Proposed Exemptions; Real Estate Equity Trust No. 1 (the Trust)

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10227 and 10232, et al.]

Proposed Exemptions; Real Estate Equity Trust No. 1 (the Trust)

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

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exemption. The applications for exemption and the comments received

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

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

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

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

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

exemption as published in the Federal Register and shall inform

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

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

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

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

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

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

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

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

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

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

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

statement of the facts and representations.

Real Estate Equity Trust No. 1 (the Trust), et al. Located in

Cincinnati, OH

[Exemption Application Nos. D-10227 and D-10232]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is

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

the Act and the sanctions resulting from the application of section

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

the Code, shall not apply to the purchase of units in the Trust by

certain multiemployer pension plans (the Plans) that will enable State

Street Global Advisors, Inc. (SSGA), the independent fiduciary for the

Plans investing in the Trust, to make initial and subsequent equity

investments on behalf of the Trust, in the Cincinnati Development Group

Limited Partnership (the Partnership), which may result in a benefit

inuring to Fifth Third Bank (Fifth Third), the trustee of the Trust and

a party in interest with respect to the Plans.

This proposed exemption is subject to the following conditions:

(a) Each Plan investing in the Trust has total assets that are in

excess of $50 million.

(b) No Plan that purchases units in the Trust that will permit the

Partnership investment has, immediately following the acquisition of

such units, more than 5 percent of its assets invested therein.

(c) The decision to purchase units in the Trust that will allow

SSGA to make the initial and any subsequent equity contributions to the

Partnership is made by a Plan fiduciary (the Second Fiduciary) which is

independent of Fifth Third and its affiliates and which is not SSGA.

(d) As independent fiduciary for the Trust, SSGA determines

whether--

(1) It is in the best interests of the Trust and the Plans

participating therein to make the initial and subsequent investments in

the Partnership;

(2) It is appropriate for the Trust to assign, transfer, pledge or

otherwise encumber its interest in the Partnership provided the Trust

obtains written consent from Cincinnati Development Group, LLC (CDG);

(3) It is appropriate for the Trust to withdraw as a limited

partner from the Partnership or to withdraw its capital from such

Partnership provided the Trust obtains the written consent of CDG;

(4) It is appropriate for the Trust to consent to the sale by CDG

of substantially all of the assets of the Partnership or the transfer

by CDG of its interest in the Partnership to a third party;

(5) It is appropriate for the Trust to contribute to the

Partnership the amount necessary to complete construction of the

Fountain Square West Project and to require that CDG release control of

the Partnership to an entity designated by the Trust, if CDG fails to

provide for construction cost overruns;

(6) It is appropriate for the Trust to elect to continue the

Partnership by appointing a successor general partner.

(7) An entity designated by the Trust to serve as general partner

is appropriate upon the occurrence of (d)(5) or (d)(6).

(e) At the time the Partnership investment is made, the terms of

the transaction are at least as favorable to each Plan participating in

the Trust as

[[Page 66315]]

those obtainable in an arm's length transaction with an unrelated

party.

(f) Prior to investing in the Partnership, Fifth Third provides

SSGA and the Second Fiduciary of each Plan participating in the Trust

with offering materials disclosing all material facts concerning the

purpose, structure and operation of the Partnership.

(g) Subsequent to investing in the Partnership, the Trust and SSGA

receive the following ongoing information from CDG:

(1) Within 120 days after the end of the Partnership's fiscal year,

an unaudited annual report containing--

(A) A balance sheet and statements of income, Partners' equity,

changes in financial position and cash flow for the year then ended;

(B) A report of the activities of the Partnership during the period

covered by the report; and

(C) An itemization of any fees or payments made to CDG or any

related party or affiliate.

(2) Within 60 days of the end of each year, an appraisal report,

prepared by a qualified, independent appraiser, of each property held

in the Partnership.

(3) Periodically (but not less frequently than quarterly),

operating and development budgets of the Partnership as well as

unaudited operations and financial reports. (Information with respect

to the Partnership is disseminated by Fifth Third to the Second

Fiduciaries of Plans investing in the Trust through annual audited

financial statements of the Trust, prepared by independent, certified

public accountants and in quarterly communications setting forth

Partnership financial data. SSGA will also be given copies of this

information.)

(h) As to each Plan participating in the Trust, the total fees paid

to Fifth Third will constitute no more than ``reasonable compensation''

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

(i) Fifth Third maintains, for a period of six years, the records

necessary to enable the persons described in paragraph (j) to determine

whether the conditions of this exemption have been met, except that--

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

occurred if, due to circumstances beyond the control of Fifth Third

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

end of the six year period; and

(2) No party in interest other than Fifth Third shall be subject to

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

or to the taxes imposed by section 4975 (a) and (b) of the Code, if the

records are not maintained, or are not available for examination as

required below by paragraph (j).

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

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

504 of the Act, the records referred to in paragraph (i) are

unconditionally available at their customary location during normal

business hours by:

(A) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

(B) Any fiduciary of a participating Plan or any duly authorized

representative of such fiduciary;

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

authorized employee representative of such employer; and

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

any duly authorized representative of such participant or beneficiary.

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

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

secrets of Fifth Third or commercial or financial information which is

privileged or confidential.

Summary of Facts and Representations

1. The Trust was originally established on December 1, 1987 by a

trust agreement between Fifth Third, as trustee, and the International

Brotherhood of Electrical Workers Local 212 Pension Fund (the IBEW

Pension Plan), as beneficiary. The purpose of the Trust is to make

equity investments in real estate development projects that are located

within a 100 mile radius of Greater Cincinnati. As a condition

precedent to any investment by the Trust, all project work must be

performed by union labor.1

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1 This proposed exemption provides no relief with respect to

any violations of section 404 of the Act.

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The Trust is a group trust, exempt from taxation under section

501(a) of the Code pursuant to the principles of Revenue Ruling 81-100,

1981-1 C.B. 326. Under the terms of the Trust, the initial investment

by a Plan must be at least $500,000.\2\

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\2\ It is represented that the purchase or redemption of units

in the Trust by the investing Plans would be statutorily exempt

under section 408(b)(8) of the Act. In this regard, the Department

expresses no opinion herein on whether such transactions would

satisfy the terms and conditions of section 408(b)(8) of the Act.

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Thereafter, a Plan may make additional contributions in increments

of $100,000. Although there are no minimum or maximum limits imposed by

the Trust on the portion of the total assets of any Plan that may be

invested therein, such investment must be approved initially by a

Second Fiduciary.

The Trust has been established for an indefinite duration. However,

it may be terminated upon (a) the resignation or termination of Fifth

Third, (b) the adoption by the Board of Directors (or the Executive

Committee) of Fifth Third of a resolution directing the termination and

liquidation of the Trust or (c) a vote of 75 percent of the beneficial

interests in the Trust to remove Fifth Third.

2. Fifth Third, the trustee of the Trust, is a regional bank

headquartered in Cincinnati, Ohio. As of August 3, 1995, Fifth Third

had over $14 billion in assets and its trust department had over $7

billion in assets under management. Fifth Third has legal title and

sole investment discretion over all of the assets of the Trust and is

permitted under the terms of the Trust Agreement to acquire new equity

real estate investments, distribute income received to investing Plans

and to maintain Trust records. Fifth Third represents that before

investing Trust assets in a specific equity investment, it must

determine whether the investment is expected to have a rate of return

at least equal to or greater than comparable investments which do not

use union labor.

For services rendered to the Trust, Fifth Third will receive the

following annual compensation: $15 per $1,000 on the first $5 million

invested; $10 per $1,000 on the next $10 million invested; $5 per

$1,000 on the next $15 million invested; and $3 per million on the next

$25 million invested. According to the applicant, as to each Plan

investing in the Trust, the total fees paid to Fifth Third will

constitute no more than reasonable compensation within the meaning of

section 408(b)(2) of the Act.3

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3 The Department expresses no opinion herein on whether such

fees will satisfy the terms and conditions of section 408(b)(2) of

the Act.

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3. There are currently five Plans participating in the Trust, none

of which are sponsored by Fifth Third or any of its affiliates. These

Plans are the IBEW Pension Plan, the Pipefitters and Mechanical

Equipment Service Union Local 392 Pension Fund (the Pipefitters Pension

Plan), the Ironworkers District Council for Southern Ohio and Vicinity

Pension Fund (the Ironworkers Pension Plan), the Southwest Ohio

District Council of Carpenters' Pension Fund (the Carpenters Pension

Plan) and the Laborers International Union of North America Local 265

Pension Fund (the Laborers Pension Plan).

As the following table shows, each Plan investing in the Trust has

total assets that are in excess of $50 million.

[[Page 66316]]

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Plan Total assets Valuation date

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IBEW Pension Plan.............. $115,500,000 Mar. 31, 1996.

Pipefitters Pension Plan....... 172,654,000 Mar. 31, 1996.

Ironworkers Pension Plan....... 395,000,000 Jan. 31, 1996.

Carpenters Pension Plan........ 132,696,000 Mar. 31, 1996.

Laborers Pension Plan.......... 64,496,000 Mar. 31, 1996.

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In addition, as of March 31, 1996, each Plan's investment in the

Trust was reported as follows:

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Value of trust Percentage of Percentage of

Plan investments trust assets plan assets

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IBEW Pension Plan............................................... $3,588,796 28 3.1

Pipefitters Pension Plan........................................ 3,097,902 24 2.0

Ironworkers Pension Plan........................................ 2,686,711 21 0.7

Carpenters Pension Plan......................................... 2,441,064 19 1.8

Laborers Pension Plan........................................... 908,672 8 1.4

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Total Assetts............................................. 12,723,145 .............. ..............

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4. The Plans are not parties in interest with respect to each other

within the meaning of section 3(14) of the Act nor do they share common

participants. Investment decisions for the Plans are made by separate

boards of trustees. The geographic jurisdictions for the Plans cover

various counties that are primarily located in the States of Ohio,

Indiana and Kentucky. Participants in the Plans are engaged in diverse

trades ranging from electrical work to general construction labor. As

of December 5, 1996, there were approximately 14,349 participants in

all of the Plans investing in the Trust with the participant level

ranging from 1,500 participants for the IBEW Pension Plan to 6,243

participants for the Ironworkers Pension Plan.

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Number of

Plan participants

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IBEW Pension Plan......................................... 1,500

Pipefitters Pension Plan.................................. 1,400

Ironworkers Pension Plan.................................. 6,243

Carpenters Pension Plan................................... 3,655

Laborers Pension Plan..................................... 1,551

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Total............................................... 14,349

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5. CDG is a limited liability company maintaining its principal

offices in Cincinnati, Ohio. CDG's members are Belvedere Corp., The

Madison Realty Partnership, Towne/Center City LLC and Duke Realty

Limited Partnership. These entities are commercial real estate

developers from the Greater Cincinnati area. CDG was formed on March

24, 1995 for the purpose of developing a 210,000 square foot retail

complex in downtown Cincinnati known as ``Fountain Square West.'' Once

developed, the Fountain Square West Project will include a three-story

anchor retail store (the Lazarus Department Store), a two-story

specialty retail center, an office tower and an underground parking

garage. As discussed below, the Lazarus Department Store, the retail

stores and the parking garage will be held by the Partnership. A

portion of the ground comprising the Fountain Square West site, the

related air rights, a building pad for the future development of an

office building (including the office building) and the exclusive

rights to 20 spaces in the underground parking garage will be held by

Fifth Third.

6. The Partnership will be a limited partnership organized under

the laws of the State of Ohio and it will maintain its principal office

at 500 Carew Tower, Cincinnati, Ohio. The primary purposes of the

Partnership are to develop, improve, own, manage and lease real estate.

It is intended that the Partnership will constitute a real estate

operating company.4 CDG will serve as the general partner of the

Partnership and the Trust will serve as the sole limited partner.

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4 According to the Partnership Agreement, the Partnership

will function as a ``real estate operating company'' within the

meaning of regulation section 29 CFR 2510.3-101(e). Accordingly, it

is represented that transactions involving assets of the Partnership

will not be deemed to involve plan assets and will not be subject to

the prohibited transaction provisions of the Act. The Department

expresses no opinion in this proposed exemption on whether the

Partnership will qualify as a real estate operating company.

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To raise equity capital for the Partnership, CDG will make a

capital contribution of approximately $1.5 million. As for the Trust,

Second Fiduciaries of the IBEW Pension Plan, the Pipefitters Pension

Plan, the Carpenters Pension Plan and the Laborers Pension Plan have

agreed to make an aggregate capital contribution to the Partnership of

up to $7 million by purchasing additional units in the Trust.5 The

Plans will contribute to the Partnership as follows:

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5 It is represented that the Trust currently has

approximately $500,000 in liquid assets which is available for

investment in the Partnership. As a result, if less than $6.5

million in units are subscribed for by the Plans, the Trust will

combine those proceeds with its existing liquid assets to make the

$7 million investment in the Partnership.

[[Page 66317]]

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Allocation Amount Percentage of

Plan percentages invested plan assets

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IBEW Pension Plan............................................... 30.8 $2,156,000 1.8

Pipefitters Pension Plan........................................ 30.8 2,156,000 1.2

Carpenters Pension Plan......................................... 30.8 2,156,000 1.6

Laborers Pension Plan........................................... 07.6 532,000 0.8

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Total..................................................... .............. 7,000,000 ..............

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Although the Second Fiduciaries of the Ironworkers Pension Plan

have declined to purchase additional units in the Trust at this time,

it is represented that this Plan will have a pro rata interest in the

Trust that will include a portion of the Partnership interest.6

After the units are acquired, no Plan, including the Ironworkers

Pension Plan, will have more than 5 percent of its assets invested in

the Trust. In addition, the Trust will not be required to pay any

unrelated business income tax in connection with the Partnership

investment.

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6 The Department notes that section 404(a)(1) of the Act

requires, among other things, that a fiduciary of a plan must 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. In order to act prudently in

making investment decisions, a plan fiduciary must consider, among

other factors, the availability, riskiness and potential return of

alternative investments for the plan. Investing the Trust's assets

in the Partnership would not satisfy section 404(a)(1) of the Act if

such investment provided the Trust with less return in comparison to

risk than comparable investments available to the Trust, or if

investment in the Partnership involved a greater risk to the

security of the Trust's assets than other investments offering a

similar return.

The Department has construed the requirements that a fiduciary

act solely in the interest of, and for the exclusive purpose of

providing benefits to, participants and beneficiaries as prohibiting

a fiduciary from subordinating the interests of participants and

beneficiaries in their retirement income to unrelated objectives.

Thus, in deciding whether and to what extent to invest in the

Partnership, SSGA must consider only factors relating to the

interests of the Trust. A decision to invest in the Partnership may

not be influenced by a desire to stimulate the real estate industry

and generate employment by union labor unless the investment, when

judged solely on the basis of its economic value to the Trust would

be equal or superior to alternative investments available to the

Trust.

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7. Aside from the capital contributions made by CDG and the Trust

to the Partnership, the city of Cincinnati (the City) will grant

financial incentives to the development of the Fountain Square West

Project of up to $22 million. These financial incentives consist of--

(a) The City's Purchase of the Downtown Lazarus Department Store.

On October 19, 1995, the City agreed to purchase the downtown Lazarus

Store location from Federated Department Stores, Inc. (Federated) for

$11,775,000. (The property was eventually transferred to the City on

January 4, 1996.) This acquisition provided funding which enabled

Federated to enter into another lease agreement (the Anchor Tenant

Lease) with CDG that would make a new Lazarus Department Store the

anchor tenant for the Fountain Square West Project. Under the terms of

the Anchor Tenant Lease, Federated must pay CDG $9,675,000 for tenant

improvements to the portion of the Fountain Square West Project leased

by Federated. In addition, Federated must pay CDG an initial rental

payment of $2,100,000. Following CDG's assignment of the Anchor Tenant

Lease to the Partnership, Federated will make the aforementioned rental

payments to the Partnership.

(b) The City's Issuance of Bonds (the City Bonds). On May 15, 1996,

the City issued bonds in the face amount of $10,225,000. The proceeds

of the City Bond issue were transferred by the City to CDG on May 16,

1996. Such proceeds will be given by CDG to the Partnership after CDG

assigns its long-term ground lease with the City (the City Lease)

7 to the Partnership. The City Bonds will be used as a funding

source for the Fountain Square West Project and they must be repaid to

the City with interest over a period of twenty years. To repay the

City, CDG has negotiated a property tax abatement on the Fountain

Square West Project during the period that the City Bonds are

outstanding. It is intended that the abatement will reduce the

Partnership's cash outflows that would be required to pay the property

taxes.

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7 On October 19, 1995, the City and CDG entered into a

written lease of the property comprising the Fountain Square West

Project, including the air rights, for a basic term minimum total

rental amount of $10,225,000 plus certain ``percentage rent.'' The

City Lease provides that while the City Bonds are outstanding, the

annual base rent will be equal to the City's annual repayment

obligation obligation on the City Bonds. That amount is $827,567

(interest only) through 1998 and approximately $1,115,000 per year

until the City Bonds are repaid. All interest and principal due on

the City Bonds are to be paid off in 2016, which is 20 years from

the date of their issuance. After the City Bonds are repaid, the

base rent under the City Lease will be $1 per year.

In addition, during the period before the City Bonds are fully

repaid (i.e., before 2016) the City Lease provides for additional

annual rent of 3 percent of the gross rents received during the year

by the Partnership in excess of $3 million. Although no gross rents

are projected during the initial 10 years of the Fountain Square

West Project, after the City Bonds are fully paid, the City Lease

will provide for annual rent of 3 percent of gross rents received by

the Parnership during the year.

The term of the City Lease has not yet commenced but it is

contingent upon whether an office building, to be located on the

Fountain Square West site, is ever constructed. If there is no

office building constructed within 45 years, the City Lease will

expire, provided, however, that CDG will have two additional 10 year

options to extend such lease, thereby making the maximum term of the

City Lease 65 years. Assuming the office building is constructed

within 45 years, the City Lease will expire after a term of 65

years, provided, however, that CDG has three, additional 10 year

options to extend the lease, thereby making the maximum term of the

City Lease 95 years. Aside from paying rent, CDG is required under

the City Lease to pay all utilities and real estate taxes with

respect to the property.

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8. Thus, based upon the foregoing, the Plans and CDG will make a

total investment in the Partnership of $8.5 million. As additional

sources of capital, the Partnership will receive the $10,225,000 in

proceeds from the City Bonds that have been issued by the City and the

$5.5 million in proceeds from the Partnership's air rights lease (the

Air Rights Lease) 8 with Fifth Third (see also Representation 13).

As a result, the total amount available to the Partnership for

construction will be $24,225,000. It is represented that these

construction funds will be greater than the budgeted construction costs

of $24,045,000, which include a ``contingency cushion'' of $3.5

million.

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8 The Air Rights Lease was entered into by and between CDG

and Fifth Third on September 7, 1995. It permits CDG to sublease a

portion of the ground comprising the Fountain Square West site,

related air rights and exclusive rights to 20 underground parking

spaces to Fifth Third for a lump sum rental of $3.5 million.

Although the initial term of the Air Rights Lease is 45 years, the

lease has not yet commenced, it will coincide with the term of the

City Lease and is similarly contingent on whether Fifth Third ever

has an office building constructed on the subject property. Assuming

the office building is constructed, the initial term of the Air

Rights Lease will be automatically extended to 65 years. Afterwards,

the Air Rights Lease may be extended by the parties for three

successive 10 year periods, thereby making the maximum lease term 95

years.

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9. If, however, construction costs exceed the budgeted funds

available to CDG for the construction of the Fountain Square West

Project, it is represented that there are several safeguards in place

which may obviate

[[Page 66318]]

the Trust's responsibility for any cost overruns. In this regard, CDG

has posted a letter of credit with the City in the amount of $500,000

to assure the City that CDG will perform its obligations under the City

Lease including the Partnership's obligation to construct the Fountain

Square West Project. In addition, Warm Brothers Construction Company

(Warm) and Duke Realty Investments, Inc. (Duke) have provided the City

with guarantees with respect to the completion of the Fountain Square

West Project.9 Further, the Partnership Agreement requires CDG to

provide additional capital in excess of $24,045,000. CDG may exercise

this option by contributing additional capital or by selling

subordinate equity in the Partnership to a third party. Such equity

will not affect the Trust's preferred return or percentage of cash flow

distributions made to the Trust described in Representation 10. Only if

the foregoing safeguards fail to provide sufficient financing, will the

Trust ever be confronted with the decision on whether to make

additional contributions to the Partnership or to remove CDG as the

general partner.

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9 Although financial information for Warm is not

available, it is represented that as of November 1996, Duke had

gross revenues of over $150 million, net operating income of over

$110 million, net income of over $42 million, free and clear cash

flow in excess of $10 million, a stock capitalization of over $1

billion and a total market value in excess of $1.4 billion.

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After construction of the Fountain Square West Project is

completed, if CDG determines that additional capital is needed for its

operations, both it and the Trust may make additional contributions in

accordance with their respective cash flow allocations as set forth

below in Representation 10. If the Trust declines to make its share of

the contribution, CDG may lend the amount requested to the Partnership.

10. The Partnership Agreement states that cash flow participation

10 will be as follows and will be paid to the extent available in

the following order of priority:

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10 The Partnership Agreement defines cash flow for any

fiscal year as all revenues relating to such fiscal year received by

the Partnership from the operation of the Fountain Square West

Project less all Partnership cash expenditures of any kind with

respect to such fiscal year.

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o First Tier: Payment of interest and principal on any loan from

CDG.

o Second Tier: Payment of a 9 percent preferred return to the

Trust.

o Third Tier: Payment of a 9 percent preferred return to the

CDG.\11\

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\11\ The Partnership Agreement states that the 9 percent

preferred return for both the Trust and CDG is calculated on the

basis of capital contributions, less extraordinary cash flow

distributions and liquidating distributions.

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o Fourth Tier: Any remaining cash flow is distributed 42.5 percent

to the Trust and 57.5 percent to CDG.\12\

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\12\ Remaining cash flow will be calculated twice a year as of

June 30 and September 30 and will be distributed no later than 90

days after such dates.

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The applicant represents that the cash flow participations by the

Trust and CDG were determined on the basis of arm's length negotiations

between the parties over a period of several months. The applicant also

represents that the percentages reflect many factors, including (a) the

efforts by CDG to negotiate the City Lease (along with financial

incentives from the City), (b) the efforts of CDG to negotiate the

Anchor Tenant Lease and the assignment of that lease to the

Partnership, (c) the efforts by CDG to negotiate the Air Rights Lease

with Fifth Third and the assignment of that lease to the Partnership,

(d) the responsibility of CDG for cost overruns during construction and

for any losses of the Partnership, (e) the capital contribution of CDG,

and (f) the preferred return provided to the Trust.

11. With respect to investments in the Partnership, it is

represented that the Trust and SSGA will receive the following

information from CDG:

(a) Within 120 days after the end of the Partnership's fiscal year,

an unaudited annual report containing (1) a balance sheet and

statements of income, Partners' equity, changes in financial position

and cash flow for the year then ended; (2) a report of the activities

of the Partnership during the period covered by the report; and (3) an

itemization of any payments or fees made to CDG or any related party or

affiliate.

(b) Within 60 days of the end of each year, an appraisal report

prepared by a qualified, independent appraiser, of each property held

by the Partnership.

(c) Periodically (but not less frequently than quarterly),

operating and development budgets of the Partnership as well as

unaudited operations and financial reports.

In addition, Fifth Third will furnish information with respect to

the Partnership to the Second Fiduciaries of Plans investing in the

Trust through annual audited financial statements of the Trust,

prepared by independent, certified public accountants and in quarterly

communications setting forth Partnership financial data. SSGA will also

receive copies of this information.

12. The Partnership may be dissolved upon the earlier of any of the

following events: (a) The disposition of all or substantially all of

the assets of the Partnership, as determined by CDG in its sole

discretion, and the receipt of the final payment of the purchase price

for the retail improvements comprising the Fountain Square West Project

that are owned by the Partnership; (b) the unanimous agreement of CDG

and the Trust to terminate and dissolve the Partnership; (c) the

withdrawal, expulsion, adjudication of bankruptcy, insolvency,

dissolution or other cessation of CDG to exist as a legal entity unless

a substitute general partner and limited partner elect to continue the

business of the Partnership; or (d) December 31, 2095 which is the

expiration of the Partnership.

Upon liquidation, the Partnership Agreement provides for the making

of distributions as follows:

o First: An amount necessary to satisfy any reserve for contingent

liabilities.

o Second: Payment of interest and principal on any loan from CDG.

o Third: Payment to the Trust for any unpaid cumulative preferred

return.

o Fourth: Payment to CDG for any unpaid cumulative paid return.

o Fifth: Payment to the Trust and CDG in the ratio of their

respective capital contributions up to the amount of their respective

capital contributions.

o Sixth: Balance to be distributed 42.5 percent to the Trust and

57.5 percent to CDG.

The procedure for making the liquidating distributions is reflected

in a report of the Fountain Square West Project that was prepared by

Carey Leggett Realty Advisors (CLRA) of Columbus, Ohio on January 15,

1996. At the time of liquidation, CLRA assumes that that the sales

price for the Fountain Square West Project will be $16,989,000 in the

year 2008. Of that amount, the Trust will receive $10,607,825 (or 62

percent of the sale proceeds). This amount consists of $7 million of

returned capital stemming from the Trust's initial investment and 42.5

percent of the balance after CDG receives its return of capital.

13. As stated above, under the proposed development plan for the

Fountain Square West Project, CDG will assign the Anchor Tenant Lease,

the City Lease and the Air Rights Lease to the Partnership. The

Partnership will construct and own the improvements on that portion of

the property that will house the Lazarus Department Store, the

specialty retail center and the underground parking garage. After

construction, the Partnership will manage the retail portion of the

Fountain Square West Project.

The proposed development plan will permit Fifth Third to build and

then own the office tower that is

[[Page 66319]]

contemplated for construction on the Fountain Square West site. As

stated previously, in accordance with the provisions of the Air Rights

Lease, Fifth Third will make a lump sum payment to the Partnership of

$3.5 million to sublease a portion of the ground and related air rights

which will be leased by the Partnership from the City as well as for

exclusive rights to 20 parking spaces at Fountain Square West. In

addition, Fifth Third will pay the Partnership $2 million in order that

the Partnership may hire a construction company (possibly, an affiliate

of CDG) for the design and construction of the building pad to support

the office tower. The total $5.5 million cost for the air rights,

building pad and parking spaces will be paid from Fifth Third's

corporate assets and none of the cost or the future cost of

constructing the office tower will come from the Trust.13

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\13\ Under the Partnership Agreement, the $3.5 million received

pursuant to the Air Rights Lease is to be treated as extraordinary

cash flow and allocated between CDG and the Trust in accordance with

their respective cash flow allocations. However, to the extent that

the proceeds are needed for construction purposes, such funds will

not be distributed as extraordinary cash flow. As for the $2 million

payment for the building pad, it is represented that such amount was

specifically earmarked and used for construction purposes and that

there is no provision in the Partnership Agreement that would permit

the distribution of any portion of that payment to the Trust and

CDG.

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14. The applicant has requested an administrative exemption from

the Department because it believes the use of the assets of the Trust

in a manner which benefits Fifth Third constitutes a violation of the

Act. Specifically, the applicant represents that the investment by the

Trust in the Partnership will not only enable the Partnership to

develop the retail portion of the Fountain Square West Project, but it

will also allow Fifth Third to cause the office tower portion of the

Project to be constructed, thereby enhancing the value of that portion

of the Project.

15. Fifth Third has appointed SSGA of Boston, Massachusetts to

serve as the independent fiduciary for the Trust with respect to the

initial, and possibly, future equity investments made by the Trust to

the Partnership. In this regard, SSGA will monitor and protect the

rights of the Trust and the Plans investing therein to the extent that

any actions of Fifth Third may impact adversely on the Partnership.

Specifically, SSGA will determine whether it is in the best interest of

the Trust and the Plans participating therein to make the initial and

subsequent investments in the Partnership. Also included among its

duties, SSGA will determine whether it is appropriate for the Trust (a)

to assign, transfer, pledge or otherwise encumber its interest in the

Partnership provided the Trust obtains written consent from CDG; (b) to

withdraw as a limited partner from the Partnership or to withdraw its

capital from such Partnership provided the Trust obtains the written

consent of CDG; (c) to consent to the sale by CDG of substantially all

of the assets of the Partnership or the transfer by CDG of its interest

in the Partnership; (d) to contribute to the Partnership the amount

necessary to complete construction of the Fountain Square West Project

and to require that CDG release control of the Partnership to an entity

designated by the Trust, if CDG fails to provide for construction cost

overruns; (e) to elect to continue the Partnership by appointing a

successor general partner; and whether (f) the entity designated by the

Trust to serve as general partner is appropriate upon the occurrence of

(d) or (e).

16. Mr. H. Peter Norstrand, Vice President of SSGA, has agreed to

undertake the duties of the independent fiduciary. Mr. Norstrand

represents that he has over 25 years of experience in commercial real

estate as well as considerable experience as a fiduciary under the Act.

Both SSGA and Mr. Norstrand represent that they understand their

fiduciary obligations and acknowledge that they are acting as a

fiduciary with respect to the Trust. Further, neither Mr. Norstrand nor

SSGA are related in any way to Fifth Third, CDG or any of their

principals. Although SSGA is compensated by Fifth Third, it has derived

approximately 0.00005 percent of its gross revenues from Fifth Third

for services rendered to date. It is anticipated that for any year that

SSGA is retained as the independent fiduciary for the Trust its

compensation for these services will be substantially below one percent

of its gross revenues.

17. SSGA represents that it has--

(a) Reviewed all relevant documents concerning the Fountain Square

West Project, including but not limited to, the lease and sublease

agreements, service agreements, guaranties, the Partnership Agreement

and the exemption application.

(b) Obtained and reviewed independent economic and market reports

on the Cincinnati economy and real estate markets. Among its findings,

SSGA observes that forecasts for the City are uniformly consistent and

call for slow but steady growth.

(c) Performed a financial analysis of the Fountain Square West

Project by reviewing the January 1996 investment summary prepared for

Fifth Third by CLRA. SSGA states that it has independently replicated

CLRA's spreadsheets and tested the performance of the investment under

various alternative assumptions as well as returns for the City Lease.

SSGA has concluded that the assumptions used by CLRA are reasonable and

in some cases, conservative.

(d) Reviewed the most recent quarterly and annual reports for

Federated whose Lazarus Department Store is expected to anchor the

Fountain Square West Project, as well as investment commentary on

Federated as published by Bloomberg. SSGA notes that Federated has a

headquarters operation in the City and states that the annual rental

obligation on the Lazarus Department Store will represent a small

fraction of Federated's annual gross income.

(e) Conducted, through Mr. Norstrand, personal interviews with

representatives of Fifth Third, CLRA and the principals of CDG and

toured the development site and environs. SSGA has concluded that CDG

is well-suited to develop and manage the Fountain Square West Project.

18. In addition, SSGA has analyzed the risk of the Fountain Square

West Project in the context of ``macro'' and ``micro'' levels. On the

``macro'' level, SSGA has examined the development team who will

construct, lease and manage the Fountain Square West Project. Further,

SSGA has examined the site on which the Fountain Square West Project

will be located and states that the property is perfectly suited for

its intended use. Finally, SSGA has considered pricing. In this regard,

SSGA has examined ``internal rates of return'' 14 and has

forecasted returns ranging between 11 percent and 14 percent for the

Trust's proposed investment. These projected returns reflect the

present value of future streams of income which have been based upon

such factors as actual market rents negotiated and assumptions of what

future market rents will be. In contrast, SSGA notes that the returns

forecasted for the Trust by CLRA range from 9 percent to 14

percent.15

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\14\ The internal rate of return is the rate of return on

invested capital that is generated or capable of being generated

within an investment during the period of ownership. The internal

rate of return is the rate of profit (or loss) or a measure of

performance. It is calculated by finding the discount rate that

equates the present value of future cash flows to the cost of the

investment. The calculation of the internal rate of return takes

into account the amount of the initial investment, cash flows during

the life of the investment and the proceeds from the disposition of

the investment.

\15\ More specifically, SSGA states that it used a three-step

process to analyze the potential return on investment. First, SSGA

replicated the ten year cash flow forecasts prepared by CLRA.

Second, SSGA tested the returns under various alternative

assumptions (e.g., an assumption of lower market rents or higher

tenant improvement costs). Third, SSGA calculated the internal rate

of return for the Trust based on the Partnership distribution

protocol during the entire term of the investment. This calculation,

according to SSGA, includes an assumption of a sale of the Fountain

Square West Project within ten years based on an ``exit valuation.''

The exit valuation is determined by applying a capitalization rate

to the eleventh year forecasted net operating income (less assumed

selling costs).

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[[Page 66320]]

Overall, SSGA believes that the range of expected returns for the

investment are comparable to the range of returns that other investors

might expect for a similar transaction. Moreover, because much of the

risk has been taken out of the proposed Trust investment (e.g., the

City has made a $22 million financial commitment to the Project and the

Anchor Tenant Lease has been closed), SSGA believes that any investor

would find these returns appropriate regardless of the collateral

benefits (e.g., the creation of jobs).16

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\16\ Since a major portion of the income derived by the Limited

Partner is generated by the Anchor Tenant Lease, SSGA states that

the rate of return is dependent on such factors as the division of

partnership cash flow, the timing of the initial investment, market

rent, lease-up assumptions regarding the balance of the retail space

and exit capitalization assumptions. Thus, in SSGA's view, the

generation of employment stemming from the Fountain Square West

Project will not impact on the Trust's internal rate of return.

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

SSGA does not view the disproportionate allocation of cash flow

between CDG and the Trust as problematic. SSGA states that because CDG

is not only committing to contribute capital and to bear the

responsibility for cost overruns, it has also mitigated much of the

risks of the investment by negotiating the Anchor Tenant Lease as well

as entering into arrangements with the City. These actions, SSGA

believes, would seem to justify the allocation of the cash flow.

On the micro-level, SSGA states that the major risk factors it has

examined include (a) the creditworthiness of Federated and (b) the

ability of the Partnership to lease certain ``speculative'' space. On

the issue of creditworthiness, SSGA believes that Federated will

perform under its lease in accordance with its terms. According to

SSGA, the Fountain Square West Project will be highly visible involving

substantial community involvement. With a headquarters operation within

sight of the Fountain Square West Project, SSGA represents that

Federated will have the necessary resources to ensure the success of

its operation. SSGA also notes that since Federated has emerged from

its reorganization as a dominant retailer, its rental obligations at

Fountain Square West will represent a small fraction of Federated's

gross revenues.

19. With respect to the ability of the Partnership to lease 45,000

square feet of speculative space, SSGA represents that several factors

suggest that Fountain Square West will be leased substantially as

forecast. In this regard, SSGA states that the speculative space will

represent less than 3 percent of the downtown inventory and that

forecasted rents will be comparable to rents currently being achieved

in the market. In addition, SSGA asserts that the space will afford a

retailer the opportunity to be in a new facility that is in close

proximity to a popular anchor store having the latest features in

storefront design. Further, SSGA notes that the possibility of an

existing store presently on the complex moving to an adjacent parcel

and the likelihood that Fifth Third will develop and occupy the office

tower will strengthen the site as a retail core and provide an

additional inducement to a prospective retailer.

20. SSGA has evaluated how the terms of the proposed transaction

will compare with the terms of similar transactions between unrelated

parties. SSGA notes that the Fountain Square West Project is extremely

unique in the following respects: (a) In terms of City commitment, SSGA

explains that the City will be making a major financial commitment to

the downtown retail core at a time when most American municipalities

are cutting back; (b) in terms of location, SSGA observes that few

American cities have such an appropriate site available for

development; (c) in terms of risk, SSGA believes that the rate of

return to the Trust relative to investment risk is appropriate; and (d)

in terms of the development team, SSGA represents that the team is of

high caliber. In conclusion, SSGA states that the terms of the Fountain

Square West Project are comparable to the terms that other investors

would accept if they were unrelated parties.

21. In summary, it is represented that the proposed transaction

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because:

(a) Each Plan investing in the Trust will have total assets that

are in excess of $50 million.

(b) No Plan that purchases units in the Trust for purposes of

allowing the Trust to invest in the Partnership will have, immediately

after the purchase of such units, more than 5 percent of its assets

invested in the Trust.

(c) The decision to purchase additional units in the Trust that

will allow SSGA to make the initial and any subsequent equity

contributions to the Partnership, will be made by a Second Fiduciary

which is independent of Fifth Third and its affiliates and which is not

SSGA.

(d) As independent fiduciary for the Trust, SSGA will approve and

monitor the Trust's investment in the Partnership.

(e) At the time the Partnership investment is made, the terms of

the transaction will be at least as favorable to each Plan

participating in the Trust as those obtainable in an arm's length

transaction with an unrelated party.

(f) SSGA and the Second Fiduciary of each Plan participating in the

Trust will receive initial and ongoing disclosures concerning the

Partnership.

(g) As to each Plan participating in the Trust, the total fees paid

to Fifth Third will constitute no more than ``reasonable compensation''

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

Notice to Interested Persons

Notice of the proposed exemption will be given to the SSGA as well

as the Second Fiduciaries of Plans investing in the Trust within 10

days of the publication of the notice of proposed exemption in the

Federal Register. Notice will be provided to SSGA and each Second

Fiduciary by first class mail. Notice will be provided to active

participants in the Plans by posting at local union halls at the

locations designated for member notifications. The notice will include

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

Register as well as a supplemental statement, as required, pursuant to

29 CFR 2570.43(b)(2), which shall inform interested persons of their

right to comment on and/or to request a hearing. Retirees in the Plans

will be mailed a statement which will include a toll-free telephone

number such participants may call if they wish to obtain a copy of the

proposed exemption. Comments and requests for a public hearing are due

within 40 days of the publication of the notice of proposed exemption

in the Federal Register.

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

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

United States Trust Company of New York and Certain of Its Affiliates

Located in New York, NY

[Application Nos. D-10234 and D-10235]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act

[[Page 66321]]

and section 4975(c)(2) of the Code and in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990).

Section I--Proposed Exemption for In-Kind Transfers of Assets

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

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

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

(F) of the Code, shall not apply, effective as of May 31, 1996, to the

in-kind transfer to any diversified open-end investment company (the

Fund or Funds) registered under the Investment Company Act of 1940 (the

ICA) to which the United States Trust Company of New York or any of its

affiliates (collectively, US Trust) serves as investment adviser and

may provide other services (i.e. ``Secondary Services'' as defined in

Section III(h) below), of the assets of various employee benefit plans

(the Plan or Plans) that are either held in certain collective

investment funds (the CIF or CIFs) maintained by US Trust or otherwise

held by US Trust as trustee, investment manager, or in any other

capacity as fiduciary on behalf of the Plans, in exchange for shares of

such Funds; provided that the following conditions are met:

(a) A fiduciary (the Second Fiduciary) who is acting on behalf of

each affected Plan and who is independent of and unrelated to US Trust,

as defined in Section III(g) below, receives advance written notice of

the in-kind transfer of assets of the Plans or the CIFs in exchange for

shares of the Fund and the disclosures described in Section II(f)

below.

(b) On the basis of the information described in Section II(f)

below, the Second Fiduciary authorizes in writing the in-kind transfer

of CIF or Plan assets in exchange for shares of the Funds, the

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

the fees received by US Trust in connection with its services to the

Fund. Such authorization by the Second Fiduciary is to be consistent

with the responsibilities, obligations, and duties imposed on

fiduciaries by Part 4 of Title I of the Act.

(c) No sales commissions are paid by the Plans in connection with

the in-kind transfers of CIF or Plan assets in exchange for shares of

the Funds.

(d) All or a pro rata portion of the assets of the Plans held in

the CIFs or all or a pro rata portion of the assets of the Plans held

by US Trust in any capacities as fiduciary on behalf of such Plans are

transferred in-kind to the Funds in exchange for shares of such Funds.

Notwithstanding the foregoing, solely for purposes of this paragraph

(d), assets of the 401(k) Plan and ESOP of United States Trust Company

of New York and Affiliated Companies (the UST DC Plan) held by US Trust

as trustee and allocated to the U.S. Government Short/Intermediate Term

Investment Fund shall be treated as assets held in a CIF.

(e) The Plans or the CIFs receive shares of the Funds that have a

total net asset value equal in value to the assets of the Plans or the

CIFs exchanged for such shares on the date of transfer.

(f) With respect to any in-kind transfer of CIF assets to a Fund,

each Plan receives shares of a Fund which have a total net asset value

that is equal to the value of the Plan's pro rata share of the assets

of the corresponding CIF on the date of the transfer, based on the

current market value of the CIF's assets, as determined in a single

valuation performed in the same manner as of the close of the same

business day with respect to all such Plans participating in the

transaction on such day, using independent sources in accordance with

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

for the valuation of such assets. Such procedures must require that all

securities for which a current market price cannot be obtained by

reference to the last sale price for transactions reported on a

recognized securities exchange or NASDAQ be valued based on an average

of the highest current independent bid and lowest current independent

offer, as of the close of business on the last business day prior to

the in-kind transfers, determined on the basis of reasonable inquiry

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

independent of US Trust.

(g) (1) Not later than thirty (30) days after completion of each

in-kind transfer of CIF or Plan assets in exchange for shares of the

Funds (except for certain transactions described in paragraph (g)(2)

below), US Trust sends by regular mail to the Second Fiduciary, a

written confirmation containing:

(i) the identity of each of the assets that was valued for purposes

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

(ii) the price of each of the assets involved in the transaction;

and

(iii) the identity of each pricing service or market maker

consulted in determining the value of such assets;

(2) For the in-kind transfer of CIF assets to the Funds which

occurred on June 28 and July 31, 1996, the written confirmations

described above in paragraph (g)(1) were made by US Trust to all Second

Fiduciaries of the appropriate Plans by October 15, 1996.

(h) For all in-kind transfers of CIF assets, US Trust sends by

regular mail to the Second Fiduciary, no later than ninety (90) days

after completion of the asset transfer made in exchange for shares of

the Funds, a written confirmation containing:

(1) the number of CIF units held by each affected Plan immediately

before the in-kind transfer, the related per unit value, and the

aggregate dollar value of the units transferred; and

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

affected Plan following the in-kind transfer, the related per share net

asset value, and the aggregate dollar value of the shares received.

(i) The conditions set forth in paragraphs (d), (e), (f), (o), (p),

and (q) of Section II below are satisfied.

Section II--Proposed Exemption for Receipt of Fees From Funds

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

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

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

4975(c)(1) (A) through (F) of the Code shall not apply, effective as of

June 30, 1996, to the receipt of fees by US Trust from the Funds for

acting as the investment adviser for the Funds as well as for acting as

the custodian, transfer agent, sub-administrator or for providing other

``Secondary Services'' (as defined in Section III(h) below) to the

Funds in connection with the investment in the Funds by Plans for which

US Trust acts as a fiduciary (Client Plans), other than Plans

established and maintained by US Trust for the benefit of its employees

and their beneficiaries (Bank Plans), provided that the following

conditions are met:

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

with purchases or sales of shares of the Funds and no redemption fees

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

Funds.

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

the Funds is the net asset value per share, as defined in Section

III(e), at the time of the transaction and is the same price which

would have been paid or received for the shares by any other investor

at that time.

(c) Neither US Trust nor any affiliate (including officers,

directors and other persons, as defined in Section III(b) below)

purchases from or sells to the Client Plans any shares of the Funds.

[[Page 66322]]

(d) For each Client Plan, the combined total of all fees received

by US Trust for the provision of services to the Client Plan, and in

connection with the provision of services to any of the Funds in which

the Plan may invest, are not in excess of ``reasonable compensation''

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

(e) US Trust or an affiliate does not receive any fees payable,

pursuant to Rule 12b-1 under the ICA (the 12b-1 Fees) in connection

with the transactions.

(f) The Second Fiduciary who is acting on behalf of a Client Plan

receives in advance of the investment by a Plan in any of the Funds a

full and detailed written disclosure of information concerning such

Fund including, but not limited to:

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

which such Client Plan is considering investing;

(2) a statement describing the fees for investment management,

investment advisory, or other similar services, any fees for Secondary

Services, as defined in Section III(h) below, and all other fees to be

charged to or paid by the Client Plan and by such Funds to US Trust,

including the nature and extent of any differential between the rates

of such fees;

(3) the reasons why US Trust may consider such investment to be

appropriate for the Client Plan;

(4) a statement describing whether there are any limitations

applicable to US Trust with respect to which assets of a Client Plan

may be invested in the Funds, and, if so, the nature of such

limitations; and

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

exemption and/or a copy of the final exemption.

(g) On the basis of the information described in Section II(f)

above, the Second Fiduciary authorizes in writing the investment of

assets of the Client Plan in shares of the Fund and the fees to be paid

to US Trust in connection with its services to the Funds. The

authorization made by the Second Fiduciary must be consistent with the

duties, responsibilities and obligations imposed on fiduciaries by Part

4 of Title I of the Act.

(h) The authorization described above in Section II(g) is

terminable at will by the Second Fiduciary of a Client Plan, without

penalty to such Plan, upon receipt by US Trust of written notice of

termination. Such termination will be effected by US Trust selling the

shares of the Fund held by the affected Client Plan within one business

day following receipt by US Trust of the termination form (the

Termination Form), as defined in Section III(i) below, or any other

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

beyond the control of US Trust, the sale cannot be executed within one

business day, US Trust shall have one additional business day to

complete such sale.

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

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

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

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

advisory fees charged to the Funds by US Trust, including any

investment advisory fees paid by US Trust to third party sub-advisers,

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

US Trust. The crediting of all such fees to the Client Plans by US

Trust is audited by an independent accounting firm on at least an

annual basis to verify the proper crediting of the fees to each Client

Plan.

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

Funds to US Trust regarding any investment management services,

investment advisory services, or fees for similar services that US

Trust provides to the Funds over an existing rate for such services

that had been authorized by a Second Fiduciary, in accordance with

Section II(g), US Trust will, at least thirty (30) days in advance of

the implementation of such increase, provide a written notice (separate

from the Fund prospectus) to the Second Fiduciary of each of the Client

Plans invested in a Fund which is increasing such fees.

(k) In the event of an addition of a Secondary Service, as defined

in Section III(h) below, provided by US Trust to the Fund for which a

fee is charged or an increase in the rate of any fee paid by the Funds

to US Trust for any Secondary Service that results either from an

increase in the rate of such fee or from the decrease in the number or

kind of services performed by US Trust for such fee over an existing

rate for such Secondary Service which had been authorized by the Second

Fiduciary of a Client Plan, in accordance with Section II(g), US Trust

will at least thirty (30) days in advance of the implementation of such

additional service for which a fee is charged or fee increase, provide

a written notice (separate from the Fund prospectus) to the Second

Fiduciary of each of the Client Plans invested in a Fund which is

adding a service or increasing fees. Such notice shall be accompanied

by the Termination Form, as defined in Section III(i) below.

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

times specified in paragraphs (k), (l), and (m) of this Section II,

which expressly provides an election to terminate the authorization,

described above in Section II(g), with instructions regarding the use

of such Termination Form including statements that:

(1) The authorization is terminable at will by any of the Client

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

by US Trust selling the shares of the Fund held by the Client Plans

requesting termination within one business day following receipt by US

Trust, either by mail, hand delivery, facsimile, or other available

means at the option of the Second Fiduciary, of the Termination Form or

any other written notice of termination; provided that if, due to

circumstances beyond the control of US Trust, the sale of shares of

such Client Plans cannot be executed within one business day, US Trust

shall have one additional business day to complete such sale; and

(2) Failure by the Second Fiduciary to return the Termination Form

on behalf of a Client Plan will be deemed to be an approval of the

additional Secondary Service for which a fee is charged or increase in

the rate of any fees, if such Termination Form is supplied pursuant to

paragraphs (k) and (l) of this section II, and will result in the

continuation of the authorization, as described in Section II(g), of US

Trust to engage in the transactions on behalf of such Client Plan.

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

annually during the first quarter of each calendar year, beginning with

the first quarter of the calendar year that begins after the date the

grant of this proposed exemption is published in the Federal Register

and continuing for each calendar year thereafter; provided that the

Termination Form need not be supplied to the Second Fiduciary, pursuant

to this paragraph (m), sooner than six months after a Termination Form

is supplied pursuant to Section II(k) and (l), except to the extent

required by such paragraphs to disclose an additional Secondary Service

for which a fee is charged or an increase in fees.

(n)(1) With respect to each of the Funds in which a Client Plan

invests, US Trust will provide the Second Fiduciary of such Plan:

(A) at least annually with a copy of an updated prospectus of such

Fund;

(B) upon the request of such Second Fiduciary, with a report or

statement

[[Page 66323]]

(which may take the form of the most recent financial report, the

current statement of additional information, or some other written

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

US Trust; and

(2) With respect to each of the Funds in which a Client Plan

invests, in the event such Fund places brokerage transactions with US

Trust, US Trust will provide the Second Fiduciary of such Plan at least

annually with a statement specifying:

(A) the total, expressed in dollars, brokerage commissions of each

Fund's investment portfolio that are paid to US Trust by such Fund;

(B) the total, expressed in dollars, of brokerage commissions of

each Fund's investment portfolio that are paid by such Fund to

brokerage firms unrelated to US Trust;

(C) the average brokerage commissions per share, expressed as cents

per share, paid to US Trust by each portfolio of a Fund; and

(D) the average brokerage commissions per share, expressed as cents

per share, paid by each portfolio of a Fund to brokerage firms

unrelated to US Trust.

(o) All dealings between the Client Plans and any of the Funds are

on a basis no less favorable to such Plans than dealings between the

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

Plans.

(p) US Trust maintains for a period of six (6) years the records

necessary to enable the persons, as described in Section II(q) below,

to determine whether the conditions of the exemption have been met,

except that:

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

occurred if, due to circumstances beyond the control of US Trust, the

records are lost or destroyed prior to the end of the six (6) year

period, and

(2) no party in interest, other than US Trust, shall be subject to

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

or to the taxes imposed by section 4975(a) and (b) of the Code, if the

records are not maintained, or are not available for examination as

required by Section II(q) below.

(q)(1) Except as provided in Section II(q)(2) and notwithstanding

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

referred to in Section II(p) above are unconditionally available at

their customary location for examination during normal business hours

by----

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

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

acquire or dispose of shares of any of the Funds owned by such a Plan,

or any duly authorized employee or representative of such fiduciary;

and

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

authorized employee or representative of such participant or

beneficiary;

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

(q)(1)(iii) of Section II shall be authorized to examine trade secrets

of US Trust, or commercial or financial information which is privileged

or confidential.

Section III--Definitions

For purposes of this proposed exemption,

(a) The term ``US Trust'' means the United States Trust Company of

New York and an affiliate, as defined in Section III(b)(1).

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

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

intermediaries, controlling, controlled by, or under common control

with the person;

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

such person; and

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

officer, director, partner, or employee.

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

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

individual.

(d) The term ``Fund or Funds'' means any diversified open-end

investment company or companies registered under the ICA for which US

Trust serves as investment adviser, and may also provide custodial or

other services as approved by such Funds.

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

pricing all purchases and sales calculated by dividing the value of all

securities, determined by a method as set forth in a Fund's prospectus

and statement of additional information, and other assets belonging to

each of the portfolios in such Fund, less the liabilities charged to

each portfolio, by the number of outstanding shares.

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

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

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

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

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

is independent of and unrelated to US Trust. For purposes of this

proposed exemption, the Second Fiduciary will not be deemed to be

independent of and unrelated to US Trust if:

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

controlled by, or is under common control with US Trust;

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

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

partner, or employee of US Trust (or is a relative of such persons);

(3) Such Second Fiduciary directly or indirectly receives any

compensation or other consideration for his or her own personal account

in connection with any transaction described in this proposed

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

Second Fiduciary may receive compensation from US Trust in connection

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

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

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

Plans participate in the transactions.

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

partner, or employee of US Trust (or a relative of such persons), is a

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

participation in (i) the choice of the Plan's investment manager/

advisor, (ii) the approval of any purchase or sale by the Plan of

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

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

transactions described in sections I and II above, then Section

III(g)(2) above shall not apply.

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

investment management, investment advisory, or similar service, which

is provided by US Trust to the Funds, including but not limited to

custodial, accounting, administrative, or any other service. However,

for purposes of Section II(k), the term ``Secondary Service'' does not

include any brokerage services provided by US Trust to the Funds.

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

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

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

Second Fiduciary to terminate on behalf of the Plans the authorization,

described in Section II(g). Such Termination Form may be used at will

by the Second Fiduciary to terminate such authorization without penalty

to the Plans and to notify US Trust in writing to effect such

[[Page 66324]]

termination by selling the shares of the Fund held by the Plans

requesting termination within one business day following receipt by US

Trust, either by mail, hand delivery, facsimile, or other available

means at the option of the Second Fiduciary, of written notice of such

request for termination; provided that if, due to circumstances beyond

the control of US Trust, the sale cannot be executed within one

business day, US Trust shall have one additional business day to

complete such sale.

(j) The term ``UST DB Plan'' means the Employees' Retirement Plan

of United States Trust Company of New York and Affiliated Companies.

(k) The term ``UST DC Plan'' means the 401(k) Plan and ESOP of

United States Trust Company of New York and Affiliated Companies.

(l) The term ``Bank Plan'' means the UST DB Plan and the UST DC

Plan.

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

as of May 31, 1996, for transactions described in Section I, and June

30, 1996, for transactions described in Section II.

Summary of Facts and Representations

1. US Trust. UST New York, a wholly-owned subsidiary of U.S. Trust

Corporation, is a New York-chartered bank and trust company. UST New

York provides trust and banking services to individuals, corporation,

and institutions both nationally and internationally. UST New York

serves as trustee, investment manager, and/or custodian to the Plans

described below and as investment adviser to certain of the Funds. As

of December 31, 1995, UST New York had total assets under management of

approximately $40 billion.

United States Trust Company of the Pacific Northwest (UST Pacific)

is a limited purpose non-depository trust company chartered in Oregon

and is also a subsidiary of U.S. Trust Corporation. UST Pacific serves

as investment adviser to certain of the Funds.

Other Affiliates of UST New York that may offer shares of the Funds

to their fiduciary customers, but which did not have customer assets

invested in the converting CIFs, are included herein solely with

respect to the fee rebate and ``negative consent'' procedure described

below for future fee changes. These entities include certain national

banks, such as U.S. Trust Company of California, N.A., and U.S. Trust

Company of Texas, N.A., as well as certain state-chartered banks, such

as U.S. Trust Company of Connecticut, U.S. Trust Company of Florida

Savings Bank, and U.S. Trust Company of New Jersey.

2. The Plans. The Plans (i.e. the Client Plans and the Bank Plans)

presently consist of retirement plans qualified under section 401(a) of

the Code for which US Trust serves as a trustee or investment

fiduciary. These Plans are considered ``pension plans'' under section

3(2) of the Act. However, US Trust requests that the proposed exemption

apply to any ``employee benefit plan'', within the meaning of section

3(3) of the Act, and to any ``plan'' within the meaning of section

4975(e)(1) of the Code (including IRAs), and not solely to qualified

plans under Code section 401(a). Currently, UST New York serves as

trustee, investment manager, and/or custodian of approximately 250

Plans. As of September 30, 1995, UST New York had approximately $800

million in Plan assets under management, of which approximately $675

million represented assets invested in the CIFs.

The Plans include two qualified retirement plans sponsored by US

Trust (collectively, the Bank Plans), which are:

(i) The Employees' Retirement Plan of United States Trust

Company of New York and Affiliated Companies (the UST DB Plan); and

(ii) The 401(k) Plan and ESOP of United States Trust Company of

New York and Affiliated Companies (the UST DC Plan).

Assets of the Bank Plans represent approximately half of the assets

of the CIFs described herein.

The applicant states that Actuarial Sciences Associates, Inc., a

fiduciary that is independent of US Trust, was appointed to act as the

Second Fiduciary for the Bank Plans in connection with the

determination made by such Plans to participate in the conversion of

the CIFs to the Funds (as discussed below).

In addition, the applicant states that the Client Plans

participated in the conversion of the CIFs to the Funds based solely

upon decisions made in each case by a Plan fiduciary independent of US

Trust (collectively, the Second Fiduciaries). The applicant represents

that, following the initial CIF conversions, decisions to participate

in any future CIF conversions will also be made on behalf of each

Client Plan by a Second Fiduciary (as discussed more fully below),

although the specific Client Plans that may be involved have not been

identified at the present time.

3. The CIFs. The CIFs comprised the individual portfolios of the

United States Trust Company of New York Pooled Pension and Profit

Sharing Trust. However, for purposes of the proposed exemption, the

CIFs are deemed to have included a short-term investment fund

(identified below as ``the Government Fund'') that was not structured

as a commingled fund but as a separate fund that formed a part of, and

was offered as an investment option under, the UST DC Plan.

Specifically, the CIFs were as follows: (i) the Equity Portfolio;

(ii) the Fixed Income Portfolio; (iii) the International Portfolio;

(iv) the Short-term Fixed Income Portfolio; and (v) the U.S. Government

Short/Intermediate Term Fund (i.e. the Government Fund).

As a result of the conversions, each of these CIFs now correspond

to one of the Funds described below. However, prior to the initial CIF

conversions on May 31, 1996, UST New York determined that approximately

50 percent of the UST DB Plan's assets allocated to the Equity

Portfolio CIF would be reallocated to three different domestic equity

Funds with certain narrower investment objectives. These Funds, and the

percentage of the UST DB Plan's assets that were allocated to each

Fund, were: (i) The Early Life Cycle (or ``Small Cap'') Portfolio (10

percent); (ii) the Optimum Growth Portfolio (20 percent); and (iii) the

Equity Value Portfolio (20 percent).

In order to accomplish this result, the applicant states that prior

to the conversions US Trust created three new domestic equity CIFs with

investment objectives corresponding directly to the objectives of the

three proposed Equity Funds. US Trust then transferred to the new CIFs

the relevant percentage of the UST DB Plan's assets that were formerly

invested in the Equity Portfolio CIF. The new CIFs were: (i) the Early

Life Cycle CIF; (ii) the Optimum Growth CIF; and (iii) the Equity Value

CIF (collectively, the New CIFs). The applicant states that a pro rata

share of each of the underlying securities held by the Equity Portfolio

CIF were reallocated to the New CIFs by UST New York in accord with its

authority as trustee of the CIFs. No assets were reallocated

selectively or disproportionately. The creation of the New CIFs allowed

US Trust to accomplish the conversions by a direct, one-to-one exchange

of assets between each CIF and a Fund with corresponding investment

objectives.

4. The Funds. The Funds are certain portfolios of the following

three similarly named but separately registered investment companies:

(i) The Excelsior Institutional Trust; (ii) the Excelsior Funds, Inc.;

and (iii) the Excelsior Funds. All of the Funds are described further

below. However, US Trust requests that the exemption apply

prospectively to any similar Fund in

[[Page 66325]]

which a Plan invests where US Trust provides investment advisory

services and certain Secondary Services. In this regard, US Trust

states that all future Funds to which US Trust serves as an investment

adviser will assume similar structures and that Plan investments

therein will meet all of the terms and conditions of the exemption.

The Excelsior Institutional Trust (the Institutional Funds) is an

open-end, diversified management investment company registered under

the ICA. Currently, the Institutional Funds comprise the following

portfolios: (i) The Equity Fund; (ii) the Income Fund; (iii) the Total

Return Bond Fund; (iv) the Bond Index Fund; (v) the Balanced Fund; (vi)

the Equity Growth Fund; and (vii) the International Equity Fund.

UST New York serves as investment adviser to the first three of the

foregoing Institutional Funds and as sub-adviser to the fourth. UST

Pacific serves as investment adviser to the remaining three

Institutional Funds. Various parties unrelated to US Trust also provide

custodial, transfer agent, recordkeeping, and other non-advisory

services (i.e. Secondary Services) to the Institutional Funds. US Trust

also performs certain Secondary Services for the Institutional Funds,

including co-administration and shareholder services, for which it

receives fees.

The Excelsior Funds, Inc. (formerly known as the UST Master Funds,

Inc.; hereafter, the UST Funds) is an open-end, diversified management

investment company registered under the ICA. Currently, the UST Funds

comprise the following portfolios: (i) The Equity Fund; (ii) the Income

and Growth Fund; (iii) the Long-Term Supply of Energy Fund; (iv) the

Productivity Enhancers Fund; (v) the Environmentally-Related Products

and Services Fund; (vi) the Aging of America Fund; (vii) the

Communication and Entertainment Fund; (viii) the Business and

Industrial Restructuring Fund; (ix) the Global Competitors Fund; (x)

the Early Life Cycle Fund; (xi) the International Fund; (xii) the

Emerging Americas Fund; (xiii) the Pacific/Asia Fund; (xiv) the Pan

European Fund; (xv) the Short-Term Government Securities Fund; (xvi)

the Intermediate-Term Managed Income Fund; (xvii) the Managed Income

Fund; (xviii) the Money Fund; (xix) the Government Money Fund; and (xx)

the Treasury Money Fund.

UST New York serves as investment adviser to each of the UST Funds.

Various parties unrelated to US Trust provide custodial, transfer

agent, recordkeeping, and other Secondary Services to the UST Funds. US

Trust also performs certain Secondary Services for the UST Funds,

including transfer agent and shareholder services, for which it

receives fees.

The Excelsior Funds is a separate open-end, diversified management

investment company registered under the ICA, the only currently

relevant portfolio of which is the Institutional Money Fund (the Money

Fund Option).

UST New York serves as supplemental investment manager to the Money

Fund Option pursuant to an investment advisory agreement. Various

parties unrelated to US Trust provide investment advisory services to

the Excelsior Funds, as well as recordkeeping and other Secondary

Services. US Trust also performs certain Secondary Services for the

Excelsior Funds, including co-administration, custodial, and transfer

agent services, for which it receives fees.

5. Actuarial Sciences Associates, Inc. (ASA). ASA is an employee

benefits consulting firm established in July 1985 which is located in

Somerset, New Jersey. ASA was retained by US Trust to serve as the

Second Fiduciary for the UST DB Plan and the UST DC Plan (i.e. the Bank

Plans) in connection with the investments made in the Funds. ASA is an

affiliate of AT&T Investment Management Corporation (ATTIMCO). ATTIMCO

is a wholly-owned subsidiary of AT&T and is a registered investment

adviser under the ICA. As of December 31, 1995, ATTIMCO exercised

discretionary investment authority over approximately $75 billion of

fiduciary assets. ASA, ATTIMCO and their affiliates are independent of,

and unrelated to, US Trust.

Description of the Transactions

6. US Trust represents that the CIFs in which the Plans invested

were maintained in accordance with the requirements under New York law

that apply to collective investment trusts. US Trust decided to

terminate the CIFs and offer to the Plans participating therein

appropriate interests in corresponding Funds as alternative

investments. Because interests in a CIF generally must be liquidated or

withdrawn to effect distributions, US Trust believed that the interests

of the Plans invested in the CIFs would be better served by investment

in shares of the Funds which could be distributed in-kind. US Trust

also believed that the Funds offered the Plans advantages over the CIFs

as pooled investment vehicles. For instance, as shareholders of the

Funds, the Plans have opportunities to exercise voting and other

shareholder rights.

The Plans, as Fund shareholders, periodically receive certain

disclosures concerning the Funds. Such information includes: (i) A copy

of the Fund prospectus, which is updated at least annually; (ii) an

annual report containing audited financial statements of the Funds and

information regarding such Funds' investment performance; and (iii) a

semi-annual report containing unaudited financial statements. With

respect to the Plans, US Trust reports all transactions in shares of

the Funds in periodic account statements provided to each of the Plans.

Further, US Trust maintains that the net asset value of the portfolios

of the Funds can be monitored daily from information available in

newspapers of general circulation.

7. With respect to the requested exemption, US Trust proposes that

when from time-to-time a CIF is terminated its assets would be

transferred in-kind to a corresponding Fund in exchange for shares of

such Fund in order to avoid the potentially large brokerage expenses

that would otherwise be incurred in having the CIF sell such assets and

having the Fund acquire such assets. In addition, US Trust also

proposes that from time-to-time it may be appropriate for an individual

Plan for which US Trust serves as fiduciary to transfer all or a pro

rata share of its assets in-kind to any of the Funds in exchange for

shares of such Funds. For example, in the case of an in-kind exchange

between an individual Plan whose portfolio consists of common stock,

money market securities, and real estate, and a Fund that (under its

investment policy) invests only in common stock and money market

securities, the exchange would involve all or a pro rata share of the

common stock and money market securities held by the Plan, if such

stock and securities are eligible for purchase by the Fund, and would

not involve the transfer or exchange of the real estate holdings of

such Plan. In this regard, a particular Fund's eligible investments

will be set forth in its prospectus. No brokerage commissions, fees or

expenses (other than customary transfer charges paid to parties other

than US Trust) will be charged to the Plans or the CIFs in connection

with the in-kind transfers of assets to the Funds for shares of the

Funds.

Thus, in addition to the retroactive exemptive relief requested

herein for the initial in-kind transfer of CIF assets to the Funds in

exchange for Fund shares (as discussed in Item 8 below), US Trust also

requests prospective relief for transactions involving: (i) The future

in-kind transfer by other CIFs of all or a pro rata portion of the

assets of any of the Plans held in such CIFs to the Funds

[[Page 66326]]

in exchange for shares of the Funds; or (ii) the in-kind transfer of

all or a pro rata portion of the assets of any of the Plans held by US

Trust, in any capacity as fiduciary on behalf of such Plans, to the

Funds in exchange for shares of such Funds.

US Trust states that the transfers in-kind of assets in exchange

for Fund shares are ministerial transactions performed in accordance

with pre-established objective procedures which are approved by the

Board of Trustees of each Fund. Such procedures require that assets

transferred to a Fund: (i) Are consistent with the investment

objectives, policies, and restrictions of the Fund; (ii) satisfy the

applicable requirements of the ICA and the Code; and (iii) have a

readily ascertainable market value. In addition, any assets that are

transferred will be marketable and will not be subject to restrictions

on resale. Assets which do not meet these requirements will be sold in

the open market through an unaffiliated brokerage firm prior to any

transfer in-kind. Further, prior to entering into an in-kind transfer,

a Second Fiduciary of each affected Plan will receive certain

disclosures from US Trust and approve the transaction in writing.

8. The Conversion Transactions. US Trust specifically requests a

retroactive exemption for the in-kind transfers of CIF assets to

certain corresponding Funds which have already occurred. The initial

in-kind transfers of CIF assets to the Funds occurred on May 31, 1996,

and was a partial conversion of various CIFs involving assets of the

Bank Plans. Another in-kind transfer of CIF assets occurred on June 30,

1996, and was a partial conversion of such CIFs involving assets of

Client Plans that elected to participate in the CIF conversions.

With respect to the in-kind transfers of CIF assets involving the

Bank Plans, US Trust states that a proportionate share of each CIF's

assets representing the interests of the Bank Plans therein was

transferred to the corresponding UST Fund, except for the UST DB Plan's

interests in the new Optimum Growth and Equity Value CIFs, which were

transferred to the corresponding new Institutional Funds. The following

table shows which CIF assets were transferred to particular Funds.

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

CIF portfolio Corresponding fund portfolio

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

Short-Term Fixed Income................... UST Funds/Money Fund.

Fixed Income.............................. UST Funds/Managed Income

Fund.

U.S. Government Short/Intermediate Term UST Funds/Short-Term

Fund. Government Securities Fund.

International............................. UST Funds/International

Fund.

Equity Portfolio.......................... UST Funds/Equity Fund.

Early Life Cycle.......................... UST Funds/Early Life Cycle

Fund.

Optimum Growth............................ Institutional Optimum Growth

Fund.

Equity Value.............................. Institutional Equity Value

Fund.

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

As noted above, the Government Fund was a separate fund forming

part of the UST DC Plan, rather than a commingled CIF. However, for

purposes of the transactions for which US Trust requests an exemption,

this fund was treated in the same manner as a CIF in that all of its

assets were transferred to a corresponding Fund.

As of June 30, 1996, US Trust states that certain Client Plan

assets invested in the Short-Term Fixed Income CIF were transferred

either to the UST Funds/Money Fund or the Excelsior Funds/Money Fund

Option at the direction of the Second Fiduciary approving the

particular in-kind transfer. Otherwise, a proportionate share of each

CIF's assets representing the interests of the Client Plans (whose

Second Fiduciaries approved the transaction) were transferred on such

date to the corresponding Institutional Funds, as follows:

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

CIF portfolio Corresponding fund portfolio

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

Short-Term Fixed Income................... Excelsior Money Fund Option

or UST Funds/Money Fund

Fixed Income.............................. Institutional Total Return

Bond Fund.

International............................. Institutional International

Equity Fund.

Equity.................................... Institutional Equity Fund.

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

Thus, for example, if at the time of the conversion the Bank Plans

held 45 percent of the interests in the Equity CIF, 45 percent of those

assets were transferred to the Equity Fund portfolio of the UST Funds

and the remaining 65 percent of the CIF's assets (representing the

interests of Client Plans) were transferred to the Equity Fund

portfolio of the Institutional Funds.

Each in-kind transfer of CIF assets was completed in a single

transaction on a single day. In each case, the in-kind transfer

transactions were accomplished by transferring from the converting CIF

a proportionate share of the Plans' assets then held by the CIF to the

corresponding Fund in exchange for an appropriate number of Fund

shares. Once all of a CIF's assets were transferred to a Fund, the CIF

was terminated and its assets, then consisting of Fund shares, were

distributed in-kind to the Plans participating in the CIFs based on

each Plan's pro rata share of the assets of the CIFs on the date of the

transaction.

Prior to each in-kind transfer transaction, the assets of a

transferring CIF were reviewed by US Trust to confirm that they were

appropriate investments for the receiving Fund. If any of the assets of

a CIF were not appropriate for its corresponding Fund, US Trust sold

such assets in the open market through an unaffiliated brokerage firm

prior to the in-kind transfer.

9. Advance Disclosure/Approval and Appointment of the Second

Fiduciary for the Bank Plans. US Trust provided to each affected Plan

disclosures that announced the termination of the particular CIF,

summarized the transaction, and otherwise complied with provisions of

Section I of this proposed exemption. Based on these disclosures, the

Second Fiduciary for each affected Plan approved in writing the Plan's

participation in the conversion transaction, including the fees that

were to be paid by the Funds to US Trust.

In the case of the initial in-kind transfer transactions involving

the Bank Plans which occurred on May 31, 1996, ASA was required to make

an independent determination in its fiduciary capacity that

participation in the conversion transaction on the terms proposed was

in the best interest of each Bank Plan. In this regard, as noted

earlier, US Trust appointed ASA to serve as the Second Fiduciary to

oversee the conversions of the CIFs to the Funds as they related to the

interests of the Bank Plans, including the decision whether to

participate therein. As part of its written report setting out the

conclusions discussed in Item 11 below, ASA was required to confirm

both its independence from US Trust and its qualifications to serve as

the Second Fiduciary for the Bank Plans.

10. Valuation Procedures. The assets transferred by a CIF to its

corresponding Fund consisted entirely of cash and marketable

securities. For purposes of a transfer in-kind, the value of the

securities in the CIF was determined based on market value as of the

close of business on the last business date prior to the transfer (the

CIF Valuation Date). The values on the CIF Valuation Date

[[Page 66327]]

were determined using the valuation procedures described in Rule 17a-7

under the ICA. In this regard, the ``current market price'' for

specific types of CIF securities involved in the transaction was

determined as follows:

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

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

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

the consolidated transaction reporting system (the Consolidated System)

for the CIF Valuation Date; or, if there were no reported transactions

in the Consolidated System that day, the average of the highest current

independent bid and the lowest current independent offer for such

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

the close of business on the CIF Valuation Date.

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

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

exchange on the CIF Valuation Date or, if there were no reported

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

current independent bid and lowest current independent offer on the

exchange as of the close of business on the CIF Valuation Date.

c. If the security was not a reported security and was quoted in

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

bid and lowest current independent offer reported on NASDAQ as of the

close of business on the CIF Valuation Date.

d. For all other securities, the average of the highest current

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

of business on the CIF valuation date, determined on the basis of

reasonable inquiry. For securities in this category, US Trust obtained

quotations from at least three sources that were either broker-dealers

or pricing services independent of and unrelated to US Trust and, when

more than one valid quotation was available, used the average of the

quotations to value the securities, in conformance with interpretations

by the SEC and practices under Rule 17a-7.

The securities received by a transferee Fund portfolio were valued

by such portfolio for purposes of the transfer in the same manner and

as of the same day as such securities were valued by the corresponding

transferor CIF. The per share value of the shares of each Fund

portfolio issued to the CIFs was based on the corresponding portfolio's

then-current net asset value. US Trust states that the value of a

Plan's investment in shares of each Fund as of the opening of business

on the date of the conversion transaction was equal to the value of

such Plan's investment in the CIFs as of the close of business on the

last business day prior to the conversion transaction.

Not later than thirty (30) business days after completion of the

in-kind transfer transaction (except as otherwise noted),17 US

Trust sent by regular mail a written statement to each affected Plan

that included a confirmation of the transaction. Such confirmation

contained: (i) The identity of each security that was valued in

accordance with Rule 17a-7(b)(4), as described above; (ii) the price of

each such security for purposes of the transaction; and (iii) the

identity of each pricing service or market-maker consulted in

determining the value of such securities.

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

17 US Trust states that the written confirmations

regarding the identity and pricing of securities described under

Rule 17a-7(b)(4) that were involved in the in-kind transfers of CIF

assets which occurred on June 28 and July 31, 1996 were not made

within 30 days of the completion of the transactions due to clerical

errors made by certain US Trust personnel. US Trust represents that

upon discovery of this error, all of the confirmations were mailed

as soon as possible and were received by the Second Fiduciaries of

the appropriate Client Plans by October 15, 1996.

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Not later than ninety (90) days after completion of each in-kind

transfer of assets of the Plans or the CIFs in exchange for shares of

the Funds, US Trust mailed to the Plans a written confirmation of the

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

conversion (and the related per unit value or the aggregate dollar

value of the units transferred), and the number of shares in the Funds

that were held by each affected Plan following the conversion (and the

related per share net asset value or the aggregate dollar value of the

shares received).

In accordance with the conditions of Section I of this proposed

exemption, similar procedures will occur upon any future in-kind

exchanges between CIFs maintained by US Trust or Plans, and the Funds.

Representations of the Independent Fiduciary for the Bank Plans

Regarding the In-Kind Transfers

11. As stated above, US Trust retained ASA as the Second Fiduciary

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

transactions affected the Bank Plans. In such capacity, ASA represented

that it understood and would accept the duties, responsibilities and

liabilities in acting as a fiduciary under the Act for the Bank Plans.

In a written report dated May 30, 1996, ASA stated that it

considered the effect of the in-kind transfer transactions on the Bank

Plans and the implications of such transactions for Plans invested in

the CIFs. ASA noted that this investment opportunity was being offered

to the Client Plans on the same terms and conditions as was being

offered to the Bank Plans. Based on all available data, ASA concluded

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

the Bank Plans. ASA states that such terms were comparable to, and no

less favorable than, the terms that would have been reached among

unrelated third parties.

Therefore, ASA specifically authorized the in-kind transfers of the

CIF assets on May 31, 1996 as the Second Fiduciary for the Bank Plans.

In this regard, ASA represented in its written report dated May 30,

1996, that the in-kind transfer transactions were in the best interests

of the Bank Plans and their participants and beneficiaries for the

following reasons:

(a) the impact of the in-kind transfers on the Bank Plans would be

de minimis because the Funds would substantially replicate the CIFs in

terms of the investment policies and objectives;

(b) the Funds would probably continue to experience relative

performance similar in nature to the CIFs given the continuity of

investment objectives and policies, management oversight and portfolio

management personnel;

(c) the in-kind transfers would not adversely affect the cash

flows, liquidity or investment diversification of the Bank Plans; and

(d) the benefits to be derived by the Bank Plans and their

participants by investing in the Funds (e.g., larger investor based

permitted by the Funds, cost savings to participants over time through

economies of scale, more choices for participants exercising investment

control, and ability to obtain investment information through readily

available sources) would more than offset the impact of minimum

additional expenses that may be borne by the Bank Plans.

In forming an opinion as to the appropriateness of the in-kind

transfers, ASA conducted an overall review of the Bank Plans, including

the Plan documents. ASA stated that it examined the total investment

portfolios of the Bank Plans to ascertain whether the Plans were in

compliance with their investment objectives and policies. Further, ASA

stated that it examined the liquidity requirements of the Bank Plans

and reviewed the concentration of the Bank Plans' assets invested in

the CIFs as well as the portion of the CIFs comprised of the assets of

the Bank Plans. Finally, ASA stated that it reviewed the

diversification provided

[[Page 66328]]

by the investment portfolios of the Bank Plans. Based on its review and

analysis of the foregoing, ASA represented that the in-kind transfer

transactions would not adversely affect the total investment portfolios

of the Bank Plans, compliance by such Plans with their stated

investment objectives and policies, or the cash flow, liquidity or

diversification requirements of the Plans.

As the Second Fiduciary for the Bank Plans, ASA represented that

following the in-kind transfer transactions, it was provided by US

Trust with the confirmation statements described herein. In addition,

ASA stated that it supplemented its findings following review of the

post-transfer account information to confirm whether the in-kind

transfers had resulted in the Bank Plans' receipt of shares in the

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

on the conversion date (i.e. May 31, 1996). ASA further represented

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

interests of the Bank Plans in the event the confirmation statements

did not confirm the foregoing.

Other Opportunities Available for Plans To Invest in the Funds

12. Besides the in-kind transfer of assets from a CIF or a Plan to

a comparable Fund, in accordance with the conditions of this proposed

exemption, a Plan's assets may be invested in the Funds in three other

ways. First, a Plan may purchase shares in the Funds for cash directly

through US Trust. Second, US Trust may transfer a Plan's assets from

one Fund to another Fund. Third, US Trust may effect a daily automated

sweep of uninvested cash of a Plan into one or more Funds designated by

US Trust. However, all investments for Plans in the Funds must be made

pursuant to the Second Fiduciary's written authorization.

With respect to sweep services for the Client Plans where US Trust

has investment discretion for the Plan, US Trust does not charge

separately for the provision of sweep services for uninvested cash

balances. Instead, US Trust charges a single, Plan-level fee, which

covers both the sweep service and the management of assets in the sweep

vehicle (generally, a short-term investment fund). Such single fee is

determined as a percentage of the assets so invested. If US Trust does

not have investment discretion with respect to the Client Plan's assets

invested in the Funds, it may charge a separate fee for sweep

services.18

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\18\ The Department in a letter, dated August 1, 1986, to Robert

S. Plotkin, Assistant Director, Division of Banking Supervision and

Regulation, Board of Governors of the Federal Reserve System,

addressed the application of section 408(b)(2) of the Act to

arrangements involving ``sweep services.'' In that letter, the

Department set forth several examples to illustrate various

circumstances under which violations of section 406(b) of the Act

would arise with respect to such arrangements. Conversely, the

letter provided that, if a bank provides ``sweep'' services without

the receipt of additional compensation or other consideration (other

than reimbursement of direct expenses properly and actually incurred

in the performance of such services), then the provision of

``sweep'' services by the bank would not, in itself, constitute a

violation of section 406(b) of the Act. Moreover, including

``sweep'' services under a single fee arrangement for investment

management services which is calculated as a percentage of the

market value of the total assets under management would not, in

itself, constitute an act described in section 406(b)(1), because

the bank would not be exercising its fiduciary authority or control

to cause a plan to pay an additional fee.

In addition, the letter also discusses the applicability of the

statutory exemptions under section 408(b)(6) of the Act (fees for

``ancillary services'') and under section 408(b)(8) of the Act

(investments in collective trust funds maintained by such bank) to

such ``sweep'' service arrangements.

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Receipt of Fees by US Trust From the Funds

13. Under certain conditions, Prohibited Transaction Exemption

(PTE) 77-4, 42 FR 18732 (April 8, 1977) \19\ would permit US Trust to

receive fees from the Funds for any investments made by the Client

Plans under either of two circumstances: (i) where the Client Plan does

not pay any investment management, investment advisory, or similar fees

for the assets of such Plan invested in shares of a Fund for the entire

period of such investment; or (ii) where the Client Plan pays

investment management, investment advisory, or similar fees to US Trust

based on the total assets of such Plans from which a credit has been

subtracted representing such Plan's pro rata share of such investment

advisory fees paid to US Trust by the Fund. As such, with respect to

the Client Plans, there may be two levels of fees: (i) Those fees which

US Trust charges to the Client Plans for serving as trustee, investment

manager, or custodian for such Plans (the Plan-level Fees); and (ii)

those fees which US Trust charges to the Fund (the Fund-level Fees) for

serving as an investment adviser for the Fund as well as for being

custodian of the Fund or for providing other Secondary Services to the

Fund.

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\19\ PTE 77-4, in pertinent part, permits the purchase and sale

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

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

the investment adviser for the investment company, provided that the

conditions of the exemption are met.

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

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

company by an employee benefit plan covering only employees of such

investment company, employees of the investment adviser or principal

underwriter for such investment company, or employees of any

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

principal underwriter, provided certain conditions are met.

In this regard, the Department is expressing no opinion in this

proposed exemption regarding whether any of the transactions with

the Funds by US Trust involving Plans discussed herein would be

covered by PTE 77-4.

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In its capacity as Plan fiduciary, except for the Bank Plans, US

Trust charges each Client Plan a fee for its investment management/

trustee services based upon its standard fee schedules and the terms of

the specific agreement negotiated between each Plan and US

Trust.20 Generally, its standard fees are expressed as a varying

percentage of plan assets invested with US Trust.

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\20\ The applicant represents that all fees paid by the Client

Plans directly to US Trust for services performed by US Trust are

exempt from the prohibited transaction provisions of the Act by

reason of section 408(b)(2) of the Act and the regulations

thereunder (see 29 CFR 2550.408b-2). In this regard, the Department

is providing no opinion in this proposed exemption as to whether the

conditions required for exemptive relief under section 408(b)(2) of

the Act, and the regulations thereunder (see 29 CFR 2550. 408b-2),

would be met for fees received by US Trust for the provision of

services to the Client Plans.

In addition, the Department notes that to the extent there are

prohibited transactions under the Act as a result of services

provided by US Trust directly to the Client Plans which are not

covered by section 408(b)(2), no relief is being proposed herein for

such transactions.

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For their investment advisory services to the Institutional Funds,

UST Pacific and UST New York are entitled to receive certain advisory

fees from the Institutional Funds, as set out in the prospectuses,

currently ranging from approximately 0.12 percent to 0.60 percent of

the Fund's daily average assets under management.

For its services as investment adviser to the UST Funds, UST New

York is entitled to receive certain advisory fees from the UST Funds,

as set out in the prospectuses, currently ranging from approximately

0.25 percent to 1.0 percent of the Funds' daily average assets under

management, prior to certain voluntary fee waivers. In addition, UST

New York may receive from the UST Funds fees for certain Secondary

Services. No such fees are paid to UST New York pursuant to a 12b-1

plan (i.e. distribution expenses payable under Rule 12b-1 of the ICA).

The Funds accrue daily as an expense payable to US Trust a ratable

portion of US Trust's investment advisory fees and fees for Secondary

Services based upon the average daily net asset value of the Funds.

Such fees are paid by the Funds

[[Page 66329]]

to US Trust monthly in arrears approximately two weeks after the end of

the month.

US Trust states that the Client Plans for which it serves as a

fiduciary generally should not bear any increased cost burdens as a

result of investing in the Funds. In this regard, US Trust credits or

``rebates'' to each Client Plan, generally by the fifth business day of

each month (and in no event later than the date it is paid by the

Funds), its proportionate share of all Fund-level investment advisory

fees for the prior month (the Credit Program).21 Under the

conditions of this proposed exemption, all ``rebates'' of such fees

must be made by US Trust to the appropriate Client Plan within not more

than one business day after the receipt of such fees by US Trust (see

Section II(i) above). US Trust charges each Client Plan, in accordance

with its pre-established fee schedules, its full investment management

fee for all assets under management, including those assets invested in

the Funds. US Trust states that the net effect of the Credit Program

will be that no Client Plan will pay, for any period, a ``double''

investment advisory fee for any assets invested in the Funds. Thus, US

Trust believes that this procedure effectively operates as a credit

against the full Plan-level investment management fee in compliance

with the terms of Part II(c) of PTE 77-4. US Trust represents that for

each Client Plan, the combined total of all fees received by US Trust

for the provision of services to the Client Plan, and in connection

with the provision of services to any of the Funds in which the Plan

may invest, will not be in excess of ``reasonable compensation'' within

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

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\21\ US Trust represents that initially the credit will take the

form of a rebate of fees to the extent of the Funds' investment

advisory fees and fees for Secondary Services paid to US Trust. The

credit will also involve an ``out-of-pocket'' payment by US Trust to

the extent that it also credits each Plan with the Plan's

proportionate share of fees paid by the Funds to service providers

unaffiliated with US Trust. Thus, for a period of time, US Trust

intends to ``rebate'' all Fund-level fees to the affected Plans.

However, in the future, US Trust will retain a portion of the fees

paid to it by the Funds for Secondary Services and will reduce or

eliminate the additional credits for fees paid by the Funds to

unaffiliated service providers. In this regard, US Trust will

continue to ``rebate'' all investment advisory fees charged to the

Funds by US Trust, including any investment advisory fees paid by US

Trust to third party sub-advisors.

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In the case of the Bank Plans, from which US Trust receives no

Plan-level fees, US Trust does not rebate or otherwise credit back to

the Plans any portion of the fees it receives from the Funds for

investment advisory/management services or Secondary Services,

consistent with the terms of PTE 77-3.22 ASA concluded, as the

Second Fiduciary for the Bank Plans in connection with the in-kind

transfer of CIF assets that was made into the Funds in exchange for

shares of the Funds on May 31, 1996, that the fees to be paid by the

Bank Plans as investors in the Funds would be reasonable and within

industry standards for mutual fund servicing fees.

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\22\ As noted previously, the Department is providing no opinion

in this proposed exemption as to whether the fee arrangements

discussed herein for the Bank Plans meet the conditions of PTE 77-3.

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14. Audit Requirements. US Trust is responsible for establishing

and maintaining a system of internal accounting controls for the

crediting of the investment advisory or other fees to the Client Plans

under the Credit Program. In this regard, US Trust has retained the

services of Coopers & Lybrand of New York, New York (the Auditor), an

independent accounting firm, to audit annually the rebating of fees to

the Client Plans under this program. Such audits will provide

independent verification of the proper crediting of fees to the Client

Plans. Information regarding fee credits will be used in the

preparation of required financial disclosure reports of the Funds for

the benefit of the Client Plans.

By letter dated September 25, 1996, the Auditor has described the

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

Program. Specifically, in performing its audit, the Auditor will: (a)

Review and test compliance with the specific operational controls and

procedures established by US Trust for making expense rebates (i.e.

credits of fees under the Credit Program); (b) verify, on a test basis,

the monthly expense ratios by agreeing them to the respective Fund's

prospectus; (c) recalculate, on a test basis, the monthly average

balance invested in the Funds; (d) recalculate, on a test basis, the

amount of the rebate to be credited to each Client Plan; (e) recompute,

on a test basis, the amount of the rebate determined for selected

Client Plans and verify that the proper credit was made to the

particular Client Plan in a timely manner; and (f) verify, on a test

basis, the total amount of credits or ``rebates'' made to the

convenience account established for the Credit Program.

In the event that either the internal audit by US Trust or the

independent audit by the Auditor identifies an error made in the

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

With respect to any shortfall in credit fees to a Client Plan involving

cash credits, US Trust will make a cash payment to the Client Plan

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

rates offered by US Trust for the period involved. With respect to any

shortfall in credited fees involving a Client Plan where the Second

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

of a particular Fund, US Trust will make a cash payment to the Client

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

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

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

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

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

an appropriate deduction and reallocation of cash during the next

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

the Plan for the period involved.

15. Future Fee Changes. US Trust states that one of the

requirements of PTE 77-4 is that any change in any of the rates of fees

requires prior written approval by the Second Fiduciary of the Plans

participating in the Funds. US Trust notes that where many Plans

participate in a Fund, the addition of a service or any increase in

fees cannot be implemented until written approval of such change is

obtained from every Second Fiduciary. US Trust proposes to follow an

alternative ``negative consent'' procedure which it believes provides

the basic safeguards for the Plans and is more efficient, cost

effective, and administratively feasible than that required by PTE 77-

4.

Specifically, in the event of an increase in the rate of any

investment management fees, investment advisory fees, or similar fees,

the addition of a Secondary Service for which a fee is charged, or an

increase in the fees for Secondary Services paid by any Fund to US

Trust over an existing rate that had been authorized by the Second

Fiduciary, US Trust will provide, at least thirty (30) days in advance

of the implementation of such additional service or fee increase, to

the Client Plans invested in such Fund a written notice of such

additional service or fee increase. Such notice may take the form of a

proxy statement, letter, or similar communication that is separate from

the Fund prospectus and will explain the nature and amount of the

additional service or the increase in fees. In this regard, such

increase in fees for Secondary Services can result either from an

increase in the rate of such fee or from the decrease in the number or

kind of services performed by US Trust

[[Page 66330]]

for such fee over that which had been authorized by the Second

Fiduciary of a Client Plan. US Trust believes that notice provided in

this way will give the Second Fiduciary of each Plan adequate

opportunity to decide whether to continue the authorization of a Plan's

investment in any of the Funds in light of the increase in investment

management fees, investment advisory fees, or similar fees, the

additional Secondary Service for which a fee is charged, or the

increase in fees for any Secondary Services. In addition, such fee

increase will be disclosed to the Plan in an amendment of or supplement

to the Fund's prospectus, as well as in the Fund's Statement of

Additional Information, to the extent necessary to comply with

disclosure requirements of the U.S. Securities and Exchange Commission

(SEC).

The written notice of an additional secondary service for which a

fee is charged or a fee increase will be accompanied by a Termination

Form, as defined in Section III(i) of this proposed exemption, and by

instructions for the use of such form which will expressly provide an

election for the Second Fiduciaries of Plans to terminate at will any

prior authorizations without penalty to the Plans. Each Client Plan

will be supplied with a Termination Form annually during the first

quarter of each calendar year, beginning with the first quarter of the

calendar year that begins after the date the grant of this proposed

exemption is published in the Federal Register and continuing for each

calendar year thereafter, regardless of whether there have been any

changes in the fees payable to US Trust or changes in other matters in

connection with services rendered to the Funds. However, if the

Termination Form has been provided to the Plan in the event of an

addition of a Secondary Service for which a fee is charged, or an

increase in any existing fees for Secondary Services paid by the Fund

to US Trust, then such Termination Form need not be provided again to

the Plan until at least six months have elapsed, unless such

Termination Form is required to be sent sooner as a result of another

increase in any such fees or addition of such services.

The Termination Form will contain instructions regarding its use

which will state expressly that the authorization is terminable at will

by a Second Fiduciary, without penalty to the Plan, and that failure to

return the form will be deemed to be an approval of the additional

Secondary Service or the increase in the rate of any fees and will

result in the continuation of all authorizations previously given by

such Second Fiduciary. Termination by any Plan of authorization to

invest in the Funds will be effected by US Trust redeeming the shares

of the Fund held by the affected Plan by the close of business on the

day following the date of receipt by US Trust of the Termination Form

or any other written notice of termination. If, due to circumstances

beyond the control of US Trust, the redemption cannot be executed

within one business day, US Trust will have one additional business day

to complete such redemption.

16. No sales commissions are paid by the Client Plans in connection

with purchases or sales of shares of the Funds and no redemption fees

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

Funds. In addition, neither US Trust nor any affiliate (including

officers, directors and other persons, as defined in Section III(b)

above) purchases from or sells to the Client Plans any shares of the

Funds. US Trust does not receive any 12b-1 fees, payable pursuant Rule

12b-1 under the ICA, for transactions with the Funds involving the

Plans. In all cases, the price paid or received by a Plan for any Fund

shares is the net asset value per share, as defined in Section III(e)

above, at the time of the transaction and is the same price which would

be paid or received for the shares by any other investor at that time.

US Trust states that all dealings between the Plans and any of the

Funds are on a basis no less favorable to such Plans than dealings

between the Funds and other shareholders holding the same class of

shares as the Plans.

17. On an annual basis, US Trust will provide the Second Fiduciary

of a Plan with a copy of the current prospectus for the Funds and, upon

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

Information which contains a description of all fees paid by the Funds

to US Trust. In addition, US Trust will provide the Second Fiduciary

with a copy of a financial disclosure report prepared by US Trust which

contains information about the portfolios of the Funds and includes the

Auditor's findings within 60 days of the preparation of the report.

Further, US Trust will respond to oral or written responses to

inquiries of the Second Fiduciary as they may arise.

In some cases, a US Trust affiliate may execute securities

transactions as a broker for the investment portfolios of certain

Funds, to the extent permitted by the ICA and the applicable rules of

the SEC. To the extent that US Trust does not currently execute

securities brokerage transactions for any Fund for which a fee is paid

to US Trust, but proposes to do so in the future, US Trust will at

least thirty (30) days in advance of the implementation of such

additional service provide a written notice to the Plan which explains

the nature of such additional service and the amount of the brokerage

fees involved. Further for any Fund that US Trust provides such

brokerages services, US Trust will provide at least annually to any

Plan that invests in such Funds a written disclosure indicating: (a)

The total, expressed in dollars, brokerage commissions of each Fund's

investment portfolio that are paid to US Trust by such Fund; (b) the

total, expressed in dollars, of brokerage commissions of each Fund's

investment portfolio that are paid by such Fund to brokerage firms

unrelated to US Trust; (c) the average brokerage commissions per share,

expressed as cents per share, paid to US Trust by each portfolio of a

Fund; and (d) the average brokerage commissions per share, expressed as

cents per share, paid by each portfolio of a Fund to brokerage firms

unrelated to US Trust.

18. In summary, US Trust represents that the transactions described

herein satisfy the statutory criteria for an exemption under section

408(a) of the Act because:

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

more effective investment vehicle than the CIFs maintained by US Trust

without any ``double'' investment advisory or similar fees paid to US

Trust.

(b) With respect to the transfer of a Plan's CIF assets into a Fund

in exchange for Fund shares, a Second Fiduciary authorizes in writing,

such transfer prior to the transaction only after full written

disclosure of information concerning the Fund.

(c) Each Bank Plan or Client Plan receives shares of the Funds, in

connection with the in-kind transfer of assets of a CIF or a Plan,

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

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

transfer as determined in a single valuation performed in the same

manner and at the close of the business day, using independent sources

in accordance with procedures established by the Funds which comply

with Rule 17a-7 of the ICA, as amended, and the procedures established

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

(d) For all in-kind transfers of CIF or Plan assets to a Fund, US

Trust sends by regular mail to each affected Plan a written

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

transaction (except for certain

[[Page 66331]]

transactions described herein where such confirmations were sent at a

later date), containing the following information: (1) The identity of

each security that was valued for purposes of the transaction in

accordance with Rule 17a-7(b)(4) of the ICA; (2) the price of each such

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

pricing service or market maker consulted in determining the value of

such securities.

(e) For all in-kind transfers of CIF assets to a Fund, US Trust

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

transfer, a written confirmation that contains the following

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

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

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

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

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

(f) The price paid or received by a Bank Plan or a Client Plan for

shares of the Funds is the net asset value per share at the time of the

transaction and is the same price for the shares which was or would

have been paid or received by any other investor at that time.

(g) No sales commissions or redemption fees are paid by a Plan in

connection with the purchase of shares of the Funds.

(h) US Trust does not receive any 12b-1 fees in connection with the

transactions.

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

in a Funds and fees paid to US Trust (including increases in the

contractual rates of fees for Secondary Services that are retained by

US Trust) are terminable at will by the Client Plan, without penalty to

the Client Plan, and are effected within one business day following

receipt by US Trust, from the Second Fiduciary, of the Termination Form

or any other written notice of termination, unless circumstances beyond

the control of US Trust delay execution for no more than one additional

business day.

(j) The Second Fiduciary receives written notice accompanied by the

Termination Form with instructions on the use of the form at least 30

days in advance of the implementation of any increase in the rate of

any fees for Secondary Services that US Trust provides to the Funds.

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

are on a basis which is at least as favorable to the Plans as such

dealings are with other shareholders of the Funds.

Notice to Interested Persons

Notice of the proposed exemption will be given to interested

persons who had investments in the terminating CIFs and from whom

approval was sought for the transfer of Plan assets to the Funds. In

this regard, interested persons will include ASA, the Second Fiduciary

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

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

Fiduciary by first class mail and to active participants in the Bank

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

interested persons within 15 days following the publication of this

notice of pendency of the proposed exemption in the Federal Register.

The notice will include a copy of the notice of proposed exemption, as

published herein, and give interested persons the right to comment on

and/or to request a hearing on the proposed exemption. Comments and

requests for a public hearing are due within 45 days of the publication

of this notice of pendency 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.)

Givens 401(k) Savings and Retirement Plan (the Plan) Located in

Chesapeake, VA

[Application No. D-10364]

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 C.F.R. Part

2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the

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

(b)(2) of the Act and the sanctions resulting from the application of

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

(E) of the Code, shall not apply to the proposed purchase from the Plan

of the Plan's interest in a group annuity contract (the GAC Interest)

by Givens, Incorporated, a sponsor of the Plan; provided the following

conditions are satisfied:

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

(b) The Plan suffers no loss nor incurs any expense in connection

with the sale; and

(c) The Plan receives a purchase price of no less than the fair

market value of the GAC Interest as of the date of the sale.

Summary of Facts and Representations

1. The Plan is a 401(k) defined contribution plan which provides

for individual participant accounts (the Accounts) and participant-

directed investment of the Accounts. The Plan is maintained by Givens

Trucking Company, Incorporated (GTC), a Virginia corporation, on behalf

of eligible employees of a controlled group of brother-sister

corporations which includes Givens, Incorporated (Givens), a Virginia

corporation engaged in the business of public warehousing in

Chesapeake, Virginia. GTC, Givens, and other employers in the

controlled group (the Sponsors) initially adopted the Plan effective

September 1, 1989 as a prototype 401(k) plan (the Predecessor Plan)

offered by the J. & W. Seligman Trust Company (Seligman). Seligman

served as trustee of the Predecessor Plan. Effective March 31, 1995,

the sponsors replaced Seligman as trustee and formed the Plan by

adopting a new plan and trust document which amended and entirely

restated the Predecessor Plan. At that time, Commerce Bank, located in

Virginia Beach, Virginia, was appointed as the new trustee to replace

Seligman. The Plan's current trustee, Branch Banking and Trust Company

of Virginia (the Trustee), is the successor to Commerce Bank as the

result of the Trustee's acquisition of Commerce Bank in 1995. As of

June 30, 1996, the Plan had 232 participants and total assets of

$2,154,700.

2. Among the investment options offered for Account investments

under Seligman's trusteeship was a fixed-income fund which invested

participant-directed Account funds in a group annuity contract, Mutual

Benefit Deferred Variable Annuity Contract No. 0888000033-S (the GAC).

The GAC, which was issued to Seligman on October 19, 1989 by Mutual

Benefit Life Insurance Company of New Jersey (Mutual Benefit), is a

pooled investment vehicle maintained by Seligman for various employee

benefit plans, each of which acquired pro-rata interests in the GAC in

proportion to amounts invested in the GAC. The terms of the GAC

provided that prior to the beginning of each calendar year, Mutual

Benefit would establish a guaranteed rate of interest (the Contract

Rates) payable on funds deposited pursuant to the GAC during that year.

3. On July 16, 1991, Mutual Benefit was placed into rehabilitation

proceedings by the New Jersey Commissioner of Insurance (the

[[Page 66332]]

Commissioner).23 As a result, the assets of the Plan invested in

the GAC were frozen, with the exception of certain hardship

withdrawals. The accumulated book value of the Plan's interest in the

GAC as of July 16, 1991 was $121,030.18, consisting of the Plan's

principal deposits plus interest at the Contract Rates less

withdrawals. In 1994, the terms of the GAC were redefined under a

rehabilitation plan (the Rehab Plan) approved by the Commissioner and

the court overseeing the rehabilitation proceedings, the Superior Court

of New Jersey--Mercer County. As a result of the Rehab Plan, all

liabilities and obligations of Mutual Benefit with respect to the GAC

have been assumed by the MBL Life Assurance Corporation (MBLLAC), a New

Jersey life insurance company located in Newark, New Jersey. Under the

Rehab Plan, contract holders such as Seligman were offered the ability

to ``opt in'' to the Rehab Plan by accepting restructured contracts or

to ``opt out'' by surrendering the contract for a reduced amount of

cash (generally, approximately 55 percent of the contract face value).

Seligman, as Plan trustee, elected to ``opt in'' to the Rehab Plan and

was issued a restructured contract designated as Mutual Benefit Life

Deferred Variable Annuity Contract No. IVA888000033 (the New GAC) in

replacement of the GAC, which was cancelled. Under the terms of the New

GAC, interest is earned on deposits not at the GAC's original Contract

Rates but at rates determined annually (the Rehab Rates) to reflect

MBLLAC's actual investment performance.24 The Rehab Rate for 1996

was established at 5.10 percent. The New GAC provides that Plan

participants are subject to a moratorium charge (the Penalty) for

withdrawal of any Account balances from the New GAC prior to December

31, 1999, for any reason other than death or financial hardship as

determined by MBLLAC. The Penalty is 21.7 percent of the amount

withdrawn through 1996, 16.3 percent through 1997, 10.9 percent through

1998 and 5.4 percent through 1999. The accumulated book value of the

Plan's interest in the New GAC was $129,178 as of June 30, 1996,

consisting of the accumulated book value of the Plan's interest in the

GAC as of July 16, 1991 plus interest at the Rehab Rates less

withdrawals.

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\23\ The Department notes that the decision to acquire and hold

interests in the GAC are governed by the fiduciary responsibility

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

proposed exemption, the Department is not proposing relief for any

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

acquisition and holding of interests in the GAC.

\24\ For the period from July 16, 1991 through April 30, 1994,

the Plan earned interest at the Rehab Rates in the amount of

$20,395.82, while Plan withdrawals for this same period totalled

$10,040.52 and the Plan was assessed a contract expense charge of

$60.00. From May 1, 1994 through June 30, 1996, the Plan earned

interest at the Rehab Rates in the amount of $13,771.21 and Plan

withdrawals for this same period totalled $15,918.69. For 1996, the

Rehab Rate has been established at 5.10 percent.

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4. GTC and Givens (the Applicants) represent that allowing the Plan

assets to remain invested in the New GAC exposes Plan participants and

beneficiaries to some degree of risk, precludes transfers of Account

balances invested in the New GAC to other investment options available

in the Plan, precludes participant loans with respect to Account

balances invested in the New GAC, and prevents lump-sum distributions

to retiring participants who do not qualify for hardship distributions.

In order to enable restoration of full Plan operations with respect to

the amounts invested in the New GAC, and to protect the Plan

participants and beneficiaries from any further risk of investment loss

associated with the New GAC, the Applicants propose that Givens

purchase the Plan's entire interest in the New GAC (the GAC Interest)

from the Plan, and is requesting an exemption to enable such

transaction under the terms and conditions described herein.

5. Givens will purchase the GAC Interest from the Plan for a

purchase price equal to the Plan's pro-rata share of the accumulated

book value of the New GAC as of the purchase date under the

restructured terms, as determined by MBLLAC. As of June 30, 1996, the

value of the GAC Interest under the GAC's restructured terms, $129,178,

constituted approximately 6 percent of all Plan assets. The purchase

price will reflect interest earnings at the Rehab Rates through the

date of the sale transaction. The Plan will incur no expenses in

connection with the transaction. The Applicants state that the

transaction will enable the Plan participants to gain access to the

Account balances invested in the New GAC, for participant loans,

distributions and non-hardship withdrawals, without incurring the

Penalty for withdrawal, which they estimate would be at least $28,031.

The Applicants represent that in the proposed transaction the Plan will

experience no loss, since the transaction will enable the Accounts to

realize the same amount of cash they would realize from a withdrawal of

Account balances from the New GAC, with Rehab Rate interest through the

date of withdrawal, if withdrawals without the Penalty were permitted

under the terms of the Rehab Plan.

6. In summary, the Applicants represent that the proposed

transaction satisfies the criteria of section 408(a) of the Act for the

following reasons: (a) The sale will be a one-time transaction for

cash; (b) The Plan will suffer no loss and will incur no expense with

respect to the transaction; (c) The transaction will protect the Plan

from any risk associated with continued holding of the New GAC, as well

as enabling participants to exercise all of their rights under the Plan

with respect to distributions, loans, transfers and withdrawals; and

(d) the purchase price will be the value of the GAC Interest as of the

sale date under the restructured terms of the New GAC, as determined by

MBLLAC.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

General Information

The attention of interested persons is directed to the following:

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

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

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

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

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

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

accordance with section 404(a)(1)(b) of the act; nor does it affect the

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of

[[Page 66333]]

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 accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 12th day of December, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 96-31993 Filed 12-16-96; 8:45 am]

BILLING CODE 4510-29-P