``Freddie Mac'') or FNMA (i.e. ``Fannie Mae''). Thus,

the Banks represent that since most of the CMOs that were owned by

the Plans had interest and principal payments payable under the CMOs

guaranteed by FHLMC or FNMA, the assets of the Plans did not include

any of the mortgages underlying such CMOs.

4 In addition, under 29 CFR 2510.3-101(a)(2) and (b), if

a plan acquires a ``publicly-offered security'' that grants the plan

an equity interest in an entity, the plan's assets would include the

security but not any of the underlying assets of the entity.

Therefore, the Banks represent that the assets of the Plans that

owned the CMOs issued by GE Capital Mortgage Services did not

include any of the mortgages underlying such CMOs even though such

CMOs would not be considered a ``guaranteed governmental mortgage

pool certificate'' under the Department's ``plan assets''

regulation.

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5. All of the CMOs mentioned above were structured as REMICs

pursuant to section 860D of the Code. The various classes of these

Securities receive principal and, possibly, interest payments in

differing portions and at differing times from the cash flows provided

from the monthly payments received on the underlying mortgages.

The repayment of principal from the underlying mortgages fluctuates

significantly. To facilitate the structuring of such REMICs, the

prepayments on the pools of mortgages are commonly measured relative to

a variety of prepayment models. The model used for these REMICs is the

Public Securities Association's standard prepayment model or ``PSA''.

For example, this model may assume that mortgages will prepay at an

annual rate of .2 percent in the first month after origination, then

the prepayment rate would increase at an annual rate of .2

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percent per month up to the 30th month after origination and then the

prepayment rate would remain constant at 6 percent per annum in the

30th and later months. Such an assumption is called 100 PSA.

The REMIC structure allocates principal payments to the various

classes or ``tranches'' in varying amounts as principal payments are

made according to the allocations specified in the prospectuses. The

exact date of repayment of all principal to any REMIC class is not

known until the mortgage-backed securities are paid in full. The

maturity for the various classes is referred to as the ``weighted

average life'' (WAL). The WAL for a particular class of securities

refers to the average amount of time, expressed in years, which will

elapse from the date of the issuance of such securities until each

dollar of principal has been repaid to the investor based on the PSA

assumption. The holders of all classes will receive all of their

principal back. The timing of when that principal is returned is

dependent on how quickly the underlying mortgages are repaid or

refinanced. However, in no event will the time for the recovery of

principal exceed the final maturity date of the underlying mortgages.

Each month the monthly payments on the underlying mortgages are

collected and distributed to the holders of the various REMIC classes.

Depending upon the structure of the REMIC, interest may be paid monthly

according to a specific formula. The CMOs owned by the Plans, referred

to above, included ``principal only'' (POs) tranches, ``Z class''

tranches, and inverse floating rate classes (i.e. so-called ``inverse

floaters'') with coupon rate formulas based on either LIBOR or COFI.

The ``principal only'' CMOs are similar to other bonds where an

investor purchases the security at a discount and receives the

principal cash flow off the collateral. The difference in the principal

amount invested and the face value equates to the investment's yield.

The timing of the cash flows received determines the ultimate yield on

the investment. With a ``principal only'' CMO, the faster the

collateral pays down, the higher the yield the investor receives.

Income is recognized by accreting the discount over the expected life

of the security. There are no regular interest payments received on

``principal only'' CMOs.

There is no loss of principal because the investor will ultimately

receive the face value of the CMO, assuming that the underlying

mortgages are guaranteed by a U.S. Government agency (e.g. FNMA or

FHLMC). However, there is no guarantee as to the timing of the cash

flows for such CMO's and the ultimate yields to the investors can be

difficult to predict.

The CMOs that are ``Z tranche'' classes of such Securities are the

last tranches entitled to repayment of principal from the underlying

mortgages. Therefore, such CMOs are the most susceptible to principal

payment extensions which lengthen the duration of the security beyond

the initially determined WAL, based on the PSA assumptions for

prepayments on the underlying mortgages. As noted above, the timing for

when all principal payments will be made is dependent on how quickly

the underlying mortgages are repaid or refinanced. If interest rates

increase significantly for a period of time, then there will be

significantly fewer mortgages that are repaid or refinanced. Such

interest rate increases can dramatically change the WAL for a ``Z

tranche'' CMO, as well as other lower ranked CMO tranches. In addition,

the amount of principal payments that a ``Z tranche'' CMO investor will

receive during such periods will be much less.

The CMOs that are ``inverse floaters'' are so described because the

formulas used to calculate the interest payments, which adjust monthly

for each class of the Security, usually raise the interest rate when

the index falls and lower the interest rate when the index rises.

Most of the coupon rate formulas are based on an interest rate

index known as ``LIBOR''. LIBOR refers to the arithmetic mean of the

London Interbank offered quotations for one-month Eurodollar deposits.

LIBOR moves up or down as interest rates move up or down. The movement

of LIBOR has an inverse relationship with respect to the interest paid

on the inverse floating rate classes. The CMOs with interest rate

formulas based on the COFI rate operate in the same manner. Therefore,

significant interest rate increases can have a dramatically adverse

affect on the investor's coupon rate and can lower the market value of

the security vis a vis other fixed income securities of comparable

duration (see Paragraph 7 below).

6. The Securities were purchased by the Banks, as trustee of the

Plans, from the following entities: (a) Kemper Securities; (b) Crews &

Associates; (c) Marcus, Stowell & Beye; (d) Bear Stearns; (e) Morgan

Keegan; (f) Merrill Lynch; and (g) First Institutional Securities. As

noted earlier, these entities were all independent of the Plans as well

as the Banks and their affiliates. In addition, the applicant notes

that the Banks acted as a trustee with investment discretion for the

assets of the Plans that were invested in the Securities and the

entities that sold the Securities to the Plans were not acting as

fiduciaries for such Plans.5

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\5\ The Department is not providing any views in this proposed

exemption as to fiduciary status and related decisions involved in

the investment of the Plans in the subject transactions.

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7. With respect to the CMOs, at the time of the purchase of these

Securities by the Plans, the Banks anticipated that most of the CMOs

would be retired within two to five years of the date of purchase due

to prepayments of the underlying mortgages in each pool as obligors

refinanced their mortgages at lower interest rates. The Banks thought

that the CMOs would yield the Plans a high rate of return which would

be superior to the yields available on other fixed income securities of

comparable duration at the time of the transactions.6 The Banks

note that the ideal time to buy CMOs that are ``inverse floaters''

would be when interest rates, as measured by indices such as LIBOR or

COFI, are high and are expected to go down during the time the investor

is holding the CMOs. However, when interest rates rise, the rate of

return on these CMOs goes down and the securities become less valuable.

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\6\ For example, the Banks state that a five-year U.S. Treasury

Note yielded 8.7 percent on March 31, 1990, but yielded only 4.7

percent on September 28, 1993. The Banks note that this interest

rate ``environment'' led to the development of new structured

products, such as ``inverse floaters'', which many investors

believed would produce superior returns based on interest rate

projections at the time.

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The Banks note that initially the Plans were receiving monthly

interest payments on the CMOs at rates that were significantly above

the market rate for comparable securities, as measured by interest rate

indexes at the time. However, increases in such interest rates during

1994 changed the investment outlook for the Securities. As a result,

the Banks anticipated that the CMOs would not be retired for many years

because of the projected decrease in the prepayments of mortgages held

in each pool. Furthermore, the increases in interest rates caused both

the rate of return on the CMOs (as measured by the monthly interest

payments) and the market value of the CMOs to decrease significantly.

In addition, the Banks state that similar decreases in market value

were occurring with respect to the other Securities that were not CMOs.

This was particularly true for the FHLB Structured Note because it had

a coupon rate formula, based on LIBOR, that was similar to the CMOs

that were ``inverse

[[Page 57465]]

floaters''.7 The FNMA Medium Term Notes, which paid fixed coupon

rates, were also declining in market value vis a vis other fixed income

securities of comparable duration (e.g. US Treasury Notes) although to

a lesser extent than the ``inverse floaters''.

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\7\ The coupon formula for the FHLB Structured Note was 14.375

percent--(2 x six-month LIBOR). This Security's coupon had a cap

of 14.375 percent and a floor of 0 percent. The coupon rate was

reset annually on April 6 and October 6. The coupons ranged from 8

percent as of April 6, 1993 to 2.6875 percent as of October 6, 1994.

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Therefore, by the end of 1994, the Banks state that the Plans were

faced with the prospect of incurring significant losses on their

investments in the Securities, particularly the ``inverse floaters''

and ``Z tranche'' CMOs.8

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\8\ The Department is expressing no opinion in this proposed

exemption regarding whether the acquisition and holding of the CMOs

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

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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8. In November and December 1994, the Banks obtained bids from

various broker-dealers and pricing services in order to establish the

fair market value of the CMOs and other Securities. The Banks received

market price information on the Securities from Bloomberg Financial

Markets (i.e. a well-known pricing service for CMOs), as well as bid

quotations from Bear Stearns, Smith Barney, Alex Brown & Sons, Morgan

Keegan, DLJ (i.e. Donaldson, Lufkin & Jenrette), and Prudential

Securities (the Broker-Dealers). All of the information received

confirmed that the fair market value of the Securities was below their

book value (i.e. either the outstanding principal balance or the

amortized cost).

The Banks represent that ten (10) of the twenty-six (26) total

Securities held by the Plans were sold on the open market on November

2, 1994, for $1,156,028.46.9 This transaction included six (6) of

the CMOs and all four (4) of the Securities that were not CMOs. The

Securities were sold after the Banks obtained bids for the Securities,

on an all or nothing basis, from all of the Broker-Dealers. After

obtaining bids from the Broker-Dealers, the Banks sold these Securities

to Prudential Securities (Prudential) because it was the broker with

the highest average total bid for all of the Securities that were

involved. The bids obtained by the Banks for all of these Securities

were as follows:

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\9\ These Securities were the following: (1) FHLMC REMIC--PAC

Series 1059, Class F, CUSIP #312905MB5; (2) FHLMC REMIC--PAC Series

1459, Class P, CUSIP #312914DV3; (3) FHLMC REMIC--PAC Series 1551,

Class E, CUSIP #312916XX2; (4) FHLB Structured Note, CUSIP

#313389FC7; (5) FHLMC REMIC--TAC Series 1580, Class H, CUSIP

#3133TOA7; (6) FNMA Note, CUSIP #31359CAL9; (7) FNMA REMIC--

Scheduled Amortization Class Series 1993-168, Class N, CUSIP

#31359DQH9; (8) FNMA Medium Term Note, CUSIP #31364AJ37; (9) FNMA

Medium Term Note, CUSIP #31364AVX7; and (10) GE Capital Mortgage

Services REMIC--PAC Series 1993-13, Class A6, CUSIP #36157LSB5.

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(a) Alex Brown--77.944; (b) Bear Stearns--76.996; (c) Morgan

Keegan--76.996; (d) Smith Barney--77.913; (e) DLJ--77.364; and (f)

Prudential--78.068.10

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\10\ The Broker-Dealers' bids represent a price quoted per $100

of principal. To determine the price for the Securities received by

the Banks based on the average bid quoted, the par value of the

Securities would be multiplied by the particular quote, expressed as

a percentage of 100. For example, if the par value of the Securities

was $100,000 and the average bid for the Securities was $78.50 per

$100 of principal, the quoted price would have been $78,500 since

$100,000 x .7850 = $78,500.

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

After the sale of these Securities to Prudential, the Banks made

the Plans ``whole'' for their losses on the investments. In this

regard, the Plans received separate ``makewhole'' payments from PNC,

the Banks' holding company, on January 20, 1995, of $210,725. These

``makewhole'' payments equalled the difference between the book value

(as discussed in Paragraph 12 below) of the Securities at the time of

sale and the market price received from the sale of the Securities to

Prudential. The Banks represent that the Plans involved will also

receive additional payments, as of the date the proposed exemption is

granted, reflecting a reasonable rate of interest for the period from

November 2, 1994 (the date of the sale of these Securities on the open

market) until January 20, 1995 (the date such payments were made to the

Plans).11

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

\11\ The Banks state that the interest on this ``makewhole''

payment for the 2.5 month period would be approximately $1,720.43.

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

Since the ``makewhole'' payments made on January 20, 1995 were a

transaction between the Plans and PNC, a party in interest with respect

to the Plans, the Banks request that the proposed exemption cover such

``makewhole'' payments. There will also be additional ``makewhole''

payments made to the Plans, as of the date the proposed exemption is

granted, to reflect the additional amounts owned to the Plans based on

the difference between the book value (i.e. outstanding principal

balance) and the amortized cost of some of the Securities, where the

latter amount would have been greater at the time of the transaction

(as discussed further below).

9. On December 28, 1994, the Banks sold fifteen (15) of the

remaining sixteen (16) Securities from the Plans to PNC for

$3,069,187.54.12

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

\ 12\ These Securities were the following: (1) FHLMC REMIC--Z

Tranche Series 1393, Class J, CUSIP #312912SQ2; (2) FHLMC REMIC--Z

Tranche Series 1411, Class ZA, CUSIP #312912X45; (3) FHLMC REMIC--

Inverse Floater Series 1438, Class F, CUSIP #312913TJ5; (4) FHLMC

REMIC--Inverse Floater Series 1625, Class SB, CUSIP #3133T22Q2; (5)

FHLMC REMIC--Inverse Floater Series 1660, Class S, CUSIP #3133T3QK7;

(6) FHLMC REMIC--Inverse Floater Series 1665, Class S, CUSIP

#3133T3RD2; (7) FNMA REMIC--Inverse Floater Series 1993-102, Class

S, CUSIP #31359AR43; (8) FNMA REMIC--Inverse Floater Series 1993-

115, Class SE, CUSIP #31359BDT1; (9) FNMA REMIC--Inverse Floater

Series 1993-185, Class SH, CUSIP #31359DU50; (10) FNMA REMIC--

Inverse Floater Series G93-31, Class SD, CUSIP #31359DZW6; (11)

FHLMC REMIC--Inverse Floater Series 1385, Class S, CUSIP #312912KK3;

(12) FNMA REMIC--Z Tranche Series 1992-123, Class Z, CUSIP

#31358N4F6; (13) FNMA REMIC--Inverse Floater Series 1992-129, Class

S, CUSIP #31358N7D8; (14) FNMA REMIC--Inverse Floater Series G93-14,

Class S, CUSIP #31358TX87; and (15) FNMA REMIC--Principal Only (PO)

Series 1993-161, Class GC, CUSIP #31359BXX0.

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

The Securities were sold for cash at an amount equal to the book

value of the Securities, as calculated by the Banks, at the time of the

transaction (as discussed further in Paragraph 12 below).

10. Prior to the transaction on December 28, 1994, the Banks

obtained bid quotations for each of the Securities from Bear Stearns,

Smith Barney, and Alex Brown & Sons, as well as market price

information from Bloomberg Financial Markets (Bloomberg). All of the

quotations received from these Broker-Dealers and the information

[[Page 57466]]

obtained from Bloomberg showed that the fair market value of the

Securities was below their book value as of December 15, 1994. The

following chart shows the market price information from Bloomberg for

each of the Securities involved in the sale to PNC on December 28,

1994.

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

Bloomberg

Securities (CMOs) market

price

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

FHLMC REMIC--Z Tran. 1393, Class J........................... 89.688

FHLMC REMIC--Z Tran. 1411, Class ZA.......................... 57.500

FHLMC REMIC--Inv. Fl. 1438, Class F.......................... 82.000

FHLMC REMIC--Inv. Fl. 1625, Class SB......................... 77.313

FHLMC REMIC--Inv. Fl. 1660, Class S.......................... 60.094

FHLMC REMIC--Inv. Fl. 1665, Class S.......................... 66.469

FNMA REMIC--Inv. Fl. 1993-102, Class S....................... 39.281

FNMA REMIC--Inv. Fl. 1993-115, Class SE...................... 33.219

FNMA REMIC--Inv. Fl. 1993-185, Class SH...................... 78.063

FNMA REMIC--Inv. Fl. G93-31, Class SD........................ 71.188

FHLMC REMIC--Inv. Fl. 1385, Class S.......................... 63.656

FNMA REMIC--Z Tran. 1992-123, Class Z........................ 79.719

FNMA REMIC--Inv. Fl. 1992-129, Class S....................... 98.813

FNMA REMIC--Inv. Fl. G93-14, Class S......................... 20.500

FNMA REMIC--PO 1993-161, Class GC............................ 19.375

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

11. On January 13, 1995, the Banks sold the last remaining Security

(i.e. the GE Capital Mortgage Services REMIC--Inverse Floater Series

1993-17, Class A20) from the Plans to PNC for $187,055.19, an amount

which represented the book value of the Securities at the time of the

transaction. The Banks represent that no bids were obtained from any of

the Broker-Dealers for this transaction because information from

Bloomberg indicated that the market price for the Security would be

approximately 21.65, an amount far below its book value at the time of

the transaction.

12. The total sales proceeds received by the Plans for the

Securities (including the ``makewhole'' payments of $210,725 paid in

connection with certain Securities sold on the open market) was

$4,622,996.19. The Banks state that this amount, which was based on the

book value of the Securities at the time of the transactions, far

exceeded the fair market value of the Securities at the time of the

transactions.13

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

\13\ The Banks note that the original cost of the Securities for

the Plans totalled $5,681,892.89. The Plans had been paid

$427,284.38 in interest and $1,156,914.74 in principal prior to the

transactions.

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

In this regard, the ``book value'' of the Securities was determined

by the Banks to be equal to the outstanding principal balance of the

Securities at the time of the transaction, plus accrued but unpaid

interest. However, the Banks subsequently determined that in some cases

the amortized cost of the Securities,14 as calculated by the

Banks, was greater than the outstanding principal balance of the

Securities. The amortized cost of certain Securities slightly exceeded

their outstanding principal balance in situations where the Securities

were initially purchased by the Plans at a discount to their face

value. The Banks state that a total of eleven (11) of the Securities

were bought by the Plans at a discount. The difference between the

amount paid by PNC to the Plans, based on the outstanding principal

balance of the Securities, and the amount that would have been paid if

the amortized cost method had been used for the Securities bought at a

discount, resulted in an ``underpayment'' of $21,876.89.

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

\14\ The Banks state that the formula used to determine the

amortized cost of these Securities was as follows: [[Purchase

Price--100/WAL x 12] x [WAL x 12--months held]]+100. For example,

assume that a particular CMO investment has been held by a Plan for

6 months. If the WAL was 2.02 years and the purchase price was 90

based on the par value being 100, the formula would be:

[[(90-100)/(2.02 x 12)] x [(2.02 x 12)-6)]]+100

=[(-10/24.24) x (24.24-6)]+100

=(-.4125413 x 18.24)+100

+-7.5247533+100

=92.475247

As the formula indicates, the amortized cost using the average

life at purchase would be $92.475247 as compared to the purchase

price of $90.00. This amortized cost formula allows the ``book

value'' to reflect the yield to the Plan based on the purchase of

the security at a discount from the face value and accretes this

discount over the WAL for the security.

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

The Banks represent that PNC is prepared to pay this additional

amount (plus a reasonable rate of interest on such amount) 15 to

the affected Plans as of the date this proposed exemption is granted.

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

\15\ The Banks state that as of September 1996, the interest on

the additional amount owed would be equal to approximately

$2,297.07, using an annual rate of 6 percent for the 21-month period

since the transaction.

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

In addition, the Banks state that there is accrued but unpaid

interest of approximately $12,194.62, which is still owed to the Plans

on the Securities involved in the transaction with PNC that occurred on

December 28, 1994. The Banks represent that PNC will pay this remaining

accrued interest due on the Securities (plus a reasonable rate of

interest on such amount) 16 to the affected Plans as of the date

this proposed exemption is granted.

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

\16\ The Banks state that as of September 1996, the interest on

this remaining interest amount would be equal to approximately

$1,280.44, using an annual rate of 6 percent for the 21-month period

since the transaction.

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

Therefore, the Plans will receive a total amount that is equal to

the greater of: (i) the outstanding principal balance for each Security

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

sale; (ii) the amortized cost for each Security owned by the Plan on

the date of the sale, plus accrued but unpaid interest, as determined

by the Banks; or (iii) the fair market value of each Security owned by

the Plan as determined by the Banks from broker-dealers or pricing

services independent of the Banks at the time of the sale. In addition,

the Plans will receive a reasonable rate of interest on any additional

amounts owed to the Plans.

13. The Banks represent that the Plans received a reasonable rate

of return on the Securities during the period of time that such

Securities were held by the Plans. The annualized rate of return for

each Security during this time varied from between 24.63 percent to

0.53 percent. The weighted average annual rate of return on the

Securities was approximately 8.32 percent. The Banks state that the

expected yield on the Securities at the time of purchase exceeded the

yield for other similar fixed income securities of comparable duration.

With respect to the actual yields to the Plans on the Securities, the

Banks state that an analysis of each of the Securities held by the

Plans reveals that the Securities outperformed the rate of return of

leading investment indices for similar fixed-income securities during

the period of time that they were held by the Plans. Therefore, the

Banks represent that each of the Plans that held these Securities

outperformed the rate of return of an appropriate index of fixed-income

securities during this period.

14. The Banks, as trustee of the Plans, represent that the sale of

the Securities was in the best interests of the Plans and their

participants and beneficiaries at the time of the transactions. The

Banks state that the sale transactions insulated the Plans from further

decreases in the fair market value of the Securities. Specifically, the

Banks state that the sale of the Securities by the Plans to Prudential

on November 2, 1994, at their fair market value, plus the ``makewhole''

payments made to the Plans by PNC on January 20, 1995, made the Plans

involved ``whole'' for the

[[Page 57467]]

actual losses they would have otherwise incurred. In addition, the Bank

states that the sale of the other Securities (CMOs) by the Plans to PNC

on December 28, 1994 and January 13, 1995 provided the Plans with an

amount which exceeded the fair market value of the Securities at the

time of the transactions. Finally, the Banks state that the additional

``makewhole'' payments for the book value adjustments based on the

amortized cost of some of the Securities, and the additional payments

for accrued but unpaid interest on some of the Securities (plus a

reasonable rate of interest on such amounts), will be paid to the Plans

as of the date that the exemption is granted.

15. The Banks represent that they took all appropriate actions

necessary to safeguard the interests of the Plans and their

participants and beneficiaries in connection with the sale

transactions. The Banks ensured that each Plan received the appropriate

amount of cash from PNC in exchange for such Plan's Securities. The

Banks also ensured that the Plans did not pay any commissions or other

expenses in connection with the sale of the Securities.

16. In summary, the Bank represents that the sale satisfied the

statutory criteria of section 408(a) of the Act and section 4975 of the

Code because: (a) each sale was a one-time transaction for cash; (b)

each Plan has received or will receive a total amount for its

Securities, including the sale proceeds and ``makewhole'' payments for

transactions that occurred either on the open market or with PNC, which

is equal to the greater of: (i) the outstanding principal balance for

each Security owned by the Plan, plus accrued but unpaid interest, at

the time of the sale, (ii) the amortized cost for each Security owned

by the Plan on the date of the sale, plus accrued but unpaid interest,

as determined by the Banks; or (iii) the fair market value of each

Security owned by the Plan as determined by the Banks based on

information obtained from independent third party sources at the time

of the transactions; (c) the Plans will receive a reasonable rate of

interest on any additional amounts owed to the Plans as of the date

this proposed exemption is granted; (d) the Plans did not pay any

commissions or other expenses with respect to the sales; (e) the Banks,

as trustee of the Plans, determined that the sale of the Securities

would be in the best interests of the Plans; (f) the Banks took all

appropriate actions necessary to safeguard the interests of the Plans

and their participants and beneficiaries in connection with the

transactions; and (g) the Plans received a reasonable rate of return on

the Securities during the period of time that they were held by the

Plans.

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.)

Univar Corporation Uni$aver Tax Savings Investment Plan (the Plan),

Located in Kirkland, Washington

[Application No. D-10143]

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) and 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 extension of credit in

the form of guarantees and loans of funds (the Loans), not to exceed

$1,466,785.38, to the Plan by Univar Corporation (the Employer), the

sponsor of the Plan, or its successors, with respect to Guaranteed

Investment Contract No. 62127 (the GIC) issued by Confederation Life

Insurance Company of Canada (Confederation), and the repayment of the

Loans by the Plan to the Employer, or its successors, provided the

following conditions are satisfied: (a) All terms and conditions of the

transactions are no less favorable to the Plan than those the Plan

could receive in arm's-length transactions with unrelated parties; (b)

No interest payments or other expenses will be incurred by the Plan

with respect to the transactions; (c) Repayment of the loans will be

made from proceeds realized from the GIC (the GIC Proceeds) as paid to

the Plan by Confederation, its successors, or any other third-party,

and made only if the repayments do not interfere with the liquidity

needs of the Plan for payment of benefits, transfer of investments,

hardship withdrawals or loans as determined by BZW Barclays Global

Investors, N.A., the Plan trustee; (d) Repayment of the Loans will be

waived by the Employer and its successors to the extent the Loans

exceed the GIC Proceeds, and (e) All unpaid principal and interest that

was due under the GIC on August 12, 1994, minus any Loans from the

Employer and/or payments received under the GIC after August 12, 1994,

will be completely paid by January 1, 2000, by a Loan to the Plan from

the Employer or its successors.

Summary of Facts and Representations

1. The Employer, a Washington corporation, is an international

distributor of industrial, agricultural, and pest control chemicals and

related products and services. The Employer purchases chemicals from

manufacturers in truck, railcar, or tank car quantities and sells the

chemicals in smaller quantities to its customers. The Employer operates

through three wholly-owned subsidiaries: Van Waters & Rogers, Inc.; Van

Waters & Rogers, Ltd.; and Univar Europe, N.V.

On September 30, 1996, all of the Employer's outstanding shares of

common stock were acquired by Royal Pakhoed, N.V. (Pakhoed), a

Netherlands company, through a friendly tender offer and merged with

Pakhoed USA, Inc. a United States subsidiary of Pakhoed. The applicant

represents that the surviving corporation is subject to all the

obligations and liabilities of the Employer and is expected to continue

the business and operations of the Employer substantially as they have

been conducted.

2. The Plan is a defined contribution plan that is intended to

satisfy the provisions of sections 401(a) and 401(k) of the Code, with

employer matching contributions. As of June 30, 1996, the Plan had

2,218 participants and beneficiaries and total assets of

$60,687,828.85.

The fiduciaries of the Plan are the Finance Committee of the Board

of Directors of the Employer (the Finance Committee), the Pension

Management Committee (Pension Committee), and the trustee, BZW Barclays

Global Investors, N.A. (Barclays). The Finance Committee establishes

the funding policy for the Plan and appoints and monitors the Pension

Committee. The

[[Page 57468]]

Pension Committee consists of executives of the Employer, who inter

alia, supervise the daily administration of the Plan. Barclays, a

national bank of the United States, represents that it is a fiduciary

with respect to the Plan and performs as trustee, investment manager,

and outside recordkeeper for the Plan.

The Pension Committee selects various funds that are offered by the

Plan to its participants as investment vehicles for their individual

accounts. Participants of the Plan can daily direct investments of the

assets in their individual accounts among the various funds offered by

the Plan.

One of the funds offered by the Plan to participants is the Fixed

Income Fund (the Fixed Fund), which invests in various guaranteed

investment contracts issued by insurance companies. There are currently

969 individual participant accounts of the Plan invested in the Fixed

Fund.

3. Among the assets of the Fixed Fund is the GIC, which represents

approximately 2.4 percent of the total assets of the Plan. The GIC has

an effective date of April 2, 1990, and an expiration date of April 5,

1995, and was issued for the principal amount of $1,000,000 with a

guaranteed interest rate of 9.18 percent compounded annually. The

applicant represents that the GIC had a Book Value of $1,466,758.38

(the Book Value), as of August 12, 1994, which represents the principal

deposit plus accrued interest, and minus any withdrawals to that date.

The applicant represents that the insurance regulators of Canada

seized the assets of Confederation on August 11, 1994. The following

day the Ingham County Circuit Court, Mason, Michigan placed the assets

of Confederation located in the United States in conservatorship and

rehabilitation proceedings under the administration of state insurance

regulators, and all withdrawals and interest payments with respect to

the GIC were suspended.17

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

17 The Department notes that the decision to acquire and hold

the GIC is governed by the fiduciary responsibility provisions of

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

Department is not herein proposing relief for any violation of Part

4 which may have arisen as a result of the acquisition and holding

of the GIC by the Plan.

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

After August 12, 1994. The trustee of the Plan has continued to

value the GIC at its Book Value of $1,466,758.38, and has not placed

restrictions with respect to contributions, loan withdrawals,

transfers, and distributions into or out of the Fixed Fund.

4. In order to maintain the Book Value of the GIC and the liquidity

of the Fixed Fund and to avoid having to segregate the GIC from the

Fixed Fund or suspend transfers from the Fixed Fund because of the GIC,

the Employer proposes to guarantee and loan funds (the Loans) for a

total amount not to exceed the Book Value of the GIC, as determined on

August 12, 1994.18

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

\ 18\ The Department notes that the exemption, if granted will

not affect the ability of a participant or beneficiary to bring a

civil action against plan fiduciaries for any breaches of section

404 of the Act which may have occurred in connection with any aspect

of the GIC transaction.

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

The Loans will be unsecured and interest-free and made, as needed,

to provide for withdrawals from the Fixed Fund of the Plan for benefit

distributions, investment transfers, or hardship withdrawals and loans.

The Employer also represents that it will make a final Loan to the

Plan by January 1, 2000, that totals $1,466,785.38, minus any other

Loans made to the Plan after August 12, 1994, and/or minus any payments

received by the Plan from the GIC Proceeds after August 12, 1994.

In addition, the applicant represents that the Plan will not incur

any interest payments or other expenses from the Loans, and repayment

of the Loans will be restricted to proceeds from the GIC as paid to the

Plan by Confederation, its successors, or any other third-party. Also,

the applicant represents that repayment of the Loans will be waived by

the Employer, or its successors, to the extent the loans exceed the

proceeds realized from the GIC by the Plan.

Barclays in an agreement dated July 10, 1996, agrees to monitor and

enforce the Employer's fulfillment of its obligations to the Plan to

make the Loans to the Plan. In addition, if the Employer fails in its

obligation of the Loans, Barclays will take prudent and appropriate

action required to protect the interests of the Plan and its

participants and beneficiaries. Barclays pledges to perform its duties

in accordance with the fiduciary requirements of the Act.

Barclays further represents that the undertakings by the Employer

with respect to its promise to make the Loans as described in the

exemption application, and the acceptance by the Plan of such

undertakings are in the best interests of the Plan and its participants

and beneficiaries.

5. In summary, the applicant represents that the proposed

transactions will satisfy the criteria for an exemption under section

408(a) of the Act because (a) the Loans will enable the Plan to fund

benefit payments and make loans, withdrawals, transfers, and

distributions from the Fixed Fund of the Plan; (b) repayments of the

Loans will be restricted to the proceeds realized from the GIC; (c)

repayments will be restricted by liquidity needs of the Plan and waived

by the Employer, or its successors, to the extent the Loans exceed the

proceeds realized from the GIC by the Plan; and (d) no interest

payments or other expenses will be incurred by the Plan with respect to

the transactions.

For Further Information Contact: Mr. C.E. Beaver of the Department,

telephone (202) 523-8881. (This is not a toll-free number.)

BA Securities, Inc. (BA) Located in San Francisco, California

[Application No. D-10335]

Proposed Exemption

I. Transactions

A. Effective August 29, 1996, the restrictions of sections 406(a)

and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b)

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

shall not apply to the following transactions involving trusts and

certificates evidencing interests therein:

(1) The direct or indirect sale, exchange or transfer of

certificates in the initial issuance of certificates between the

sponsor or underwriter and an employee benefit plan when the sponsor,

servicer, trustee or insurer of a trust, the underwriter of the

certificates representing an interest in the trust, or an obligor is a

party in interest with respect to such plan;

(2) The direct or indirect acquisition or disposition of

certificates by a plan in the secondary market for such certificates;

and

(3) The continued holding of certificates acquired by a plan

pursuant to subsection I.A. (1) or (2).

Notwithstanding the foregoing, section I.A. does not provide an

exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and

407 for the acquisition or holding of a certificate on behalf of an

Excluded Plan by any person who has discretionary authority or renders

investment advice with respect to the assets of that Excluded

Plan.19

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\19\ Section I.A. provides no relief from sections 406(a)(1)(E),

406(a)(2) and 407 for any person rendering investment advice to an

Excluded Plan within the meaning of section 3(21)(A)(ii) and

regulation 29 CFR 2510.3-21(c).

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

B. Effective August 29, 1996, the restrictions of sections

406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section

4975 (a) and (b) of the Code by reason of section

[[Page 57469]]

4975(c)(1)(E) of the Code shall not apply to:

(1) The direct or indirect sale, exchange or transfer of

certificates in the initial issuance of certificates between the

sponsor or underwriter and a plan when the person who has discretionary

authority or renders investment advice with respect to the investment

of plan assets in the certificates is (a) an obligor with respect to 5

percent or less of the fair market value of obligations or receivables

contained in the trust, or (b) an affiliate of a person described in

(a); if:

(i) the plan is not an Excluded Plan;

(ii) solely in the case of an acquisition of certificates in

connection with the initial issuance of the certificates, at least 50

percent of each class of certificates in which plans have invested is

acquired by persons independent of the members of the Restricted Group

and at least 50 percent of the aggregate interest in the trust is

acquired by persons independent of the Restricted Group;

(iii) a plan's investment in each class of certificates does not

exceed 25 percent of all of the certificates of that class outstanding

at the time of the acquisition; and

(iv) immediately after the acquisition of the certificates, no more

than 25 percent of the assets of a plan with respect to which the

person has discretionary authority or renders investment advice are

invested in certificates representing an interest in a trust containing

assets sold or serviced by the same entity.20 For purposes of this

paragraph B.(1)(iv) only, an entity will not be considered to service

assets contained in a trust if it is merely a subservicer of that

trust;

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\20\ For purposes of this exemption, each plan participating in

a commingled fund (such as a bank collective trust fund or insurance

company pooled separate account) shall be considered to own the same

proportionate undivided interest in each asset of the commingled

fund as its proportionate interest in the total assets of the

commingled fund as calculated on the most recent preceding valuation

date of the fund.

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

(2) The direct or indirect acquisition or disposition of

certificates by a plan in the secondary market for such certifi- cates,

provided that the conditions set forth in paragraphs B.(1)(i), (iii)

and (iv) are met; and

(3) The continued holding of certificates acquired by a plan

pursuant to subsection I.B. (1) or (2).

C. Effective August 29, 1996, the restrictions of sections 406(a),

406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a)

and (b) of the Code by reason of section 4975(c) of the Code, shall not

apply to transactions in connection with the servicing, management and

operation of a trust, provided:

(1) such transactions are carried out in accordance with the terms

of a binding pooling and servicing arrangement; and

(2) the pooling and servicing agreement is provided to, or

described in all material respects in the prospectus or private

placement memorandum provided to, investing plans before they purchase

certificates issued by the trust.21

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\21\ In the case of a private placement memorandum, such

memorandum must contain substantially the same information that

would be disclosed in a prospectus if the offering of the

certificates were made in a registered public offering under the

Securities Act of 1933. In the Department's view, the private

placement memorandum must contain sufficient information to permit

plan fiduciaries to make informed investment decisions.

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

Notwithstanding the foregoing, section I.C. does not provide an

exemption from the restrictions of section 406(b) of the Act or from

the taxes imposed by reason of section 4975(c) of the Code for the

receipt of a fee by a servicer of the trust from a person other than

the trustee or sponsor, unless such fee constitutes a ``qualified

administrative fee'' as defined in section III.S.

D. Effective August 29, 1996, the restrictions of sections 406(a)

and 407(a) of the Act, and the taxes imposed by section 4975 (a) and

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

Code, shall not apply to any transactions to which those restrictions

or taxes would otherwise apply merely because a person is deemed to be

a party in interest or disqualified person (including a fiduciary) with

respect to a plan by virtue of providing services to the plan (or by

virtue of having a relationship to such service provider described in

section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2)

(F), (G), (H) or (I) of the Code), solely because of the plan's

ownership of certificates.

II. General Conditions

A. The relief provided under Part I is available only if the

following conditions are met:

(1) The acquisition of certificates by a plan is on terms

(including the certificate price) that are at least as favorable to the

plan as they would be in an arm's-length transaction with an unrelated

party;

(2) The rights and interests evidenced by the certificates are not

subordinated to the rights and interests evidenced by other

certificates of the same trust;

(3) The certificates acquired by the plan have received a rating at

the time of such acquisition that is in one of the three highest

generic rating categories from either Standard & Poor's Corporation

(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.

(D & P) or Fitch Investors Service, Inc. (Fitch);

(4) The trustee is not an affiliate of any member of the Restricted

Group. However, the trustee shall not be considered to be an affiliate

of a servicer solely because the trustee has succeeded to the rights

and responsibilities of the servicer pursuant to the terms of a pooling

and servicing agreement providing for such succession upon the

occurrence of one or more events of default by the servicer;

(5) The sum of all payments made to and retained by the

underwriters in connection with the distribution or placement of

certificates represents not more than reasonable compensation for

underwriting or placing the certificates; the sum of all payments made

to and retained by the sponsor pursuant to the assignment of

obligations (or interests therein) to the trust represents not more

than the fair market value of such obligations (or interests); and the

sum of all payments made to and retained by the servicer represents not

more than reasonable compensation for the servicer's services under the

pooling and servicing agreement and reimbursement of the servicer's

reasonable expenses in connection therewith; and

(6) The plan investing in such certificates is an ``accredited

investor'' as defined in Rule 501(a)(1) of Regulation D of the

Securities and Exchange Commission under the Securities Act of 1933.

B. Neither any underwriter, sponsor, trustee, servicer, insurer,

nor any obligor, unless it or any of its affiliates has discretionary

authority or renders investment advice with respect to the plan assets

used by a plan to acquire certificates, shall be denied the relief

provided under Part I, if the provision of subsection II.A.(6) above is

not satisfied with respect to acquisition or holding by a plan of such

certificates, provided that (1) such condition is disclosed in the

prospectus or private placement memorandum; and (2) in the case of a

private placement of certificates, the trustee obtains a representation

from each initial purchaser which is a plan that it is in compliance

with such condition, and obtains a covenant from each initial purchaser

to the effect that, so long as such initial purchaser (or any

transferee of such initial purchaser's certificates) is required to

obtain from its transferee a representation regarding compliance

[[Page 57470]]

with the Securities Act of 1933, any such transferees will be required

to make a written representation regarding compliance with the

condition set forth in subsection II.A.(6) above.

III. Definitions

For purposes of this exemption:

A. Certificate means:

(1) a certificate--

(a) that represents a beneficial ownership interest in the assets

of a trust; and

(b) that entitles the holder to pass-through payments of principal,

interest, and/or other payments made with respect to the assets of such

trust; or

(2) a certificate denominated as a debt instrument--

(a) that represents an interest in a Real Estate Mortgage

Investment Conduit (REMIC) within the meaning of section 860D(a) of the

Internal Revenue Code of 1986; and

(b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which BA

or any of its affiliates is either (i) the sole underwriter or the

manager or co-manager of the underwriting syndicate, or (ii) a selling

or placement agent.

For purposes of this exemption, references to ``certificates

representing an interest in a trust'' include certificates denominated

as debt which are issued by a trust.

B. Trust means an investment pool, the corpus of which is held in

trust and consists solely of:

(1) either

(a) secured consumer receivables that bear interest or are

purchased at a discount (including, but not limited to, home equity

loans and obligations secured by shares issued by a cooperative housing

association);

(b) secured credit instruments that bear interest or are purchased

at a discount in transactions by or between business entities

(including, but not limited to, qualified equipment notes secured by

leases, as defined in section III.T);

(c) obligations that bear interest or are purchased at a discount

and which are secured by single-family residential, multi-family

residential and commercial real property (including obligations secured

by leasehold interests on commercial real property);

(d) obligations that bear interest or are purchased at a discount

and which are secured by motor vehicles or equipment, or qualified

motor vehicle leases (as defined in section III.U);

(e) ``guaranteed governmental mortgage pool certificates,'' as

defined in 29 CFR 2510.3-101(i)(2);

(f) fractional undivided interests in any of the obligations

described in clauses (a)-(e) of this section B.(1); \22\

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\22\ It is the Department's view that the definition of

``trust'' contained in III.B. includes a two-tier structure under

which certificates issued by the first trust, which contains a pool

of receivables described above, are transferred to a second trust

which issues securities that are sold to plans. However, the

Department is of the further view that, since the exemption provides

relief for the direct or indirect acquisition or disposition of

certificates that are not subordinated, no relief would be available

if the certificates held by the second trust were subordinated to

the rights and interests evidenced by other certificates issued by

the first trust.

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(2) property which had secured any of the obligations described in

subsection B.(1);

(3) undistributed cash or temporary investments made therewith

maturing no later than the next date on which distributions are to made

to certificateholders; and

(4) rights of the trustee under the pooling and servicing

agreement, and rights under any insurance policies, third-party

guarantees, contracts of suretyship and other credit support

arrangements with respect to any obligations described in subsection

B.(1).

Notwithstanding the foregoing, the term ``trust'' does not include

any investment pool unless: (i) the investment pool consists only of

assets of the type which have been included in other investment pools,

(ii) certificates evidencing interests in such other investment pools

have been rated in one of the three highest generic rating categories

by S&P's, Moody's, D & P, or Fitch for at least one year prior to the

plan's acquisition of certificates pursuant to this exemption, and

(iii) certificates evidencing interests in such other investment pools

have been purchased by investors other than plans for at least one year

prior to the plan's acquisition of certificates pursuant to this

exemption.

C. Underwriter means:

(1) BA;

(2) any person directly or indirectly, through one or more

intermediaries, controlling, controlled by or under common control with

BA; or

(3) any member of an underwriting syndicate or selling group of

which BA or a person described in (2) is a manager or co-manager with

respect to the certificates.

D. Sponsor means the entity that organizes a trust by depositing

obligations therein in exchange for certificates.

E. Master Servicer means the entity that is a party to the pooling

and servicing agreement relating to trust assets and is fully

responsible for servicing, directly or through subservicers, the assets

of the trust.

F. Subservicer means an entity which, under the supervision of and

on behalf of the master servicer, services loans contained in the

trust, but is not a party to the pooling and servicing agreement.

G. Servicer means any entity which services loans contained in the

trust, including the master servicer and any subservicer.

H. Trustee means the trustee of the trust, and in the case of

certificates which are denominated as debt instruments, also means the

trustee of the indenture trust.

I. Insurer means the insurer or guarantor of, or provider of other

credit support for, a trust. Notwithstanding the foregoing, a person is

not an insurer solely because it holds securities representing an

interest in a trust which are of a class subordinated to certificates

representing an interest in the same trust.

J. Obligor means any person, other than the insurer, that is

obligated to make payments with respect to any obligation or receivable

included in the trust. Where a trust contains qualified motor vehicle

leases or qualified equipment notes secured by leases, ``obligor''

shall also include any owner of property subject to any lease included

in the trust, or subject to any lease securing an obligation included

in the trust.

K. Excluded Plan means any plan with respect to which any member of

the Restricted Group is a ``plan sponsor'' within the meaning of

section 3(16)(B) of the Act.

L. Restricted Group with respect to a class of certificates means:

(1) each underwriter;

(2) each insurer;

(3) the sponsor;

(4) the trustee;

(5) each servicer;

(6) any obligor with respect to obligations or receivables included

in the trust constituting more than 5 percent of the aggregate

unamortized principal balance of the assets in the trust, determined on

the date of the initial issuance of certificates by the trust; or

(7) any affiliate of a person described in (1)-(6) above.

M. Affiliate of another person includes:

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

intermediaries, controlling, controlled by, or under common control

with such other person;

(2) Any officer, director, partner, employee, relative (as defined

in section

[[Page 57471]]

3(15) of the Act), a brother, a sister, or a spouse of a brother or

sister of such other person; and

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

officer, director or partner.

N. Control means the power to exercise a controlling influence over

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

O. A person will be ``independent'' of another person only if:

(1) Such person is not an affiliate of that other person; and

(2) The other person, or an affiliate thereof, is not a fiduciary

who has investment management authority or renders investment advice

with respect to any assets of such person.

P. Sale includes the entrance into a forward delivery commitment

(as defined in section Q below), provided:

(1) The terms of the forward delivery commitment (including any fee

paid to the investing plan) are no less favorable to the plan than they

would be in an arm's-length transaction with an unrelated party;

(2) The prospectus or private placement memorandum is provided to

an investing plan prior to the time the plan enters into the forward

delivery commitment; and

(3) At the time of the delivery, all conditions of this exemption

applicable to sales are met.

Q. Forward delivery commitment means a contract for the purchase or

sale of one or more certificates to be delivered at an agreed future

settlement date. The term includes both mandatory contracts (which

contemplate obligatory delivery and acceptance of the certificates) and

optional contracts (which give one party the right but not the

obligation to deliver certificates to, or demand delivery of

certificates from, the other party).

R. Reasonable compensation has the same meaning as that term is

defined in 29 CFR 2550.408c-2.

S. Qualified Administrative Fee means a fee which meets the

following criteria:

(1) The fee is triggered by an act or failure to act by the obligor

other than the normal timely payment of amounts owing in respect of the

obligations;

(2) The servicer may not charge the fee absent the act or failure

to act referred to in (1);

(3) The ability to charge the fee, the circumstances in which the

fee may be charged, and an explanation of how the fee is calculated are

set forth in the pooling and servicing agreement; and

(4) The amount paid to investors in the trust will not be reduced

by the amount of any such fee waived by the servicer.

T. Qualified Equipment Note Secured By A Lease means an equipment

note:

(1) Which is secured by equipment which is leased;

(2) Which is secured by the obligation of the lessee to pay rent

under the equipment lease; and

(3) With respect to which the trust's security interest in the

equipment is at least as protective of the rights of the trust as would

be the case if the equipment note were secured only by the equipment

and not the lease.

U. Qualified Motor Vehicle Lease means a lease of a motor vehicle

where:

(1) The trust holds a security interest in the lease;

(2) The trust holds a security interest in the leased motor

vehicle; and

(3) The trust's security interest in the leased motor vehicle is at

least as protective of the trust's rights as would be the case if the

trust consisted of motor vehicle installment loan contracts.

V. Pooling and Servicing Agreement means the agreement or

agreements among a sponsor, a servicer and the trustee establishing a

trust. In the case of certificates which are denominated as debt

instruments, ``Pooling and Servicing Agreement'' also includes the

indenture entered into by the trustee of the trust issuing such

certificates and the indenture trustee.

W. BA means BA Securities, Inc. and its affiliates.

The Department notes that this proposed exemption is included

within the meaning of the term ``Underwriter Exemption'' as it is

defined in section V(h) of Prohibited Transaction Exemption 95-60 (60

FR 35925, July 12, 1995), the Class Exemption for Certain Transactions

Involving Insurance Company General Accounts at 35932.

Summary of Facts and Representations

1. BA is the wholly-owned, separately capitalized investment

banking subsidiary of BankAmerica Corporation (the Bank), a multi-bank

holding company which was incorporated in Delaware in 1968. On March

31, 1996 the Bank's consolidated assets were approximately $234.2

billion. The Bank is headquartered in San Francisco and, through its

various subsidiaries, provides a diversified range of financial

services to its customers. The Bank's depository subsidiaries provide

consumer banking and other retail banking services. The Bank, through

its banking and other subsidiaries, also provides wholesale banking and

financial products and services throughout the United States and in

overseas markets to business customers. These products and services

encompass corporate lending, business finance, leasing, cash

management, trade finance and investment banking services.

BA was incorporated in 1986. It maintains its principal place of

business in San Francisco, California, and has branch operations in

Chicago, Los Angeles, New York, Atlanta and Portland.

BA is a member of the National Association of Securities Dealers

and a primary dealer in U.S. Treasury securities. BA also underwrites

and deals in corporate debt securities, commercial paper, municipal

securities, high-yield securities and asset-backed securities, provides

private placement and corporate finance advisory services, including

merger and acquisition advisory services, publishes research on a wide

range of securities and issuers, and engages in syndication, arranging

and trading of bank loans.

BA and its predecessors, including Security Pacific Corporation and

Continental Bank Corporation, have extensive experience in asset

securitizations. BA has participated in securitization transactions as

lead or co-manager of underwritten public offerings, and as private

placement agent or commercial paper conduit agent/dealer for

transactions backed by retail auto receivables, bank and retail credit

cards, equipment loans and leases, manufactured housing loans, auto

leases, unsecured consumer loans, dealer floor plan accounts, trade

receivables and student loans.

BA represents that it received Federal Reserve Board authorization

to underwrite and deal in commercial paper, municipal revenue bonds,

residential mortgage-related securities and consumer receivable-related

securities. In October 1994, BA received Federal Reserve Board approval

to underwrite and deal in corporate debt and equity securities. These

orders are subject to the condition that BA does not derive more than

10% of its total gross revenues from such activities. In addition, BA's

affiliates have the power to sell interests in their own assets in the

form of asset-backed securities.

Trust Assets

2. BA seeks exemptive relief to permit plans to invest in pass-

through certificates representing undivided interests in the following

categories of trusts: (1) single and multi-family residential or

commercial mortgage investment trusts; 23 (2) motor vehicle

[[Page 57472]]

receivable investment trusts; (3) consumer or commercial receivables

investment trusts; and (4) guaranteed governmental mortgage pool

certificate investment trusts.24

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\ 23\ The Department notes that PTE 83-1 [48 FR 895, January 7,

1983], a class exemption for mortgage pool investment trusts, would

generally apply to trusts containing single-family residential

mortgages, provided that the applicable conditions of PTE 83-1 are

met. BA requests relief for single-family residential mortgages in

this exemption because it would prefer one exemption for all trusts

of similar structure. However, BA has stated that it may still avail

itself of the exemptive relief provided by PTE 83-1.

\24\ Guaranteed governmental mortgage pool certificates are

mortgage-backed securities with respect to which interest and

principal payable is guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation

(FHLMC), or the Federal National Mortgage Association (FNMA). The

Department's regulation relating to the definition of plan assets

(29 CFR 2510.3-101(i)) provides that where a plan acquires a

guaranteed governmental mortgage pool certificate, the plan's assets

include the certificate and all of its rights with respect to such

certificate under applicable law, but do not, solely by reason of

the plan's holding of such certificate, include any of the mortgages

underlying such certificate. The applicant is requesting exemptive

relief for trusts containing guaranteed governmental mortgage pool

certificates because the certificates in the trusts may be plan

assets.

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3. Commercial mortgage investment trusts may include mortgages on

ground leases of real property. Commercial mortgages are frequently

secured by ground leases on the underlying property, rather than by fee

simple interests. The separation of the fee simple interest and the

ground lease interest is generally done for tax reasons. Properly

structured, the pledge of the ground lease to secure a mortgage

provides a lender with the same level of security as would be provided

by a pledge of the related fee simple interest. The terms of the ground

leases pledged to secure leasehold mortgages will in all cases be at

least ten years longer than the term of such mortgages.25

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25 Trust assets may also include obligations that are secured

by leasehold interests on residential real property. See PTE 90-32

involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,

1990 at 23150).

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Trust Structure

4. Each trust is established under a pooling and servicing

agreement between a sponsor, a servicer and a trustee. The sponsor or

servicer of a trust selects assets to be included in the trust. These

assets are receivables which may have been originated by a sponsor or

servicer of the trust, an affiliate of the sponsor or servicer, or by

an unrelated lender and subsequently acquired by the trust sponsor or

servicer.26

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\26\ It is the view of the Department that section III.B.(4)

includes within the definition of the term ``trust'' rights under

any yield supplement or similar arrangement which obligates the

sponsor or master servicer, or another party specified in the

relevant pooling and servicing agreement, to supplement the interest

rates otherwise payable on the obligations described in section

III.B.(1), in accordance with the terms of a yield supplement

arrangement described in the pooling and servicing agreement,

provided that such arrangements do not involve swap agreement or

other notional principal contracts.

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On or prior to the closing date, the sponsor acquires legal title

to all assets selected for the trust, establishes the trust and

designates an independent entity as trustee. On the closing date, the

sponsor conveys to the trust legal title to the assets, and the trustee

issues certificates representing fractional undivided interests in the

trust assets. BA, alone or together with other broker-dealers, acts as

underwriter or placement agent with respect to the sale of the

certificates. All of the public offerings of certificates presently

contemplated are to be underwritten by BA on a firm commitment basis.

In addition, BA anticipates that it may privately place

certificates on both a firm commitment and an agency basis. BA may also

act as the lead underwriter for a syndicate of securities underwriters.

Certificateholders will be entitled to receive monthly, quarterly

or semi-annual installments of principal and/or interest, or lease

payments due on the receivables, adjusted, in the case of payments of

interest, to a specified rate--the pass-through rate--which may be

fixed or variable.

When installments or payments are made on a semi-annual basis,

funds are not permitted to be commingled with the servicer's assets for

longer than would be permitted for a monthly-pay security. A segregated

account is established in the name of the trustee (on behalf of

certificateholders) to hold funds received between distribution dates.

The account is under the sole control of the trustee, who invests the

account's assets in short-term securities which have received a rating

comparable to the rating assigned to the certificates. In some cases,

the servicer may be permitted to make a single deposit into the account

once a month. When the servicer makes such monthly deposits, payments

received from obligors by the servicer may be commingled with the

servicer's assets during the month prior to deposit. Usually, the

period of time between receipt of funds by the servicer and deposit of

these funds in a segregated account does not exceed one month.

Furthermore, in those cases where distributions are made semi-annually,

the servicer will furnish a report on the operation of the trust to the

trustee on a monthly basis. At or about the time this report is

delivered to the trustee, it will be made available to

certificateholders and delivered to or made available to each rating

agency that has rated the certificates.

5. Some of the certificates will be multi-class certificates. BA

requests exemptive relief for two types of multi-class certificates:

``strip'' certificates and ``fast-pay/slow-pay'' certificates. Strip

certificates are a type of security in which the stream of interest

payments on receivables is split from the flow of principal payments

and separate classes of certificates are established, each representing

rights to disproportionate payments of principal and interest.27

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\27\ It is the Department's understanding that where a plan

invests in REMIC ``residual'' interest certificates to which this

exemption applies, some of the income received by the plan as a

result of such investment may be considered unrelated business

taxable income to the plan, which is subject to income tax under the

Code. The Department emphasizes that the prudence requirement of

section 404(a)(1)(B) of the Act would require plan fiduciaries to

carefully consider this and other tax consequences prior to causing

plan assets to be invested in certificates pursuant to this

exemption.

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``Fast-pay/slow-pay'' certificates involve the issuance of classes

of certificates having different stated maturities or the same

maturities with different payment schedules. Interest and/or principal

payments received on the underlying receivables are distributed first

to the class of certificates having the earliest stated maturity of

principal, and/or earlier payment schedule, and only when that class of

certificates has been paid in full (or has received a specified amount)

will distributions be made with respect to the second class of

certificates. Distributions on certificates having later stated

maturities will proceed in like manner until all the certificateholders

have been paid in full. The only difference between this multi-class

pass-through arrangement and a single-class pass-through arrangement is

the order in which distributions are made to certificateholders. In

each case, certificateholders will have a beneficial ownership interest

in the underlying assets. In neither case will the rights of a plan

purchasing a certificate be subordinated to the rights of another

certificateholder in the event of default on any of the underlying

obligations. In particular, if the amount available for distribution to

certificateholders is less than the amount required to be so

distributed, all senior certificateholders then entitled to receive

distributions will share in the amount distributed on a pro rata

basis.28

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\28\ If a trust issues subordinated certificates, holders of

such subordinated certificates may not share in the amount

distributed on a pro rata basis with the senior certificateholders.

The Department notes that the exemption does not provide relief for

plan investment in such subordinated certificates.

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[[Page 57473]]

6. For tax reasons, the trust must be maintained as an essentially

passive entity. Therefore, both the sponsor's discretion and the

servicer's discretion with respect to assets included in a trust are

severely limited. Pooling and servicing agreements provide for the

substitution of receivables by the sponsor only in the event of defects

in documentation discovered within a short time after the issuance of

trust certificates (within 120 days, except in the case of obligations

having an original term of 30 years, in which case the period will not

exceed two years). Any receivable so substituted is required to have

characteristics substantially similar to the replaced receivable and

will be at least as creditworthy as the replaced receivable.

In some cases, the affected receivable would be repurchased, with

the purchase price applied as a payment on the affected receivable and

passed through to certificateholders.

Parties to Transactions

7. The originator of a receivable is the entity that initially

lends money to a borrower (obligor), such as a homeowner or automobile

purchaser, or leases property to a lessee. The originator may either

retain a receivable in its portfolio or sell it to a purchaser, such as

a trust sponsor.

Originators of receivables included in the trusts will be entities

that originate receivables in the ordinary course of their business,

including finance companies for whom such origination constitutes the

bulk of their operations, financial institutions for whom such

origination constitutes a substantial part of their operations, and any

kind of manufacturer, merchant, or service enterprise for whom such

origination is an incidental part of its operations. Each trust may

contain assets of one or more originators. The originator of the

receivables may also function as the trust sponsor or servicer.

8. The sponsor will be one of three entities: (i) a special-purpose

or other corporation unaffiliated with the servicer, (ii) a special-

purpose or other corporation affiliated with the servicer, or (iii) the

servicer itself. Where the sponsor is not also the servicer, the

sponsor's role will generally be limited to acquiring the receivables

to be included in the trust, establishing the trust, designating the

trustee, and assigning the receivables to the trust.

9. The trustee of a trust is the legal owner of the obligations in

the trust. The trustee is also a party to or beneficiary of all the

documents and instruments deposited in the trust, and as such is

responsible for enforcing all the rights created thereby in favor of

certificateholders.

The trustee will be an independent entity, and therefore will be

unrelated to BA, the trust sponsor or the servicer. BA represents that

the trustee will be a substantial financial institution or trust

company experienced in trust activities. The trustee receives a fee for

its services, which will be paid by the servicer or sponsor. The method

of compensating the trustee which is specified in the pooling and

servicing agreement will be disclosed in the prospectus or private

placement memorandum relating to the offering of the certificates.

10. The servicer of a trust administers the receivables on behalf

of the certificateholders. The servicer's functions typically involve,

among other things, notifying borrowers of amounts due on receivables,

maintaining records of payments received on receivables and instituting

foreclosure or similar proceedings in the event of default. In cases

where a pool of receivables has been purchased from a number of

different originators and deposited in a trust, the receivables may be

``subserviced'' by their respective originators and a single entity may

``master service'' the pool of receivables on behalf of the owners of

the related series of certificates. Where this arrangement is adopted,

a receivable continues to be serviced from the perspective of the

borrower by the local subservicer, while the investor's perspective is

that the entire pool of receivables is serviced by a single, central

master servicer who collects payments from the local subservicers and

passes them through to certificateholders.

Receivables of the type suitable for inclusion in a trust

invariably are serviced with the assistance of a computer. After the

sale, the servicer keeps the sold receivables on the computer system in

order to continue monitoring the accounts. Although the records

relating to sold receivables are kept in the same master file as

receivables retained by the originator, the sold receivables are

flagged as having been sold. To protect the investor's interest, the

servicer ordinarily covenants that this ``sold flag'' will be included

in all records relating to the sold receivables, including the master

file, archives, tape extracts and printouts.

The sold flags are invisible to the obligor and do not affect the

manner in which the servicer performs the billing, posting and

collection procedures related to the sold receivables. However, the

servicer uses the sold flag to identify the receivables for the purpose

of reporting all activity on those receivables after their sale to

investors.

Depending on the type of receivable and the details of the

servicer's computer system, in some cases the servicer's internal

reports can be adapted for investor reporting with little or no

modification. In other cases, the servicer may have to perform special

calculations to fulfill the investor reporting responsibilities. These

calculations can be performed on the servicer's main computer, or on a

small computer with data supplied by the main system. In all cases, the

numbers produced for the investors are reconciled to the servicer's

books and reviewed by public accountants.

The underwriter will be a registered broker-dealer that acts as

underwriter or placement agent with respect to the sale of the

certificates. Public offerings of certificates are generally made on a

firm commitment basis. Private placement of certificates may be made on

a firm commitment or agency basis. It is anticipated that the lead and

co-managing underwriters will make a market in certificates offered to

the public.

In some cases, the originator and servicer of receivables to be

included in a trust and the sponsor of the trust (although they may

themselves be related) will be unrelated to BA. In other cases,

however, affiliates of BA may originate or service receivables included

in a trust or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

11. In some cases, the sponsor will obtain the receivables from

various originators pursuant to existing contracts with such

originators under which the sponsor continually buys receivables. In

other cases, the sponsor will purchase the receivables at fair market

value from the originator or a third party pursuant to a purchase and

sale agreement related to the specific offering of certificates. In

other cases, the sponsor will originate the receivables itself.

As compensation for the receivables transferred to the trust, the

sponsor receives certificates representing the entire beneficial

interest in the trust, or the cash proceeds of the sale of such

certificates. If the sponsor receives certificates from the trust, the

sponsor sells all or a portion of these certificates for cash to

investors or securities underwriters.

[[Page 57474]]

12. The price of the certificates, both in the initial offering and

in the secondary market, is affected by market forces, including

investor demand, the pass-through interest rate on the certificates in

relation to the rate payable on investments of similar types and

quality, expectations as to the effect on yield resulting from

prepayment of underlying receivables, and expectations as to the

likelihood of timely payment.

The pass-through rate for certificates is equal to the interest

rate on receivables included in the trust minus a specified servicing

fee.\29\ This rate is generally determined by the same market forces

that determine the price of a certificate. The price of a certificate

and its pass-through, or coupon, rate together determine the yield to

investors. If an investor purchases a certificate at less than par,

that discount augments the stated pass-through rate; conversely, a

certificate purchased at a premium yields less than the stated coupon.

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\29\ The pass-through rate on certificates representing

interests in trusts holding leases is determined by breaking down

lease payments into ``principal'' and ``interest'' components based

on an implicit interest rate.

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13. As compensation for performing its servicing duties, the

servicer (who may also be the sponsor or an affiliate thereof, and

receive fees for acting in that capacity) will retain the difference

between payments received on the receivables in the trust and payments

payable (at the pass-through rate) to certificateholders, except that

in some cases a portion of the payments on receivables may be paid to a

third party, such as a fee paid to a provider of credit support. The

servicer may receive additional compensation by having the use of the

amounts paid on the receivables between the time they are received by

the servicer and the time they are due to the trust (which time is set

forth in the pooling and servicing agreement). The servicer typically

will be required to pay the administrative expenses of servicing the

trust, including in some cases the trustee's fee, out of its servicing

compensation.

The servicer is also compensated to the extent it may provide

credit enhancement to the trust or otherwise arrange to obtain credit

support from another party. This ``credit support fee'' may be

aggregated with other servicing fees, and is either paid out of the

interest income received on the receivables in excess of the pass-

through rate or paid in a lump sum at the time the trust is

established.

14. The servicer may be entitled to retain certain administrative

fees paid by a third party, usually the obligor. These administrative

fees fall into three categories: (a) prepayment fees; (b) late payment

and payment extension fees; and (c) expenses, fees and charges

associated with foreclosure or repossession, or other conversion of a

secured position into cash proceeds, upon default of an obligation.

Compensation payable to the servicer will be set forth or referred

to in the pooling and servicing agreement and described in reasonable

detail in the prospectus or private placement memorandum relating to

the certificates.

15. Payments on receivables may be made by obligors to the servicer

at various times during the period preceding any date on which pass-

through payments to the trust are due.

In some cases, the pooling and servicing agreement may permit the

servicer to place these payments in non-interest bearing accounts

maintained with itself or to commingle such payments with its own funds

prior to the distribution dates. In these cases, the servicer would be

entitled to the benefit derived from the use of the funds between the

date of payment on a receivable and the pass-through date. Commingled

payments may not be protected from the creditors of the servicer in the

event of the servicer's bankruptcy or receivership. In those instances

when payments on receivables are held in non-interest bearing accounts

or are commingled with the servicer's own funds, the servicer is

required to deposit these payments by a date specified in the pooling

and servicing agreement into an account from which the trustee makes

payments to certificateholders.

16. The underwriter will receive a fee in connection with the

securities underwriting or private placement of certificates. In a firm

commitment underwriting, this fee would consist of the difference

between what the underwriter receives for the certificates that it

distributes and what it pays the sponsor for those certificates. In a

private placement, the fee normally takes the form of an agency

commission paid by the sponsor. In a best efforts underwriting in which

the underwriter would sell certificates in a public offering on an

agency basis, the underwriter would receive an agency commission rather

than a fee based on the difference between the price at which the

certificates are sold to the public and what it pays the sponsor.

In some private placements, the underwriter may buy certificates as

principal, in which case its compensation would be the difference

between what it receives for the certificates that it sells and what it

pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

17. The applicant represents that as the principal amount of the

receivables in a trust is reduced by payments, the cost of

administering the trust generally increases, making the servicing of

the trust prohibitively expensive at some point. Consequently, the

pooling and servicing agreement generally provides that the servicer

may purchase the receivables remaining in the trust when the aggregate

unpaid balance payable on the receivables is reduced to a specified

percentage (usually 5 to 10 percent) of the initial aggregate unpaid

balance.

The purchase price of a receivable is specified in the pooling and

servicing agreement and will be at least equal to: (1) the unpaid

principal balance on the receivable plus accrued interest, less any

unreimbursed advances of principal made by the servicer; or (2) the

greater of (a) the amount in (1) or (b) the fair market value of such

obligations in the case of a REMIC, or the fair market value of the

receivables in the case of a trust that is not a REMIC.

Certificate Ratings

18. The certificates will have received one of the three highest

ratings available from either S&P's, Moody's, D&P or Fitch. Insurance

or other credit support (such as surety bonds, letters of credit,

guarantees, or overcollateralization) will be obtained by the trust

sponsor to the extent necessary for the certificates to attain the

desired rating. The amount of this credit support is set by the rating

agencies at a level that is a multiple of the worst historical net

credit loss experience for the type of obligations included in the

issuing trust.

Provision of Credit Support

19. In some cases, the master servicer, or an affiliate of the

master servicer, may provide credit support to the trust (i.e. act as

an insurer). In these cases, the master servicer, in its capacity as

servicer, will first advance funds to the full extent that it

determines that such advances will be recoverable (a) out of late

payments by the obligors, (b) from the credit support provider (which

may be the master servicer or an affiliate thereof) or, (c) in the case

of a trust that issues subordinated certificates, from amounts

otherwise distributable to holders of subordinated certificates, and

the master servicer will advance such funds in a timely manner. When

the servicer is the provider of the credit support and provides its own

funds to cover defaulted payments, it will do so either on the

initiative of the trustee, or

[[Page 57475]]

on its own initiative on behalf of the trustee, but in either event it

will provide such funds to cover payments to the full extent of its

obligations under the credit support mechanism. In some cases, however,

the master servicer may not be obligated to advance funds but instead

would be called upon to provide funds to cover defaulted payments to

the full extent of its obligations as insurer. Moreover, a master

servicer typically can recover advances either from the provider of

credit support or from future payments on the affected assets.

If the master servicer fails to advance funds, fails to call upon

the credit support mechanism to provide funds to cover delinquent

payments, or otherwise fails in its duties, the trustee would be

required and would be able to enforce the certificateholders' rights,

as both a party to the pooling and servicing agreement and the owner of

the trust estate, including rights under the credit support mechanism.

Therefore, the trustee, who is independent of the servicer, will have

the ultimate right to enforce the credit support arrangement.

When a master servicer advances funds, the amount so advanced is

recoverable by the master servicer out of future payments on

receivables held by the trust to the extent not covered by credit

support. However, where the master servicer provides credit support to

the trust, there are protections in place to guard against a delay in

calling upon the credit support to take advantage of the fact that the

credit support declines proportionally with the decrease in the

principal amount of the obligations in the trust as payments on

receivables are passed through to investors. These safeguards include:

(a) There is often a disincentive to postponing credit losses

because the sooner repossession or foreclosure activities are

commenced, the more value that can be realized on the security for the

obligation;

(b) The master servicer has servicing guidelines which include a

general policy as to the allowable delinquency period after which an

obligation ordinarily will be deemed uncollectible. The pooling and

servicing agreement will require the master servicer to follow its

normal servicing guidelines and will set forth the master servicer's

general policy as to the period of time after which delinquent

obligations ordinarily will be considered uncollectible;

(c) As frequently as payments are due on the receivables included

in the trust (monthly, quarterly or semi-annually, as set forth in the

pooling and servicing agreement), the master servicer is required to

report to the independent trustee the amount of all past-due payments

and the amount of all servicer advances, along with other current

information as to collections on the receivables and draws upon the

credit support. Further, the master servicer is required to deliver to

the trustee annually a certificate of an executive officer of the

master servicer stating that a review of the servicing activities has

been made under such officer's supervision, and either stating that the

master servicer has fulfilled all of its obligations under the pooling

and servicing agreement or, if the master servicer has defaulted under

any of its obligations, specifying any such default. The master

servicer's reports are reviewed at least annually by independent

accountants to ensure that the master servicer is following its normal

servicing standards and that the master servicer's reports conform to

the master servicer's internal accounting records. The results of the

independent accountants' review are delivered to the trustee; and

(d) The credit support has a ``floor'' dollar amount that protects

investors against the possibility that a large number of credit losses

might occur towards the end of the life of the trust, whether due to

servicer advances or any other cause. Once the floor amount has been

reached, the servicer lacks an incentive to postpone the recognition of

credit losses because the credit support amount thereafter is subject

to reduction only for actual draws. From the time that the floor amount

is effective until the end of the life of the trust, there are no

proportionate reductions in the credit support amount caused by

reductions in the pool principal balance. Indeed, since the floor is a

fixed dollar amount, the amount of credit support ordinarily increases

as a percentage of the pool principal balance during the period that

the floor is in effect.

Disclosure

20. In connection with the original issuance of certificates, the

prospectus or private placement memorandum will be furnished to

investing plans. The prospectus or private placement memorandum will

contain information material to a fiduciary's decision to invest in the

certificates, including:

(a) Information concerning the payment terms of the certificates,

the rating of the certificates, and any material risk factors with

respect to the certificates;

(b) A description of the trust as a legal entity and a description

of how the trust was formed by the seller/servicer or other sponsor of

the transaction;

(c) Identification of the independent trustee for the trust;

(d) A description of the receivables contained in the trust,

including the types of receivables, the diversification of the

receivables, their principal terms, and their material legal aspects;

(e) A description of the sponsor and servicer;

(f) A description of the pooling and servicing agreement, including

a description of the seller's principal representations and warranties

as to the trust assets and the trustee's remedy for any breach thereof;

a description of the procedures for collection of payments on

receivables and for making distributions to investors, and a

description of the accounts into which such payments are deposited and

from which such distributions are made; identification of the servicing

compensation and any fees for credit enhancement that are deducted from

payments on receivables before distributions are made to investors; a

description of periodic statements provided to the trustee, and

provided to or made available to investors by the trustee; and a

description of the events that constitute events of default under the

pooling and servicing contract and a description of the trustee's and

the investors' remedies incident thereto;

(g) A description of the credit support;

(h) A general discussion of the principal federal income tax

consequences of the purchase, ownership and disposition of the pass-

through securities by a typical investor;

(i) A description of the underwriters' plan for distributing the

pass-through securities to investors; and

(j) Information about the scope and nature of the secondary market,

if any, for the certificates.

21. Reports indicating the amount of payments of principal and

interest are provided to certificateholders at least as frequently as

distributions are made to certificateholders. Certificateholders will

also be provided with periodic information statements setting forth

material information concerning the underlying assets, including, where

applicable, information as to the amount and number of delinquent and

defaulted loans or receivables.

22. In the case of a trust that offers and sells certificates in a

registered public offering, the trustee, the servicer or the sponsor

will file such periodic reports as may be required to be filed under

the Securities Exchange Act of 1934. Although some trusts that offer

certificates in a public offering will file quarterly reports on Form

10-Q and

[[Page 57476]]

Annual Reports on Form 10-K, many trusts obtain, by application to the

Securities and Exchange Commission, a complete exemption from the

requirement to file quarterly reports on Form 10-Q and a modification

of the disclosure requirements for annual reports on Form 10-K. If such

an exemption is obtained, these trusts normally would continue to have

the obligation to file current reports on Form 8-K to report material

developments concerning the trust and the certificates. While the

Securities and Exchange Commission's interpretation of the periodic

reporting requirements is subject to change, periodic reports

concerning a trust will be filed to the extent required under the

Securities Exchange Act of 1934.

23. At or about the time distributions are made to

certificateholders, a report will be delivered to the trustee as to the

status of the trust and its assets, including underlying obligations.

Such report will typically contain information regarding the trust's

assets, payments received or collected by the servicer, the amount of

prepayments, delinquencies, servicer advances, defaults and

foreclosures, the amount of any payments made pursuant to any credit

support, and the amount of compensation payable to the servicer. Such

report also will be delivered to or made available to the rating agency

or agencies that have rated the trust's certificates.

In addition, promptly after each distribution date,

certificateholders will receive a statement prepared by the servicer,

paying agent or trustee summarizing information regarding the trust and

its assets. Such statement will include information regarding the trust

and its assets, including underlying receivables. Such statement will

typically contain information regarding payments and prepayments,

delinquencies, the remaining amount of the guaranty or other credit

support and a breakdown of payments between principal and interest.

Forward Delivery Commitments

24. To date, no forward delivery commitments have been entered into

by BA in connection with the offering of any certificates, but BA may

contemplate entering into such commitments. The utility of forward

delivery commitments has been recognized with respect to offering

similar certificates backed by pools of residential mortgages, and BA

may find it desirable in the future to enter into such commitments for

the purchase of certificates.

Secondary Market Transactions

25. It is BA's normal policy to attempt to make a market for

securities for which it is lead or co-managing underwriter. BA

anticipates that it will make a market in certificates.

Retroactive Relief

26. BA represents that it has not engaged in transactions related

to mortgage-backed and asset-backed securities based on the assumption

that retroactive relief would be granted prior to the date of their

application. However, BA requests the exemptive relief granted to be

retroactive to August 29, 1996, the date of their application, and

would like to rely on such retroactive relief for transactions entered

into prior to the date exemptive relief may be granted.

Summary

27. In summary, the applicant represents that the transactions for

which exemptive relief is requested satisfy the statutory criteria of

section 408(a) of the Act due to the following:

(a) The trusts contain ``fixed pools'' of assets. There is little

discretion on the part of the trust sponsor to substitute receivables

contained in the trust once the trust has been formed;

(b) Certificates in which plans invest will have been rated in one

of the three highest rating categories by S&P's, Moody's, D&P or Fitch.

Credit support will be obtained to the extent necessary to attain the

desired rating;

(c) All transactions for which BA seeks exemptive relief will be

governed by the pooling and servicing agreement, which is made

available to plan fiduciaries for their review prior to the plan's

investment in certificates;

(d) Exemptive relief from sections 406(b) and 407 for sales to

plans is substantially limited; and

(e) BA anticipates that it will make a secondary market in

certificates.

Discussion of Proposed Exemption

I. Differences Between Proposed Exemption and Class Exemption PTE 83-1

The exemptive relief proposed herein is similar to that provided in

PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain

Transactions Involving Mortgage Pool Investment Trusts, amended and

restated as PTE 83-1 [48 FR 895, January 7, 1983].

PTE 83-1 applies to mortgage pool investment trusts consisting of

interest-bearing obligations secured by first or second mortgages or

deeds of trust on single-family residential property. The exemption

provides relief from sections 406(a) and 407 for the sale, exchange or

transfer in the initial issuance of mortgage pool certificates between

the trust sponsor and a plan, when the sponsor, trustee or insurer of

the trust is a party-in-interest with respect to the plan, and the

continued holding of such certificates, provided that the conditions

set forth in the exemption are met. PTE 83-1 also provides exemptive

relief from section 406(b)(1) and (b)(2) of the Act for the above-

described transactions when the sponsor, trustee or insurer of the

trust is a fiduciary with respect to the plan assets invested in such

certificates, provided that additional conditions set forth in the

exemption are met. In particular, section 406(b) relief is conditioned

upon the approval of the transaction by an independent fiduciary.

Moreover, the total value of certificates purchased by a plan must not

exceed 25 percent of the amount of the issue, and at least 50 percent

of the aggregate amount of the issue must be acquired by persons

independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1

provides conditional exemptive relief from section 406(a) and (b) of

the Act for transactions in connection with the servicing and operation

of the mortgage trust.

Under PTE 83-1, exemptive relief for the above transactions is

conditioned upon the sponsor and the trustee of the mortgage trust

maintaining a system for insuring or otherwise protecting the pooled

mortgage loans and the property securing such loans, and for

indemnifying certificateholders against reductions in pass-through

payments due to defaults in loan payments or property damage. This

system must provide such protection and indemnification up to an amount

not less than the greater of one percent of the aggregate principal

balance of all trust mortgages or the principal balance of the largest

mortgage.

The exemptive relief proposed herein differs from that provided by

PTE 83-1 in the following major respects: (1) The proposed exemption

provides individual exemptive relief rather than class relief; (2) The

proposed exemption covers transactions involving trusts containing a

broader range of assets than single-family residential mortgages; (3)

Instead of requiring a system for insuring the pooled receivables, the

proposed exemption conditions relief upon the certificates having

received one of the three highest ratings available from S&P's,

Moody's, D&P or Fitch (insurance or other credit support would be

obtained only to the extent necessary for the certificates to attain

the desired rating); and (4) The proposed exemption provides more

[[Page 57477]]

limited section 406(b) and section 407 relief for sales transactions.

II. Ratings of Certificates

After consideration of the representations of the applicant and

information provided by S&P's, Moody's, D&P and Fitch, the Department

has decided to condition exemptive relief upon the certificates having

attained a rating in one of the three highest generic rating categories

from S&P's, Moody's, D&P or Fitch. The Department believes that the

rating condition will permit the applicant flexibility in structuring

trusts containing a variety of mortgages and other receivables while

ensuring that the interests of plans investing in certificates are

protected. The Department also believes that the ratings are indicative

of the relative safety of investments in trusts containing secured

receivables. The Department is conditioning the proposed exemptive

relief upon each particular type of asset-backed security having been

rated in one of the three highest rating categories for at least one

year and having been sold to investors other than plans for at least

one year.30

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\30\ In referring to different ``types'' of asset-backed

securities, the Department means certificates representing interests

in trusts containing different ``types'' of receivables, such as

single family residential mortgages, multi-family residential

mortgages, commercial mortgages, home equity loans, auto loan

receivables, installment obligations for consumer durables secured

by purchase money security interests, etc. The Department intends

this condition to require that certificates in which a plan invests

are of the type that have been rated (in one of the three highest

generic rating categories by S&P's, D&P, Fitch or Moody's) and

purchased by investors other than plans for at least one year prior

to the plan's investment pursuant to the proposed exemption. In this

regard, the Department does not intend to require that the

particular assets contained in a trust must have been ``seasoned''

(e.g., originated at least one year prior to the plan's investment

in the trust).

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III. Limited Section 406(b) and Section 407(a) Relief for Sales

BA represents that in some cases a trust sponsor, trustee,

servicer, insurer, and obligor with respect to receivables contained in

a trust, or an underwriter of certificates may be a pre-existing party

in interest with respect to an investing plan.31 In these cases, a

direct or indirect sale of certificates by that party in interest to

the plan would be a prohibited sale or exchange of property under

section 406(a)(1)(A) of the Act.32 Likewise, issues are raised

under section 406(a)(1)(D) of the Act where a plan fiduciary causes a

plan to purchase certificates where trust funds will be used to benefit

a party in interest.

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\31\ In this regard, we note that the exemptive relief proposed

herein is limited to certificates with respect to which BA or any of

its affiliates is either (a) the sole underwriter or manager or co-

manager of the underwriting syndicate, or (b) a selling or placement

agent.

\32\ The applicant represents that where a trust sponsor is an

affiliate of BA, sales to plans by the sponsor may be exempt under

PTE 75-1, Part II (relating to purchases and sales of securities by

broker-dealers and their affiliates), if BA is not a fiduciary with

respect to plan assets to be invested in certificates.

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Additionally, BA represents that a trust sponsor, servicer,

trustee, insurer, and obligor with respect to receivables contained in

a trust, or an underwriter of certificates representing an interest in

a trust may be a fiduciary with respect to an investing plan. BA

represents that the exercise of fiduciary authority by any of these

parties to cause the plan to invest in certificates representing an

interest in the trust would violate section 406(b)(1), and in some

cases section 406(b)(2), of the Act.

Moreover, BA represents that to the extent there is a plan asset

``look through'' to the underlying assets of a trust, the investment in

certificates by a plan covering employees of an obligor under

receivables contained in a trust may be prohibited by sections 406(a)

and 407(a) of the Act.

After consideration of the issues involved, the Department has

determined to provide the limited sections 406(b) and 407(a) relief as

specified in the proposed exemption.

Notice to Interested Persons: The applicant represents that because

those potentially interested participants and beneficiaries cannot all

be identified, the only practical means of notifying such participants

and beneficiaries of this proposed exemption is by the publication of

this notice in the Federal Register. Comments and requests for a

hearing must be received by the Department not later than 30 days from

the date of publication of this notice of proposed exemption in the

Federal Register.

For Further Information Contact: Gary Lefkowitz of the Department,

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

Zions Bancorporation and Affiliated Companies (Zions) Located in Salt

Lake City, Utah

[Application No. L-10338]

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 premiums therefrom by Zions

Life Insurance Company (ZLIC) in connection with an insurance contract

sold by American Bankers Life Insurance Company (AB) to provide group

life and accidental death and dismemberment insurance to employees of

Zions (the Plan), provided the following conditions are met:

(a) ZLIC--

(1) Is a party in interest with respect to the Plan by reason of a

stock or partnership affiliation with Zions 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 State as defined in section 3(10) of the Act,

(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 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 ZLIC, the gross premiums and annuity

considerations received in that taxable year by ZLIC for life and

health insurance or annuity contracts for all employee benefit plans

(and their employers) with respect to which ZLIC 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 ZLIC. 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

[[Page 57478]]

annuity contracts to such plans (and their employers) by ZLIC. 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 ZLIC.

(2) all premium and annuity considerations written by ZLIC for

plans which it alone maintains are to be excluded from both the

numerator and the denominator of the fraction.

Preamble

On August 7, 1979, the Department published a class exemption

[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44FR 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. Zions is a publicly traded bank holding company organized under

the laws of the State of Utah in 1955. Zions provides a full range of

banking and related services through its subsidiaries located in Utah,

Nevada and Arizona. Zions has several subsidiaries, including a

mortgage company, a life insurance company (ZLIC), an insurance agency

company, and a securities brokerage company.

2. ZLIC is a corporation organized under the laws of Arizona, its

domiciliary state. ZLIC is a wholly owned subsidiary of Zions. ZLIC is

principally in the business of reinsurance, primarily with respect to

mortgage life and other credit life products. The applicant represents

that $765,000 in premiums was written by ZLIC in 1995.

3. Zions provides to its employees certain welfare benefits through

the Plan. The Plan includes group life, dependent life, supplemental

life and accidental death and dismemberment insurance issued by AB with

respect to the employees of Zions. The Plan is a fully insured welfare

plan within the meaning of section 3(1) of the Act. The Plan currently

has approximately 2,400 participants and beneficiaries.

4. The insurance is currently underwritten by AB, an unaffiliated

insurance carrier. Zions has entered into a policy with AB for 100% of

this coverage. Zions proposes to use its subsidiary, ZLIC, to reinsure

50% of the risk through a reinsurance contract between ZLIC and AB in

which AB would pay 50% of the premiums to ZLIC. From the participants'

perspective, the participants have a binding contract with AB, which is

legally responsible for the risk associated under the Plan. AB is

liable to provide the promised coverage regardless of the proposed

reinsurance arrangement.

5. The applicant represents that the proposed transaction will not

in any way affect the cost to the insureds of the group life insurance

contracts, and the Plan will pay no more than adequate consideration

for the insurance. Also, Plan participants are afforded insurance

protection from AB at competitive rates arrived at through arm's-length

negotiations. AB is rated ``A'' by the A. W. Best Company, whose

insurance ratings are widely used in financial and regulatory circles.

AB has assets in excess of $600 million. AB will continue to have the

ultimate responsibility in the event of loss to pay insurance benefits

to the employee's beneficiary. The applicant represents that ZLIC is a

sound, viable company which is dependent upon insurance customers that

are unrelated to itself and its affiliates for premium revenue.

6. The applicant represents that the proposed reinsurance

transaction will meet all of the conditions of PTE 79-41 covering

direct insurance transactions:

(a) ZLIC 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 Zions, which maintains the Plan.

(b) ZLIC is licensed to do business in Arizona.

(c) ZLIC has undergone an examination by an independent certified

public accountant for 1995.

(d) ZLIC has received a Certificate of Authority from its

domiciliary state, Arizona, which has neither been revoked nor

suspended.

(e) The Plan will pay no more than adequate consideration for the

insurance. The proposed transaction will not in any way affect the cost

to the insureds of the group life insurance transaction.

(f) No commissions will be paid with respect to the acquisition of

insurance by Zions from AB or the acquisition of reinsurance by AB from

ZLIC.

(g) For each taxable year of ZLIC, 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 ZLIC

is a party in interest by reason of a relationship to such employer

described in section 3(14)(E) or (G) of the Act will not exceed 50% of

the ``gross premiums and annuity considerations received'' by ZLIC from

all lines of insurance in that taxable year. All of the premium income

of ZLIC comes from reinsurance. ZLIC has received no premiums for the

Plan insurance in the past. ZLIC wrote $765,000 in premiums in 1995,

and the applicant estimates that the 1996 premiums should be 15-25%

higher. In 1995, the premium income for ZLIC all came from AB, and

represented reinsurance premiums relating to policies sold by AB to

entities unrelated to Zions and its affiliates. Thus, 100% of ZLIC's

premiums for 1995 were derived from insurance (or reinsurance thereon)

sold to entities other than Zions and its affiliated group.

7. In summary, the applicant represents that the proposed

transaction will meet the criteria of section 408(a) of the Act

because: a) Plan participants and beneficiaries are afforded insurance

protection by AB, an ``A'' rated group insurer, at competitive market

rates arrived at through arm's-length negotiations; b) ZLIC 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 will be met under the proposed reinsurance transaction.

For Further Information Contact: Gary H. Lefkowitz of the

Department,

[[Page 57479]]

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

General Information

The attention of interested persons is directed to the following:

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

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

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

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

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

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

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

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

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

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

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

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

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

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

Code, including statutory or administrative exemptions and transitional

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

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

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

express condition that the material facts and representations contained

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

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 1st day of November, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 96-28504 Filed 11-5-96; 8:45 am]

BILLING CODE 4510-29-P