Proposed Exemptions; RREEF USA Fund-I (The Trust)

DEPARTMENT OF LABOR

[Application No. D-09410, et al.]

Proposed Exemptions; RREEF USA Fund-I (The Trust)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

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.

RREEF USA Fund-I (The Trust) Located in San Francisco, California

[Application No. D-09410]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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

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

the Code, shall not apply to the proposed receipt by RREEF America

L.L.C., the investment manager of the Trust (the Manager), of a certain

performance compensation fee (the Performance Fee) in connection with

the liquidation of the Trust, provided that the following conditions

are satisfied:

[[Page 11879]]

(a) The terms and the payment of the Performance Fee shall be

approved in writing, through approval of an amendment to the Group

Trust Agreement (the Group Trust Agreement), by independent fiduciaries

of the plans that participate in the Trust (the Participating Plans);

(b) The terms of the Performance Fee shall be at least as favorable

to the Participating Plans as those obtainable in an arm's-length

transaction between unrelated parties;

(c) The total fees paid to the Manager by the Participating Plans

that have invested in the Trust, shall constitute no more than

reasonable compensation;

(d) The Performance Fee will be payable only when all of the assets

of the Trust have been completely liquidated;

(e) The Performance Fee received by the Manager will be based on

distributions, adjusted for inflation and present value, and will be

calculated using two real hurdle rates of return (the Hurdle Rates).

The Performance Fee will equal 10% after the Participating Plans have

earned a 5% real return on the initial value of their investment and

20% after the Participating Plans have earned an 8% real return on the

initial value of their investment;

(f) In the event of the Manager's resignation or termination as the

investment manager to the Trust, the Investment Management Agreement

would also terminate 1 and the Manager will not receive a

Performance Fee.

\1\ Unless termination was in bad faith wherein the Manager may

seek legal recourse.

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

(g) The Manager or its affiliates shall maintain, for a period of

six years, the records necessary to enable the persons described in

paragraph (2) of this Section (g) to determine whether the conditions

of this exemption have been met, except that:

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

occurred if, due to circumstances beyond the control of the Manager or

its affiliates, the records are lost or destroyed prior to the end of

the six year period; and (b) no party in interest, other than the

Manager, shall be subject to the civil penalty that may be assessed

under section 502(i) of the Act or the taxes imposed by section 4975

(a) and (b) of the Code if the records are not maintained or are not

available for the examinations required from (2) below.

(2)(a) Except as provided in paragraph (3) and notwithstanding any

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

referred to in paragraph (1) of this Part (g) shall be 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 a Participating Plan or any duly authorized

employee or representative of such fiduciary;

(iii) Any contributing employer to a Participating Plan or any duly

authorized employee or representative of such employer; and

(iv) Any participant or beneficiary of a Participating Plan or any

duly authorized employee or representative of such participant or

beneficiary.

(3) None of the persons described above in paragraph (2)(a)(ii)-

(iv) shall be authorized to examine the trade secrets of the Manager

and its affiliates or any commercial or financial information which is

privileged or confidential.

Effective Date: If granted this exemption will be effective as of

January 1, 1993.

Summary of Facts and Representations

1. The assets of the Trust consist of direct or indirect 2

ownership interests in commercial or industrial real property (the

Properties). Currently, there are six Properties held by the Trust

which are located in California, Pennsylvania, New Jersey, New York and

Illinois. The Trust is a closed-end real estate tax-exempt group trust

organized in 1979 in the State of California pursuant to the IRS

Revenue Ruling 81-100. The Trust was organized to allow the

Participating Plans to pool their assets to purchase income-producing

real property for investment. The Trust was created and is operated in

accordance with the terms of the Group Trust Agreement dated September

7, 1979, with certain amendments thereto (the Amendments). Initially,

the Trust provided for a ten year holding period of the Properties with

additional extensions of two years if consented to by more than sixty

percent of outstanding beneficiaries. The end of the initial holding

period of the Trust was 12/31/92. As of December 31, 1992, the net

asset value of the Trust was $325,040 million. It is represented that

this figure was based on the most recent independent annual appraisals

obtained prior to December 31, 1992, and it is also the ``base'' amount

against which the Manager's asset management fee (the Base Fee) is

determined, as discussed further in paragraph 5 below.

\2\ Several of the real properties of the Trust are held

indirectly through wholly owned Code section 501(c)(2) or 501(c)(25)

corporations.

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

2. The Participating Plans are seven large ERISA plans (including

one or more master or group trusts holding assets of multiple ERISA

plans) and one governmental plan (as defined in section 3(32) of

ERISA), each with assets in excess of $1 billion.

3. RREEF America L.L.C. is the investment manager to the Trust (the

Manager) and the trustees of the Trust are principals and officers of

the Manager (the Trustees), (the Manager and the Trustees,

collectively; the Fiduciaries). The Trustees and the Manager have

entered into an Investment Management Agreement, also dated September

7, 1979. Pursuant to that Investment Management Agreement, the Manager

has the authority to acquire and dispose of any and all properties on

behalf of the Trust; perform day-to-day investment and administrative

operations of the Trust; and prepare the financial and other reports as

provided in the Group Trust Agreement. The Investment Management

Agreement is terminable by the Trustees or by a vote or written consent

of the Participating Plans holding sixty percent of the outstanding

units in the Trust at any time upon not less than sixty days written

notice.

4. Pursuant to the Group Trust Agreement, the Trust was scheduled

to terminate on December 31, 1992, whereupon an orderly liquidation of

the Trust was to begin as soon as practicable. On September 11, 1991,

the Participating Plans' representatives and the Fiduciaries held a

conference to discuss the pending expiration of the Trust and

liquidation of its assets. Due to a downturn in the real estate market,

the Participating Plans' representatives proposed to the Fiduciaries

that the Trust's liquidation period (the Liquidation Period) be

extended for a period of up to six years to avoid ``fire sale'' prices.

This extension of the Liquidation Period also involved restructuring of

the fees payable to the Manager so as to provide further incentives to

maximize sales prices while liquidating the Trust's real estate assets

as soon as practicable. Accordingly, as of December 31, 1992, subject

to the unanimous consent of the Participating Plans, the Trustees

adopted Amendment #7 to the Group Trust Agreement in order to: (1)

Extend the period for liquidating the Trust's real property assets up

to six years from its scheduled expiration date; (2) reduce the annual

Base Fee payable to the Manager during the Liquidation Period as

discussed more fully below; (3) add a performance component (the

Performance Fee) to the Base Fee.

5. Until December 31, 1992, the annual investment management fee

(the Base Fee) under the Group Trust

[[Page 11880]]

Agreement remained at 1% of the net asset value of the Trust as of the

preceding December 31 (based on annual independent appraisals), and was

payable 1/12th monthly in advance.

However, effective January 1, 1993, pursuant to the unanimous

consent of the Participating Plans, and conditioned upon the grant of

this proposed exemption, the Base Fee was reduced from 1% to .45% of

``the adjusted December 31, 1992, net asset value of the Trust'', also

payable 1/12th monthly in advance. The ``adjusted December 31, 1992 net

asset value of the Trust'' is the net asset value determined pursuant

to the most recent independent appraisals of the Trust's properties at

or before December 31, 1992. The net asset value is the base amount on

which the Base Fee is determined, and it can be reduced (not increased)

at the time the Base Fee is calculated to reflect any subsequent

material changes in the value of the Trust's properties as evidenced by

the Manager's subsequent quarterly internal appraisals. The net asset

value and any subsequent reductions to it, if required by the Manager's

internal appraisals, will be used by the Manager solely for the

determination of the Base Fee. With respect to the Liquidation Period,

the Participating Plans determined that continuing to obtain annual

appraisals by independent qualified appraisers was too costly and

inconsistent with their goal of maximizing their returns. It is

represented, however, that the Manager will obtain independent

appraisals every three years, and will compare them to the Manager's

quarterly internal appraisals.

6. The Performance Fee was proposed by the Participating Plans as

an incentive for the Manager to liquidate the assets of the Trust as

quickly as possible while achieving the best possible sales prices for

the Trust's assets. However, in the event this proposed exemption is

not granted, the Base Fee will be calculated on the basis of .60% of

the adjusted December 31, 1992 net asset value of the Trust; this

resulting increase in the Base Fee will be payable retroactive from

January 1, 1993 (without interest); and no Performance Fee will be

paid.

7. For the purpose of the Performance Fee, the initial value of the

Trust's assets is based on the greater of the Trust's value on December

31, 1991 or December 31, 1992. The Performance Fee will reflect all

gains and losses of the Trust with respect to the Properties 3 and

will be calculated as a cash flow fee with two real (inflation-

adjusted) hurdle rates of 5% and 8% (the Hurdle Rates) of the initial

value of the Trust's assets. It is represented that the payment of the

Performance Fee to the Manager is dependent upon distribution to the

Participating Plans' of such initial value plus interest at the real

Hurdle Rates.

The Performance Fee is calculated with respect to the cash flow.

The applicant represents that prior to the Trust's liquidation, cash

flow is all cash actually distributed by the Trust to the Participating

Plans, either from operations or capital events. The major sources of

cash are rents, interest or dividends on invested reserves, and

proceeds of sale, net of all expenses. Upon the liquidation of the

Trust, cash flow means all cash available for distribution to the

Participating Plans after payment of (or reservation for) all remaining

liabilities of the Trust, but before the payment of the Performance

Fee.

8. The Performance Fee is payable to the Manager in cash as of the

date the last real property asset in the Trust is liquidated and the

Trust is fully terminated. The calculation of the Performance Fee is

accomplished by converting the annual distributions to the

Participating Plans into 1993 dollars (January 1, 1993 is the effective

date of the addition of the Performance Fee component to the fees paid

by the Trust to the Manager). The annual distributions include, among

other things, proceeds from capital events and rents. First, the annual

distributions are discounted for inflation using the CPI index. Second,

the inflation adjusted annual distributions are discounted to the

present value using appropriate discount rates of 5% or 8%, which are

identical to the Hurdle Rates to arrive at the discounted distributions

(the Discounted Distributions). The amounts by which the Discounted

Distributions exceed the initial value of the Trust as of January 1,

1993 are then calculated (the Excess Distributions).

For purposes of the Performance Fee calculation, these Excess

Distributions are converted into the current value (i.e., value during

the year when the Manager is paid the Performance Fee). This conversion

is calculated as follows. The Excess Distributions are divided first by

the inflation CPI index for the year when the Performance Fee is paid,

and second, they are divided by the appropriate 5% or 8% discount

rates. The result is current excess distributions (Current Excess

Distributions).

The Performance Fee paid to the Manager is ten percent (10%) of the

Current Excess Distributions when the Participating Plans earn a 5%

real Hurdle Rate on the initial value of their investment in the Trust

and until the Participating Plans earn an 8% real Hurdle Rate return on

the initial value of their investment in the Trust. When the

Participating Plans earn an 8% real Hurdle Rate return on the initial

value of their investment in the Trust, the Performance Fee paid to the

Manager is twenty percent (20%) of the Current Excess Distributions in

the 8% real Hurdle Rate context after they have been reduced by 10%

Performance Fee amount.

9. In this regard, the applicant submitted a numerical example of

how the Performance Fee will work under certain assumptions if the

inflation rate is 4% annually. Under these assumptions the Trust holds

a single real property with an initial value of $100,000 as of December

31, 1992, and this property generates distributable (before fees) cash

flow of $10,000 a year for three years. At the end of the third year

the property is sold for $110,000.

At a 5% real Hurdle Rate, the Discounted Distributions are as

follows:

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

Year 1 Year 2 Year 3 Total

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

Nominal $........................ $10,000+ $10,000+ $120,000= $140,000

CPI.............................. *.9615= *.9246= *.8890= ...........

Discount......................... $9,615 $9,246 $106,680 ...........

5% Discount...................... *.9524 *.9070 *.8638 ...........

Adjusted $....................... $9,157+ $8,386+ $92,150= $109,693

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

[[Page 11881]]

\3\ By definition, all gains and losses with respect to the

Properties will be realized prior to calculation of the Performance

Fee, i.e., there will be no unrealized gains or losses.

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

The present value of the Excess Distributions, at a 5% real Hurdle

Rate, is $109,693-$100,000=$9,693. Converting the Excess Distributions

to current value, the excess is $12,622. This is calculated as follows:

9,693/.8890=10,903 then 10,903/.8638=$12,622 (the Current Excess

Distributions).

At an 8% real Hurdle Rate, the Discounted Distributions are as

follows:

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

Year 1 Year 2 Year 3 Total

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

Nominal $........................ $10,000+ $10,000+ $120,000= $140,000

CPI.............................. *.9615= *.9246= *.8890= ...........

Discount......................... $9,615 $9,246 $106,680 ...........

8% Discount...................... *.9259 *.8573 *.7938 ...........

Adjusted $....................... $8,903+ $7,927+ $84,683= $101,513

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

The present value of the Excess Distributions at an 8% real Hurdle

Rate, is $101,513-$100,00=$1,513. Converting the Excess Distributions

to current value, the excess is $2,144. This is calculated as follows:

1,513/.8890=1701.9 then 1701.9/.7938=$2,144 (Current Excess

Distributions).

For Current Excess Distributions above the 5% real Hurdle Rate and

until the 8% Hurdle Rate, the Performance Fee is 10%:

$12,622-$2,144=$10,478 * 10%=$1,048

This fee payment reduces the remaining amount available for

distribution. Accordingly, after subtracting the 10% fee, the remaining

Current Excess Distributions are subject to a 20% Performance Fee:

$2,144-$1,048=$1,096 * 20%=$219

As such, in this example the total Performance Fee paid is $1,048

+$219=$1,267.

The applicant represents that the cash flow will not be reinvested

and the Performance Fee would not be determined and paid until all of

the Trust's assets have been liquidated and the Trust is terminated.

10. In the event that the Manager is terminated 4 or resigns

with respect to the Trust, the Manager will not receive a Performance

Fee, and the Investment Management Agreement, including all obligations

of the Trustees to continue to compensate the Manager thereunder, would

also terminate. If, however, the Manager is terminated in bad faith,

the Manager may seek legal recourse. Also, whether a replacement

investment manager would receive a performance fee is dependent solely

upon whether a performance fee was negotiated as part of the investment

management agreement of the replacement manager.

\4\ The Manager can be terminated by the Trustees, or by a vote

or written consent of the Participating Plans holding sixty percent

(60%) of the outstanding units in the Trust at any time upon not

less than sixty days written notice.

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

11. The applicant represents that the interests of the

Participating Plans are fully aligned by the Performance Fee because

the Performance Fee is calculated as a ``share'' in all distributions

after the Plans have received the initial value of their investment

plus earnings at the designated real Hurdle Rates. Furthermore, the

Performance Fee will reflect all gains and losses of the Trust with

respect to the Properties and will be payable only at a pre-established

point, i.e., the liquidation of all of the Trust's Properties. It is

also represented that the Manager cannot use its discretion to

accelerate sales to benefit itself without equally benefitting the

Participating Plans, and the Manager cannot use its discretion over the

timing of sales to the detriment of the Participating Plans without

causing itself a similar detriment. If the Trust distributes a real

return of at least 5%, the Manager would receive 10% of all

distributions in excess of a 5% real return until the Participating

Plans have received a real return of at least 8%. If the Trust

distributes a real return of at least 8%, the Manager would receive 20%

of all distributions in excess of an 8% real return. It is represented

that the Performance Fee component will allow the Manager to

potentially offset some or all of the reduction in the Base Fee and to

provide other incentives to maximize the value and dispose of the

Properties. If the Trust is completely liquidated earlier than the six

year period, the Performance Fee will become payable at that time. The

applicant also represents that making the payment of the Performance

Fee contingent upon the complete liquidation of the Trust would prevent

the Fiduciaries from causing the Trust to acquire assets with a view

toward increasing the Performance Fee (e.g., by increasing risk).

12. In summary, the applicant represents that the transaction

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

section 4975(c)(2) of the Code because:

(a) The terms and the payment of the Performance Fee shall be

approved in writing, through an amendment to the Group Trust Agreement,

by independent fiduciaries of the Participating Plans;

(b) The terms of the Performance Fee shall be at least as favorable

to the Participating Plans as those obtainable in an arm's-length

transaction between unrelated parties;

(c) The total fees paid to the Manager by the Participating Plans

that have invested in the Trust, shall constitute no more than

reasonable compensation;

(d) The Performance Fee will be payable only when all of the assets

of the Trust have been completely liquidated;

(e) The Performance Fee received by the Manager will be based on

distributions, adjusted for inflation and present value, and will be

calculated using two real Hurdle Rates of return. The Performance Fee

will equal 10% after the Participating Plans have earned a 5% real

return on the initial value of their investment and 20% after the

Participating Plans have earned an 8% real return on the initial value

of their investment;

(f) In the event of the Manager's resignation or termination as the

investment manager to the Trust, the Investment Management Agreement

would also terminate and the Manager will not receive a Performance

Fee. However, if the Manager is terminated in bad faith, the Manager

may seek legal recourse;

(g) The Performance Fee is a one-time payment to the Manager upon

complete liquidation of the Trust within six years and upon final

distribution of its assets; and

(h) The Participating Plans have proposed the Performance Fee as

being in their interest because it would encourage the goal of the

Participating

[[Page 11882]]

Plans to liquidate the Properties as quickly as practicable while

maximizing their sales prices.

Notice to Interested Persons

Those persons who may be interested in the pendency of this

exemption include the fiduciaries who are responsible for directing the

investment of the Participating Plans' assets in the Trust. The

applicant represents that it proposes to notify the interested persons

within ten (10) days of the publication of the notice of the proposed

exemption in the Federal Register. Such notice will contain a copy of

the notice of the proposed exemption published in the Federal Register

and a statement advising interested persons of their right to comment

and to request a hearing on the proposed exemption. Accordingly,

comments and hearing requests on the proposed exemption are due forty

(40) days after the date of publication of this proposed exemption in

the Federal Register.

For Further Information Contact: Ekaterina A. Uzlyan, U.S.

Department of Labor, telephone (202) 219-8883. (This is not a toll-free

number.)

PaineWebber Incorporated (PaineWebber) Located in New York, NY

[Application No. D-09818]

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting an exemption under

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

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

2570, Subpart B (55 FR 32836, August 10, 1990).5

\5\ For purposes of this proposed exemption, reference to

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

also to the corresponding provisions of the Code.

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

Section I. Covered Transactions

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

the Act and the sanctions resulting from the application of section

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

the Code, shall not apply, effective August 18, 1995, to the purchase

or redemption of shares by an employee benefit plan, an individual

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

individual (the Keogh Plan) (collectively referred to herein as the

Plans) in the PaineWebber Managed Accounts Services Portfolio Trust

(the Trust) established in connection with such Plans' participation in

the PaineWebber PACE Program (the PACE Program).

In addition, the restrictions of section 406(b) of the Act and the

sanctions resulting from the application of section 4975 of the Code,

by reason of section 4975(c)(1) (E) and (F) of the Code, shall not

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

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

allocation and related services to an independent fiduciary of a Plan

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

Directing Participant) in a Plan that is covered under the provisions

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

result in the selection by the Independent Fiduciary or the Directing

Participant of portfolios of the Trust (the Portfolios) in the PACE

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

investment management services by Mitchell Hutchins Asset Management,

Inc. (Mitchell Hutchins) to the PACE Money Market Investments Portfolio

of the Trust.

This proposed exemption is subject to the conditions set forth

below in Section II.

Section II. General Conditions

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

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

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

constitute no more than reasonable compensation and do not include the

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

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

transactions.

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

or redemption of shares in the Trust.

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

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

arm's length transaction with an unrelated party.

(e) PMAS provides written documentation to an Independent Fiduciary

or a Directing Participant of its recommendations or evaluations based

upon objective criteria.

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

Fiduciary or Directing Participant is implemented only at the express

direction of such fiduciary or participant.

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

Fiduciary or Directing Participant with respect to all available

Portfolios.

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

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

Hutchins to exercise investment discretion with respect to a Portfolio

is independent of PaineWebber and its affiliates.

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

allocation and related services rendered to such Plan under the PACE

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

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

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

Market Investments Portfolio from which Mitchell Hutchins retains an

investment management fee of 15 basis points) containing investments

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

basis points that is paid to Mitchell Hutchins for administrative

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

outside fee.

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

purchasing Trust shares,

(1) Each Independent Fiduciary receives the following written or

oral disclosures from PaineWebber:

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

discussing the investment objectives of the Portfolios comprising the

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

affiliation existing between PaineWebber, PMAS, Mitchell Hutchins and

their affiliates; the compensation paid to such entities; any

additional information explaining the risks of investing in the Trust;

and sufficient and understandable disclosures relating to rebalancing

of investor accounts.

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

Additional Information supplementing the Prospectus, which describes

the types of securities and other instruments in which the Portfolios

may invest, the investment policies and strategies that the Portfolios

may utilize and certain risks attendant to those investments, policies

and strategies.

(C) An investor questionnaire.

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

recommendation of specific Portfolios.

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

participation in the PACE Program.

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

respective investment advisory agreement between Mitchell Hutchins and

the Sub-Advisers.

[[Page 11883]]

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

the exemptive relief provided herein.

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

will--

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

Participants.

(B) Allow Directing Participants to interact with PaineWebber

Investment Executives and receive information relative to the services

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

the operation and objectives of the Portfolios.

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

Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in

writing to PMAS, prior to purchasing Trust shares that such fiduciary

has received copies of the documents described in paragraph (j)(1) of

this Section II.

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

of the receipt of such documents is provided by the Independent

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

named fiduciary, as the recordholder of Trust shares). Such Independent

Fiduciary will be required to represent in writing to PMAS that such

fiduciary is--

(A) Independent of PaineWebber and its affiliates;

(B) Knowledgeable with respect to the Plan in administrative

matters and funding matters related thereto, and;

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

the PACE Program.

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

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

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

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

PMAS that such fiduciary is--

(A) Independent of PMAS and its affiliates;

(B) Capable of making an independent decision regarding the

investment of Plan assets;

(C) Knowledgeable with respect to the Plan in administrative

matters and funding matters related thereto; and

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

the PACE Program.

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

Program, each Independent Fiduciary receives the following written or

oral disclosures with respect to its ongoing participation in the PACE

Program:

(1) Written confirmations of each purchase or redemption

transaction by the Plan with respect to a Portfolio.

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

balance.

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

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

statement is also anticipated to include cash flow and transaction

activity during the month, unrealized gains or losses on Portfolio

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

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

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

financial statements for the Trust and investment management fees paid

by each Portfolio.

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

the Plan's PACE Program portfolio for the quarter and since inception,

showing the rates of return relative to comparative market indices

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

participation in the PACE Program actually incurred during the period);

an investment outlook summary containing market commentary; and the

Plan's actual PACE Program portfolio with a breakdown, in both dollars

and percentages, of the holdings in each portfolio. The quarterly

monitoring report will also contain an analysis and an evaluation of a

Plan investor's account to ascertain whether the Plan's investment

objectives have been met and recommending, if required, changes in

Portfolio allocations.

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

specifying--

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

commissions that are paid to PaineWebber and its affiliates;

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

commissions that are paid to unrelated brokerage firms;

(C) The average brokerage commissions per share by the Trust to

brokers affiliated with PaineWebber, expressed as cents per share; and

(D) The average brokerage commissions per share by the Trust to

brokers unrelated to PaineWebber and its affiliates, expressed as cents

per share for any year in which brokerage commissions are paid to

PaineWebber by the Trust Portfolios in which a Plan's assets are

invested.

(7) Periodic meetings with a PaineWebber Investment Executive by

Independent Fiduciaries to discuss the quarterly monitoring report or

any other questions that may arise.

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

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

(the Undisclosed Account) with PaineWebber, the information noted above

in subparagraphs (k)(1) through (k)(7) of this Section II may be

provided directly by PaineWebber to the Directing Participants or to

the Independent Fiduciary for dissemination to the Directing

Participants, depending upon the arrangement negotiated by the

Independent Fiduciary with PMAS.

(m) If previously authorized in writing by the Independent

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

periodic basis to the asset allocation previously prescribed by the

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

that one or more Portfolio allocations deviates from the allocation

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

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

independent, certified public accountants and all investors receive

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

close of each Trust fiscal year.

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

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

Section II to determine whether the conditions of this exemption have

been met, except that--

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

occurred if, due to circumstances beyond the control of PaineWebber

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

end of the six year period; and

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

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

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

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

required by paragraph (p)(1) of this Section II below.

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

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

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

this Section II are unconditionally available at their customary

location during normal business hours by:

(A) Any duly authorized employee or representative of the

Department, the Internal Revenue Service (the Service) or the

Securities and Exchange Commission (the SEC);

[[Page 11884]]

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

representative of such fiduciary;

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

authorized employee representative of such employer; and

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

any duly authorized representative of such participant or beneficiary.

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

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

secrets of PaineWebber or Mitchell Hutchins or commercial or financial

information which is privileged or confidential.

Section III. Definitions

For purposes of this proposed exemption:

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

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

III.

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

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

intermediaries, controlling, controlled by, or under common control

with PaineWebber.

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

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

officer, director or a 5 percent partner or owner.

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

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

individual.

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

is independent of PaineWebber and its affiliates and is either

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

fiduciary, as the recordholder of Trust shares of a Section 404(c)

Plan;

(2) A participant in a Keogh Plan;

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

in Trust shares;

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

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

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

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

Plan that does not permit individual direction as contemplated by

Section 404(c) of the Act; or

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

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

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

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

Plan.

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

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

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

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

Effective Date: If granted, this proposed exemption will be

effective as of August 18, 1995.

Summary of Facts and Representations

1. The parties to the transactions are as follows:

(a) Paine Webber Group (Paine Webber Group), located in New York,

New York, is the parent of PaineWebber.

Paine Webber Group is one of the leading full-line securities firms

servicing institutions, governments and individual investors in the

United States and throughout the world. Paine Webber Group conducts its

businesses in part through PMAS, a division of PaineWebber and Mitchell

Hutchins, a wholly owned subsidiary of PaineWebber. Paine Webber Group

is a member of all principal securities and commodities exchanges in

the United States and the National Association of Securities Dealers,

Inc. In addition, it holds memberships or associate memberships on

several principal foreign securities and commodities exchanges.

Although Paine Webber Group is not an operating company and, as such,

maintains no assets under management, as of September 30, 1994, Paine

Webber Group and its subsidiaries rendered investment advisory services

with respect to $36.1 billion in assets.

(b) PaineWebber, whose principal executive offices are located in

New York, New York, provides investment advisory services to

individuals, banks, thrift institutions, investment companies, pension

and profit sharing plans, trusts, estates, charitable organizations,

corporations and other business and government entities. PaineWebber is

also responsible for securities underwriting, investment and merchant

banking services and securities and commodities trading as principal

and agent. PaineWebber serves as the dealer of Trust shares described

herein.

(c) PMAS, located in Weehawken, New Jersey is responsible for

individual investor account management and investor consulting

services. PMAS provides such services to the investors involved in

various PaineWebber investment programs by providing asset allocation

recommendations and related services with respect to their investments.

PMAS provides investment consulting and advisory services to more than

40,000 accounts, with account sizes ranging from institutional accounts

in excess of $650 million in assets to individual accounts with

$100,000 minimum investments. PMAS provides investors in the Trust with

asset allocation recommendations and related services with respect to

investments in the Trust Portfolios.

(d) Mitchell Hutchins, which is located in New York, New York, is a

registered investment adviser under the Investment Adviser's Act of

1940 (the Advisers Act) and a wholly owned subsidiary of PaineWebber.

Mitchell Hutchins provides investment advisory and asset management

services to investors and develops and distributes investment products,

including mutual funds and limited partnerships. Mitchell Hutchins also

provides financial services to over $24.8 billion in client assets

representing twenty-eight investment companies with fifty-five separate

portfolios. Mitchell Hutchins is providing investment management and

administrative services with respect to the Trust and investment

advisory services with respect to one of the Trust's Portfolios.

(e) State Street Bank and Trust Company (State Street), located in

North Quincy, Massachusetts, serves as the custodian of assets for the

Trust. State Street is not affiliated with PaineWebber and its

affiliates. It provides a full array of integrated banking products,

focusing on servicing financial assets (i.e., asset custody, cash

management, securities lending, multi-currency accounting and foreign

exchange), managing assets and commercial lending. As of September 30,

1994, State Street rendered custodian services with respect to

approximately $1.6 trillion in assets and provided investment

management services to approximately $155 billion in assets.

(f) PFPC, Inc. (PFPC), a subsidiary of PNC Bank, National

Association, and whose principal address is in Wilmington, Delaware,

serves as the Trust's transfer and dividend disbursing agent. PFPC is

not affiliated with PaineWebber and its affiliates. PFPC provides a

complete range of mutual fund administration and accounting services to

a diverse product base of domestic and international investment

portfolios. PFPC is also one of the nation's leading providers of

transfer and shareholder servicing services to mutual funds and asset

management accounts. As of September 30, 1994, PFPC rendered accounting

and administration services to over 400

[[Page 11885]]

mutual funds and provided transfer agency, dividend disbursing and/or

shareholder servicing services with respect to more than 3.1 million

shareholder accounts.

2. The Trust is a no load, open-end, diversified management

investment company registered under the '40 Act. The Trust was

organized as a Delaware business trust on September 9, 1994 and it has

an indefinite duration. As of November 6, 1995, the Trust had $184

million in net assets. The Trust presently consists of twelve different

portfolios which will pay dividends to investors. The composition of

the Portfolios will cover a spectrum of investments ranging from

foreign and U.S. Government-related securities to equity and debt

securities issued by foreign and domestic corporations. Although a

Portfolio of the Trust is permitted to invest its assets in securities

issued by PaineWebber and/or its affiliates, the percentage of that

Portfolio's net assets invested in such securities will never exceed

one percent. With the exception of the PACE Money Market Investments

Portfolio, shares in each of the Portfolios are being initially offered

to the public at a net asset value of $10 per share. Shares in the PACE

Money Market Investments Portfolio are being initially offered to the

public at a net asset value of $1.00 per share.

3. Mitchell Hutchins serves as the distributor of Trust shares and

PaineWebber serves as the dealer with respect to shares of the

Portfolios.6 Such shares are being offered by PaineWebber at no

load, to participants in the PACE Program. The PACE Program is an

investment service pursuant to which PMAS provides participants in the

PACE Program with asset allocation recommendations and related services

with respect to the Portfolios based on an evaluation of an investor's

investment objectives and risk tolerances. As stated above, State

Street will serve as the custodian of each Portfolio's assets and PFPC

serves as the Portfolio's transfer and dividend disbursing agent.

\6\ As distributor or principal underwriter for the Trust,

Mitchell Hutchins will use its best efforts, consistent with its

other businesses, to sell shares of the Portfolios. Pursuant to a

separate dealer agreement with Mitchell Hutchins, PaineWebber will

sell Trust shares to investors. However, neither Mitchell Hutchins

nor PaineWebber will receive any compensation for their services as

distributor or dealer of Trust shares. According to the applicants,

Mitchell Hutchins and PaineWebber may be regarded as having an

indirect economic incentive by virtue of the fact that Mitchell

Hutchins and PaineWebber will be paid for the services they provide

to the Trust in their respective capacities as investment manager

and administrator of the Trust (Mitchell Hutchins) and as the

provider of asset allocation and related services (PaineWebber,

through PMAS).

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

To participate in the PACE Program, each investor must open a

brokerage account with PaineWebber.7 The minimum initial

investment in the PACE Program is $10,000.

\7\ According to the Statement of Additional Information that

accompanies the Prospectus for the PACE Program, shares in the Trust

are not certificated for reasons of economy and convenience.

However, PFPC maintains a record of each investor's ownership of

shares. Although Trust shares are transferable and accord voting

rights to their owners, they do not confer pre-emptive rights (i.e.,

the privilege of a shareholder to maintain a proportionate share of

ownership of a company by purchasing a proportionate share of any

new stock issues). PaineWebber represents that in the context of an

open-end investment company that continuously issues and redeems

shares, a pre-emptive right would make the normal operations of the

Trust impossible.

As for voting rights, PaineWebber states that they are accorded

to recordholders of Trust shares. PaineWebber notes that a

recordholder of Trust shares may determine to seek the submission of

proxies by Plan participants and vote Trust shares accordingly. In

the case of individual account plans such as Section 404(c) Plans,

PaineWebber believes that most Plans will pass the vote through to

Directing Participants on a pro-rata basis.

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

Although PaineWebber anticipates that investors in the Trust will

initially consist of institutions and individuals, it is proposed that

prospective investors will include Plans for which PaineWebber may or

may not currently maintain investment accounts. A majority of these

Plans may be IRAs or Keogh Plans. In addition, it is proposed that

Plans for which PaineWebber or an affiliate serves as a prototype

sponsor and/or a nondiscretionary trustee or custodian be permitted to

invest in the Trust.8

\8\ The Department notes that the general standards of fiduciary

conduct promulgated under the Act would apply to the participation

in the PACE Program by an Independent Fiduciary. Section 404 of the

Act requires that a fiduciary discharge his duties respecting a plan

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

and in a prudent fashion. Accordingly, an Independent Fiduciary must

act prudently with respect to the decision to enter into the PACE

Program with PMAS as well as with respect to the negotiation of

services that will be performed thereunder and the compensation that

will be paid to PaineWebber and its affiliates. The Department

expects that an Independent Fiduciary, prior to entering into the

PACE Program, to understand fully all aspects of such arrangement

following disclosure by PMAS of all relevant information.

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

The applicants represent that the initial purchase of shares in the

Trust by a Plan participating in the PACE Program may give rise to a

prohibited transaction where PaineWebber, or an affiliate thereof, is a

party in interest with respect to the Plan. PaineWebber also

acknowledges that a prohibited transaction could arise upon a

subsequent purchase or redemption of shares in the Trust by a

participating Plan inasmuch as the party in interest relationship

between PaineWebber and the Plan may have been established at that

point.

Accordingly, the applicants have requested retroactive exemptive

relief from the Department with respect to the purchase and redemption

of shares in the Trust by a Plan participating in the PACE Program

where PaineWebber does not (a) sponsor the Plan (other than as

prototype sponsor) or (b) have discretionary authority over such Plan's

assets.9 No commissions or fees will be paid by a Plan with

respect to the sale and redemption transactions or a Plan's exchange of

shares in a Portfolio for shares of another Portfolio. If granted, the

proposed exemption will be effective as of August 18, 1995.

\9\ PaineWebber represents that to the extent employee benefit

plans that are maintained by PaineWebber purchase or redeem shares

in the Trust, such transactions will meet the provisions of

Prohibited Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8,

1977). PaineWebber further represents that, although the exemptive

relief proposed above would not permit PaineWebber or an affiliate

(while serving as a Plan fiduciary with discretionary authority over

the management of a Plan's assets) to invest those assets over which

it exercises discretionary authority in Trust shares, a purchase or

redemption of Trust shares under such circumstances would be

permissible if made in compliance with the terms and conditions of

PTE 77-4 (42 FR 18732, April 8, 1977). The Department expresses no

opinion herein as to whether such transactions will comply with the

terms and conditions of PTEs 77-3 and 77-4.

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

4. Overall responsibility for the management and supervision of the

Trust and the Portfolios rests with the Trust's Board of Trustees (the

Trustees). The Trustees will approve all significant agreements

involving the Trust and the persons and companies that provide services

to the Trust and the Portfolios.

5. Mitchell Hutchins also serves as the investment manager to each

Portfolio. Under its investment management and administration agreement

with the Trust, Mitchell Hutchins will provide certain investment

management and administrative services to the Trust and the Portfolios

that, in part, involve calculating each Portfolio's net asset value

10 and, with the exception of the PACE Money Market Investments

Portfolio (for which Mitchell Hutchins will exercise investment

discretion), making recommendations to the Board of Trustees of the

Trust regarding (a) the

[[Page 11886]]

investment policies of each Portfolio and (b) the selection and

retention of the Sub-Advisers who will exercise investment discretion

with respect to the assets of each Portfolio.\11\

\10\ The net asset value of each Portfolio's shares, except for

the PACE Money Market Investments Portfolio, fluctuates and is

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

Exchange (the NYSE) (currently, 4:00 p.m. Eastern Time) each

business day. The net asset value of shares in the PACE Money Market

Investments Portfolio is determined as of 12:00 p.m. each business

day. Each Portfolio's net asset value per share is determined by

dividing the value of the securities held by the Portfolio plus any

cash or other assets minus all liabilities by the total number of

Portfolio shares outstanding.

\11\ Subject to the supervision and direction of the Trustees,

Mitchell Hutchins will provide to the Trust investment management

evaluation services principally by performing initial review on

prospective Sub-Advisers for each Portfolio and thereafter

monitoring each Sub-Adviser's performance. In evaluating prospective

Sub-Advisers, Mitchell Hutchins will consider, among other factors,

each Sub-Adviser's level of expertise, consistency of performance

and investment discipline or philosophy. Mitchell Hutchins will have

the responsibility for communicating performance expectations and

evaluations to the Sub-Advisers and ultimately recommending to the

Trustees whether a Sub-Adviser's contract should be continued.

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

The Sub-Advisers will provide discretionary advisory services with

respect to the investment of the assets of the respective Portfolios

(other than the PACE Money Market Investments Portfolio) on the basis

of their performance in their respective areas of expertise in asset

management. With the exception of the PACE Money Market Investments

Portfolio which will be advised by Mitchell Hutchins, PaineWebber

represents that all of the Sub-Advisers, will be independent of, and

will remain independent of PaineWebber and/or its affiliates. The Sub-

Advisers will be registered investment advisers under the Advisers Act

and maintain their principal executive offices in various regions of

the United States.

The administrative services for which Mitchell Hutchins will be

responsible include the following: (a) supervising all aspects of the

operations of the Trust and each Portfolio (e.g., oversight of transfer

agency, custodial, legal and accounting services; (b) providing the

Trust and each Portfolio with corporate, administrative and clerical

personnel as well as maintaining books and records for the Trust and

each Portfolio; (c) arranging for the periodic preparation, updating,

filing and dissemination of the Trust's Registration Statement, proxy

materials, tax returns and required reports to each Portfolio's

shareholders and the SEC, as well as other federal or state regulatory

authorities; (d) providing the Trust and each Portfolio with, and

obtaining for it, office space, equipment and services; (e) providing

the Trustees with economic and investment analyses and reports, and

making available to the Trustees, upon request, any economic,

statistical and investment services. These administrative services do

not include any management services that might be performed by Mitchell

Hutchins. As noted in Representations 17 and 18, Mitchell Hutchins is

separately compensated for management services rendered to the Trust.

6. Through the PACE Program, PMAS is providing a Plan investor with

non-binding, asset allocation recommendations with respect to such

investor's investments in the Portfolios. In order to make these

evaluations, PMAS will furnish copies of an investor questionnaire,

designed to elicit information about the specific investment needs,

objectives and expectations of the investor, to an Independent

Fiduciary of a Title I Plan that does not permit individually-directed

investments, to an Independent Fiduciary of an IRA or a Keogh Plan, or

to a Directing Participant of a Section 404(c) Plan. Although the

contents of the questionnaire may vary somewhat depending upon the type

of Plan investing in the PACE Program, for a particular Plan, the same

questionnaire will be given to each participant.

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

has established an Undisclosed Account with PaineWebber in the name of

the Plan, PMAS will provide investor questionnaires to each Directing

Participant through PaineWebber Investment Executives (who are

registered representatives of PaineWebber), via the Plan's benefits

personnel or independent recordkeeper (the Recordkeeper), or by other

means requested by the Independent Fiduciary. The applicants recognize

that Section 404(c) Plans typically employ a Recordkeeper to assist the

Independent Fiduciary with maintaining Plan-related data which is used

to generate benefit status reports, regulatory compliance reports and

participant- and Plan-level investment performance reports. Therefore,

the Undisclosed Account arrangement is intended to coordinate with the

functions traditionally provided to Section 404(c) Plans by their

Recordkeepers.12

\12\ The applicants wish to emphasize that the PACE Program can

currently be provided to participants in Section 404(c) Plans on

either an Undisclosed Account or a disclosed account (the Disclosed

Account) basis (i.e., where the Independent Fiduciary opens a

separate PACE Program account with PaineWebber for each Directing

Participant). In this regard, the applicants note that PaineWebber

presently offers the PACE Program on a Disclosed Account arrangement

to IRAs and Keogh Plans. However, for other Section 404(c) Plans

such as those that are covered under the provisions of section

401(k) of the Code, PaineWebber prefers not to establish Disclosed

Accounts for individual participants because of servicing and other

administrative matters typically undertaken by such Plans'

Recordkeepers. The applicants note that from the participant's

perspective, there is no difference in the nature of the services

provided under the PACE Program regardless of whether the

participant's investment is held through a ``Disclosed'' or

``Undisclosed'' Account arrangement. The applicants state that these

designations are primarily internal distinctions relating to whether

the participant's name appears in the account set-up and reflects

differences in the applicable sub-accounting functions.

Notwithstanding the above, the Department wishes to point out

that, regardless of the arrangement negotiated with PaineWebber, an

Independent Fiduciary of a Section 404(c) Plan has the

responsibility to disseminate all information it receives to each

Directing Participant investing in the PACE Program.

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

7. Based upon data obtained from the investor questionnaire, PMAS

will evaluate the investor's risk tolerances and investment objectives.

PMAS will then recommend, in writing, an appropriate allocation of

assets among suitable Portfolios that conforms to these tolerances and

objectives.

PaineWebber represents that PMAS will not have any discretionary

authority or control with respect to the allocation of an investor's

assets among the Portfolios. In the case of an IRA or Keogh Plan,

PaineWebber represents that all of PMAS's recommendations and

evaluations will be presented to the Independent Fiduciary and will be

implemented only if accepted and acted upon by such fiduciary.

In the case of a Section 404(c) Plan, PaineWebber represents that

Directing Participants in such Plan will be presented with

recommendations and evaluations that are tailored to the responses

provided by that Directing Participant in his or her questionnaire.

PMAS's recommendations will be disseminated to Directing Particpants in

accordance with procedures established for the Plan.

After receipt of PMAS's initial recommendations, which may or may

not be adopted, the Independent Fiduciary or Directing Participant, as

applicable, will select the specific Portfolios. PMAS will continue to

recommend to Independent Fiduciaries or Directing Participants asset

allocations among the selected Portfolios.

8. Aside from the investor questionnaire, in order for a Plan to

participate in the PACE Program, PaineWebber or PMAS will provide an

Independent Fiduciary with a copy of the Trust Prospectus discussing

(a) the investment objectives of the Portfolios comprising the Trust,

(b) the policies employed to achieve these objectives, (c) the

corporate affiliation existing between PaineWebber, PMAS, Mitchell

Hutchins and their subsidiaries, and (d) the compensation paid to such

entities by the Trust and information explaining the risks attendant to

investing in the Trust. In addition, upon written or oral

[[Page 11887]]

request to PaineWebber, the Independent Fiduciary will be given a

Statement of Additional Information supplementing the Prospectus which

describes, in further detail, the types of securities and other

instruments in which the Portfolios may invest, the investment policies

and strategies that the Portfolios may utilize and certain risks

attendant to those investments, policies and strategies. Further, each

Independent Fiduciary will be given a copy of the investment advisory

agreement between PMAS and such Plan relating to participation in the

PACE Program, including copies of the notice of proposed exemption and

grant notice for the exemptive relief provided herein. Upon oral or

written request to the Trust, PaineWebber will also provide an

Independent Fiduciary with a copy of the respective investment advisory

agreements between Mitchell Hutchins and the Sub-Advisers.

In the case of a Section 404(c) Plan, depending on the arrangement

negotiated with the Independent Fiduciary, PaineWebber represents that

the Independent Fiduciary will make available copies of the foregoing

documents to Directing Participants.

In addition, Independent Fiduciaries and, if applicable, Directing

Participants, will receive introductory documentation regarding the

PACE Program in marketing materials and in other communications.

Further, depending upon the arrangement negotiated between PMAS and the

Independent Fiduciary, a PaineWebber Investment Executive will meet

with a Directing Participant, upon oral or written request, to discuss

the services offered under the PACE Program, including the rebalancing

feature described in Representation 12, as well as the operation and

objectives of the Portfolios.13

\13\ The Department is expressing no opinion as to whether the

information provided under the PACE Program is sufficient to enable

a Directing Participant to exercise independent control over assets

in his or her account as contemplated by section 404(c) of the Act.

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

9. If accepted as an investor in the PACE Program, an Independent

Fiduciary will be required by PMAS to acknowledge, in writing, prior to

purchasing Trust shares, that such fiduciary has received copies of the

documents referred to in Representation 8. With respect to a Plan that

is covered by Title I of the Act (e.g., a defined contribution plan),

where investment decisions will be made by a trustee, investment

manager or a named fiduciary, PMAS will require that such Independent

Fiduciary acknowledge in writing receipt of such documents and

represent to PaineWebber that such fiduciary is (a) independent of

PaineWebber and its affiliates, (b) capable of making an independent

decision regarding the investment of Plan assets, (c) knowledgeable

with respect to the Plan in administrative matters and funding matters

related thereto, and (d) able to make an informed decision concerning

participation in the PACE Program.

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

the receipt of such documents will be provided by the Independent

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

named fiduciary, as the recordholder of Trust shares). Such Independent

Fiduciary will be required to represent, in writing, to PMAS that such

fiduciary is (a) independent of PaineWebber and its affiliates, (b)

knowledgeable with respect to the Plan in administrative matters and

funding matters related thereto, and (c) able to make an informed

decision concerning participation in the PACE Program.

10. After the selection of specific Portfolios by an Independent

Fiduciary or a Directing Participant,14 PMAS will continue to

provide recommendations to such persons relating to asset allocations

among the selected Portfolios. However, with respect to a Section

404(c) Plan in which at least three Portfolios may be selected by the

Independent Fiduciary, PMAS's initial asset allocation recommendation

to Directing Participants will be limited to the suggested Portfolios

offered under the Plan. PMAS anticipates that it may also work with the

Independent Fiduciary of a Section 404(c) Plan to assist the fiduciary

in (a) identifying and drafting investment objectives, (b) selecting

suitable investment categories or actual Portfolios to be offered to

Directing Participants or (c) recommending appropriate long-term

investment allocations to a Directing Participant, if this individual

receives such advice.

\14\ In the case of a Section 404(c) Plan, PMAS will receive

electronically from the Recordkeeper each participant's investment

selections.

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

An Independent Fiduciary or a Directing Participant will be

permitted to change his or her investment allocation by specifying the

new allocation in writing or by other means authorized by the Plan

(e.g., by use of a kiosk). Although PaineWebber currently imposes no

limitation on the frequency with which an Independent Fiduciary or a

Directing Participant may change his or her prescribed asset

allocation, PaineWebber reserves the right to impose reasonable

limitations.

11. Depending on the arrangement negotiated with PMAS, PaineWebber

will provide each Independent Fiduciary with the following information:

(a) Written confirmations of each purchase and redemption of shares of

a Portfolio; (b) daily telephone quotations of such Plan's account

balance; (c) a monthly statement of account specifying the net asset

value of a Plan's assets that are invested in such account; and (d) a

quarterly, written investment performance monitoring report.

The monthly account statement will include, among other

information: (a) cash flow and transaction activity during the month,

including purchase, sale and exchange activity and dividends paid or

reinvested; (b) unrealized gains or losses on Portfolio shares held;

and (c) a summary of total earnings and capital returns on the Plan's

PACE Program Portfolio for the month and year-to-date. The quarterly

investment performance report will include, among other information,

the following: (a) a record of the performance of the Plan's PACE

Program portfolio for the quarter and since inception showing rates of

return relative to comparative market indices (illustrated in a manner

that reflects the effect of any fees for participation in the PACE

Program actually incurred during the period) 15; (b) an investment

outlook summary containing market commentary; and (c) the Plan's actual

PACE Program portfolio with a breakdown, in both dollars and

percentages, of the holdings in each Portfolio. In addition, to the

extent required by the arrangement negotiated with the Independent

Fiduciary, the quarterly performance monitoring report will (a) contain

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

the investor to ascertain whether the investment objectives are being

met, and (b) recommend, from time to time, changes in Portfolio

allocations. The quarterly performance monitoring report is described

in the summary of the PACE Program contained in the Trust Prospectus.

\15\ The comparative index is a blended index of the individual

Portfolio indices that are weighted by the allocation percentages

corresponding to those holdings that make up the investor's total

investment in the PACE Program.

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

With respect to a Section 404(c) Plan, the quarterly investment

performance report transmitted to the Independent Fiduciary will

include the following aggregate information relative to the Undisclosed

Account as well as market commentary: (a) a record of the performance

of the Plan's assets and rates of return as compared to several

[[Page 11888]]

appropriate market indices (illustrated in a manner that reflects the

effect of any fees for participation in the PACE Program actually

incurred during the period); and (b) the Plan's actual investment

portfolio with a breakdown of investments made in each Portfolio. As to

each Directing Participant, PMAS will provide information to be

contained in the quarterly performance monitoring report to such

participants.

In addition, on both a quarterly and annual basis, commencing with

the first quarterly report due after this notice of proposed exemption

is issued, PaineWebber will provide, as applicable, an Independent

Fiduciary or a Directing Participant with written disclosures of (a)

the total, expressed in dollars, of each Portfolio's brokerage

commissions that are paid to PaineWebber and its affiliates; (b) the

total, expressed in dollars, of each Portfolio's brokerage commissions

that are paid to unrelated brokerage firms; (c) the average brokerage

commissions per share by the Trust to brokers affiliated with the

PaineWebber, expressed as cents per share; and (d) the average

brokerage commissions per share by the Trust to brokers unrelated to

the PaineWebber and its affiliates, expressed as cents per share for

any year in which brokerage commissions are paid to PaineWebber by the

Trust Portfolios in which a Plan's assets are invested.

Further, the Independent Fiduciary or Directing Participant, as

applicable, will have access to a PaineWebber Investment Executive for

the discussion of the quarterly performance monitoring reports, the

rebalancing feature described below in Representation 12 or any

questions that may arise.

12. Depending on the arrangement negotiated with PMAS, for any

investor who so directs PMAS, the investor's Trust holdings will be

automatically rebalanced on a periodic basis to maintain the investor's

designated allocation among the Portfolios. PMAS will receive no

additional compensation to provide this service. At both the

Independent Fiduciary and Directing Participant levels, the rebalancing

election will be made in writing or in any manner permitted by the Plan

(e.g., in the case of a Section 404(c) Plan, electronic transmission by

the Recordkeeper to PMAS of the Directing Participant's election). The

election will be accompanied by a disclosure that is designed to

provide the Independent Fiduciary and the Directing Participant, as

applicable, with an understanding of the rebalancing feature.

Disclosure of the rebalancing feature is included in the Prospectus for

the PACE Program which will be provided to each Independent Fiduciary

and Directing Participant.

It is currently anticipated that screening will be performed

quarterly with respect to the PACE Program accounts for which the

investor has elected the rebalancing service and that rebalancing will

be performed for each such account where any Portfolio allocation

deviates from the allocation prescribed by the investor by the agreed-

upon uniform threshold.16 The threshold for triggering rebalancing

is a percentage (presently, 2\1/2\ percent) that has been established

by PaineWebber and is applied uniformly to all accounts subject to

rebalancing. If PaineWebber were, in the future, to determine that this

uniform threshold should be changed, PMAS would notify all investors

(including Independent Fiduciaries and Directing Participants) who had

elected the rebalancing feature. Then, in order to continue to provide

this service, PMAS would need to obtain the consent of each such

investor.

\16\ Currently, with regard to investors who have elected the

rebalancing feature, rebalancing is effected by an automated,

mechanical system that, as to each account: (a) Calculates the

current allocation for each Portfolio based on the quarter-end net

asset value; (b) compares the current allocation for each Portfolio

with the allocation prescribed by the investor; (c) identifies for

rebalancing all accounts with one or more Portfolios whose current

allocation deviates by the agreed-upon threshold from the allocation

prescribed by the investor; and (d) for each account which has been

identified for rebalancing pursuant to (a)-(c), (1) calculates the

dollar difference between the current allocation and the allocation

prescribed by the investor, (2) reduces each Portfolio whose current

allocation exceeds the allocation prescribed by the investor by an

amount equal to the dollar difference between the two allocations,

and (3) increases each Portfolio whose current allocation is less

than the allocation prescribed by the investor by an amount equal to

the dollar difference between the two allocations. This rebalancing

is accomplished by automatically exchanging, in the order of the

Portfolio's respective CUSIP numbers, a dollar-equivalent number of

shares of each Portfolio to be reduced for the corresponding number

of shares of a Portfolio to be increased until the current

allocation is equal to the allocation prescribed by the investor.

Valuation of the Portfolios is done as of the close of regular

trading on the NYSE each business day.

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

The applicants note that rebalancing is a feature that an investor

chooses to apply indefinitely until the investor notifies PaineWebber

that it wishes to have this service discontinued. After rebalancing has

been discontinued, an investor may reactivate the rebalancing service

by notifying PaineWebber in writing.

13. PaineWebber notes that not all of the services described above

will be provided to every Plan. The services that will be provided will

depend on what is decided upon by the Independent Fiduciary. Assuming

the Independent Fiduciary requests a reduction in the level of

services, there will be no corresponding reduction in the fee that the

fiduciary pays PMAS. This is due to the bundled nature of the services

provided in the PACE Program. For example, if the Independent Fiduciary

were to limit the number of Portfolios available as investment options

for its Plan participants, this might be deemed a reduction in the

services available under the PACE Program that would not result in any

reduction in the applicable Program fee. Similarly, under the PACE

Program, an Independent Fiduciary of a Section 404(c) Plan may decide

for its own reasons not to make the automatic rebalancing service

available to Directing Participants. Under such circumstances, PMAS

will not reduce its fees to reflect the absence of the provision of

rebalancing services to the Plan. Further, under the particular

arrangement which it has negotiated with PMAS, the Independent

Fiduciary may or may not request PaineWebber Investment Executives to

make presentations or be available to meet with Directing Participants.

Thus, an Independent Fiduciary may choose all, some or none of the

PACE Program's optional services. If an Independent Fiduciary selects

all of these services, the Plan will incur no greater an annual fee

than had that Independent Fiduciary selected some or none of these

services. The absence of a reduction in fees in the event not all

services are requested is an issue that should be considered by the

Independent Fiduciary.17 Nonetheless, the Applicants represent

that the reduction in the types of services provided will not cause the

fees paid to PaineWebber by a Plan under the PACE Program to violate

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

\17\ In this regard, the Department emphasizes that it expects

the Independent Fiduciary to consider prudently the relationship of

the fees to be paid by the Plan to the level of services to be

provided by PaineWebber. In response to the Department's concern

over this matter, PaineWebber represents that it will amend the

Trust Prospectus to include the following statement: ``Investors who

are fiduciaries or otherwise, in the process of making investment

decisions with respect to Plans, should consider, in a prudent

manner, the relationship of the fees to be paid by the Plan along

with the level of services provided by PaineWebber.''

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

14. Plans wishing to redeem their Trust shares may communicate

their requests in writing or by telephone to PMAS. Redemption requests

received in proper form prior to the close of trading on the NYSE will

be effected at the net asset value per share determined on that day.

Redemption requests received after

[[Page 11889]]

the close of regular trading on the NYSE will be effected at the net

asset value at the close of business of the next day, except on

weekends or holidays when the NYSE is closed. A Portfolio will be

required to transmit redemption proceeds for credit to an investor's

account with PaineWebber within 5 business days after receipt of the

redemption request.18 In the case of an IRA or Keogh Plan

investor, PaineWebber will not hold redemption proceeds as free credit

balances and will, in the absence of receiving investment instructions,

place all such assets in a money market fund (other than the PACE Money

Market Investments Portfolio) that may be affiliated with

PaineWebber.19 In the case of Plans that are covered by Title I of

the Act, the redemption proceeds will be invested by PaineWebber in

accordance with the investment directions of the Independent Fiduciary

responsible for the management of the Plan's assets. With respect to a

Section 404(c) Plan, the treatment of such investment will depend upon

the arrangement for participant investment instructions selected by the

Plan sponsor. In the event that the Independent Fiduciary does not give

other investment directions, such assets will be swept into a no-load

money market fund that may be affiliated with PaineWebber. No brokerage

charge or commission is charged to the participant for this service.

\18\ PaineWebber will provide clearance (on a fully disclosed

basis), settlement and other back office services to other broker-

dealers.

\19\ The applicants are not requesting, nor is the Department

proposing, exemptive relief with respect to the investment, by

PaineWebber, of redemption proceeds in an affiliated money market

fund where the Plan investor has not given investment instructions.

The applicants represent that to the extent PaineWebber is

considered a fiduciary, such investments will comply with the terms

and conditions of PTE 77-4. However, the Department expresses no

opinion herein on whether such transactions are covered by this

class exemption.

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

Due to the high costs of maintaining small PACE Program (Plan)

accounts, the Trust may redeem all Trust shares held in a PACE Program

account in which the Trust shares have a current value of $7,500 or

less after the investor has been given at least thirty days in which to

purchase additional Trust shares to increase the value of the account

to more than the $7,500 amount. Proceeds of an involuntary redemption

will be deposited in the investor's brokerage account unless

PaineWebber is otherwise instructed.20

\20\ The thirty day limit does not restrict a Plan's ability to

redeem its interest in the Trust. The thirty day notice period is

provided to give a Plan an opportunity to increase the value of the

assets in its Plan account with PaineWebber to an amount in excess

of $7,500. If desired, the Plan may still follow the redemption

guidelines described above.

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

15. Through the PACE Program, shares of a Portfolio may be

exchanged by an investor for shares of another Portfolio at their

respective net asset values and without the payment of an exchange fee.

However, Portfolio shares are not exchangeable with shares of other

PaineWebber group of funds or portfolio families.

With respect to brokerage transactions that are entered into under

the PACE Program for a Portfolio, such transactions may be executed

through PaineWebber and other affiliated broker-dealers, if in the

judgment of Mitchell Hutchins or the Sub-Adviser, as applicable, the

use of such broker-dealer is likely to result in price and execution at

least as favorable, and at a commission charge comparable to those of

other qualified broker-dealers.

16. Each Portfolio will bear its own expenses, which generally

include all costs that are not specifically borne by PaineWebber,

Mitchell Hutchins or the Sub-Advisers. Included among a Portfolio's

expenses will be costs incurred in connection with the Portfolio's

organization, investment management and administration fees, fees for

necessary professional and brokerage services, fees for any pricing

service, the costs of regulatory compliance and costs associated with

maintaining the Trust's legal existence and shareholder relations. No

Portfolio, however, will impose sales charges on purchases, reinvested

dividends, deferred sales charges, redemption fees; nor will any

Portfolio incur distribution expenses. Investment management fees

payable to Mitchell Hutchins and the Sub-Advisers will be disclosed in

the Trust Prospectus.

17. As to each Plan, the total fees that are paid to PMAS and its

affiliates will constitute no more than reasonable compensation.21

In this regard, for its services under the PACE Program, PMAS charges

an investor a quarterly fee for asset allocation and related services.

This ``outside fee,'' will not be more than 1.50 percent on an annual

basis of the maximum annual value of the assets in the investor's PACE

Program account. Such fee may be paid either from the assets in the

account or by separate check. A smaller outside fee may be charged

depending on such factors as the size of the PACE Program account

(e.g., PACE Program accounts in excess of $100,000), the number of Plan

participants or the number of PACE Program accounts. The outside fee is

charged directly to an investor and is neither affected by the

allocation of assets among the Portfolios nor by whether an investor

follows or ignores PMAS's advice.22 In the case of Plans, the

outside fee may be paid by the Plan or the Plan sponsor or, in the case

of IRAs only, the fee may be paid by the IRA owner directly.

\21\ The applicants represent that PMAS and its affiliates will

not receive 12b-1 Fees in connection with the transactions.

\22\ PaineWebber represents that the outside fee will not be

imposed on the accounts of the Paine Webber Group and its

subsidiaries, including PaineWebber, PMAS, Mitchell Hutchins or

their subsidiaries, accounts of their immediate families and IRAs

and certain employee pension benefit plans for these persons. The

applicants state that this fee will be waived to encourage employees

to invest in PaineWebber, although PaineWebber reserves the right to

impose such fees. However, with respect to IRAs or Plans maintained

by PaineWebber or its affiliates for their employees, the applicants

assert that such waiver would be required by PTE 77-3.

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

For Plan investors, the outside fee will be payable in full within

five business days (or such other period as may be required under

applicable law or regulation) after the trade date for the initial

investment in the Portfolios and will be based on the value of assets

in the PACE Program on the trade date of the initial investment. The

initial fee payment will cover the period from the initial investment

trade date through the last calendar day of the subsequent calendar

quarter, and the fee will be pro-rated accordingly. Thereafter, the

quarterly fee will cover the period from the first calendar day through

the last calendar day of the current calendar quarter. The quarterly

fee will be based on the value of assets in the PACE Program measured

as of the last calendar day of the previous quarter, and will be

payable on the fifth business day of the current quarter.

If additional funds are invested in the Portfolios during any

quarter, the applicable fee, pro-rated for the number of calendar days

then remaining in the quarter and covering the amount of such

additional funds, shall be charged and be payable five business days

later. In the case of redemptions during a quarter, the fee shall be

reduced accordingly, pro-rated for the number of calendar days then

remaining in the quarter. If the 'net fee increase or decrease to an

investor for additional purchases and/or redemptions during any one

quarter is less than $20, the fee increase or decrease will be waived.

In addition, for investment management and administrative services

provided to the Trust, Mitchell Hutchins will be paid, from each

Portfolio, a fee which is computed daily and paid monthly at an annual

rate ranging from .35 percent to 1.10 percent,

[[Page 11890]]

of which the management fee component ranges from .15 percent to .90

percent on an annual basis, of each Portfolio's average daily net

assets depending upon the Portfolio's objective.23 From these

management fees, Mitchell Hutchins will compensate the applicable Sub-

Adviser. This ``inside fee,'' which is the difference between the

individual Portfolio's total management fee and the fee paid by

Mitchell Hutchins to the Sub-Adviser, will vary from the annual rate of

.15 percent to .40 percent depending on the Portfolio. With the

exception of the PACE Money Market Investments Portfolio from which

Mitchell Hutchins is paid a management fee of 15 basis points, Mitchell

Hutchins is retaining 20 basis points as a management fee from each

remaining single Portfolio on investment assets attributable to the

Plans. Pursuant to Transfer Agency and Service Agreements with the

Trust, PFPC and State Street will be paid annual fees of $350,000 and

$650,000, respectively, for transfer agent and custodial services.

\23\ The fees payable to Mitchell Hutchins under its investment

management and administration agreement with the Trust are comprised

of two components. One component is for administrative services

provided to each Portfolio at the annual rate of .20 percent of each

Portfolio's net assets. The second component is for investment

management and related services provided to each Portfolio. The

annualized fee range here is from .15 percent to .90 percent of the

Portfolio's average daily net assets.

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

18. The management fees that are paid at the Portfolio level to

Mitchell Hutchins and the Sub-Advisers are set forth in the following

table. For purposes of the table, Mitchell Hutchins and a Sub-Adviser

are referred to as ``MH'' and ``SA,'' respectively. As noted in the

table, the sum of the management fees retained by Mitchell Hutchins and

the Sub-Adviser with respect to a Portfolio will equal the total

management fee paid by that Portfolio.

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

MH

management SA retained MH retained

Portfolio fee fee fee

(percent) (percent) (percent)

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

PACE Money Market Investments.... .15 .00 .15

PACE Government Securities Fixed

Income Investments.............. .50 .25 .25

PACE Intermediate Fixed Income

Investments..................... .40 .20 .20

PACE Strategic Fixed Income

Investments..................... .50 .25 .25

PACE Municipal Fixed Income

Investments..................... .40 .20 .20

PACE Global Fixed Income

Investments..................... .60 .35 .25

PACE Large Company Value Equity

Investments..................... .60 .30 .30

PACE Large Company Growth Equity

Investments..................... .60 .30 .30

PACE Small/Medium Company Value

Equity Investments.............. .60 .30 .30

PACE Small/Medium Company Growth

Equity Investments.............. .60 .30 .30

PACE International Equity

Investments..................... .70 .40 .30

PACE International Emerging

Markets Investments............. .90 .50 .40

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

PMAS is offsetting, quarterly, against the outside fee such amounts

as is necessary to ensure that Mitchell Hutchins retains no more than

20 basis points as a management fee from any Portfolio on investment

assets attributable to any Plan.24

\24\ PaineWebber asserts that it chose 20 basis points as the

maximum net fee retained for management services rendered to the

Portfolios because this amount represents the lowest percentage

management fee charged by PaineWebber among the Portfolios

(excluding the PACE Money Market Investments Portfolio for which a

fee of 15 basis points will be charged).

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

The administrative services fee payable to Mitchell Hutchins is not

being offset against the outside fee. Instead, that fee is being

retained by Mitchell Hutchins.

19. The following example demonstrates the operation of the fee

offset mechanism, the calculation of the net inside fee, and the

calculation of the total of a Plan investor's net outside fee and share

of the investment management fees paid by the Portfolios in a given

calendar quarter or year:

Assume that as of September 30, 1995, the net asset value of

Trust Portfolio shares held by a Plan investor was $1,000.

Investment assets attributable to the Plan were distributed among

five Trust Portfolios: (1) PACE Money Market Investments in which

the Plan made a $50 investment and from which Mitchell Hutchins

would retain an inside fee of .15 percent; (2) PACE Intermediate

Fixed Income Investments in which the Plan made a $200 investment

and from which Mitchell Hutchins would retain an inside fee of .20

percent; (3) PACE Large Company Value Equity Investments in which

the Plan made a $250 investment and Mitchell Hutchins would retain

an inside fee of .30 percent; (4) PACE Small/Medium Company Growth

Equity Investments in which the Plan made a $250 investment and

Mitchell Hutchins would be entitled to receive an inside fee of .30

percent; and (5) PACE International Equity Investments in which the

Plan made a $250 investment and Mitchell Hutchins would be entitled

to receive an inside fee of .30 percent.

Assume that the Plan investor pays an outside fee of 1.50

percent so that the total outside fee for the calendar quarter

October 1 through December 31, prior to the fee offset, would be as

follows:

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

Maximum

Portfolio Amount outside Outside

invested quarterly fee quarterly fee

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

PACE Money Market Investments...................................... $50 1.50% (.25) $0.1875

PACE Intermediate Fixed Income Investments......................... 200 1.50% (.25) .7500

PACE Large Company Value Equity Investments........................ 250 1.50% (.25) .9375

PACE Small/Medium Company Growth Equity Investments................ 250 1.50% (.25) .9375

PACE International Equity Investments.............................. 250 1.50% (.25) .9375

Total Outside Fee Per Quarter.................................. 1,000 .............. 3.7500

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

Under the proposed fee offset, the outside fee charged to the

Plan must be reduced by a Reduction Factor to ensure that Mitchell

Hutchins retains an inside fee of no more than 20 basis points from

each of the Portfolios on investment assets attributable to

[[Page 11891]]

the Plan. The following table shows the Reduction Factor as applied

to each of the Portfolios comprising the Trust:

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

MH retained Maximum MH Reduction

Portfolio fee fee factor

(percent) (percent) (percent)

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

PACE Money Market Investments.... .15 .15 .00

PACE Government Securities Fixed

Income Investments.............. .25 .20 .05

PACE Intermediate Fixed Income

Investments..................... .20 .20 .00

PACE Strategic Fixed Income

Investments..................... .25 .20 .05

PACE Municipal Fixed Income

Investments..................... .20 .20 .00

PACE Global Fixed Income

Investments..................... .25 .20 .05

PACE Large Company Value Equity

Investments..................... .30 .20 .10

PACE Large Company Growth Equity

Investments..................... .30 .20 .10

PACE Small/Medium Company Value

Equity Investments.............. .30 .20 .10

PACE Small/Medium Company Growth

Equity Investments.............. .30 .20 .10

PACE International Equity

Investments..................... .30 .20 .10

PACE International Emerging

Markets Investments............. .40 .20 .20

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

Under the proposed fee offset, a Reduction Factor of .10 percent

is applied against the quarterly outside fee with respect to the

value of Plan assets that have been invested in PACE Large Company

Value Equity Investments, PACE Small/Medium Company Growth Equity

Investments and PACE International Equity Investments. As noted

above, the PACE Money Market Investments Portfolio and the PACE

Intermediate Fixed Income Investments Portfolio do not require the

application of a Reduction Factor because the management fee

retained by Mitchell Hutchins for managing these Portfolios does not

exceed 20 basis points. Therefore, the quarterly offset for the plan

investor is computed as follows:

(.25) [($250).10% + ($250).10% + ($250).10%] = $0.1875 or $.19.

In the foregoing example, if the Plan investor elects to receive

an invoice directly, the Plan investor would be mailed a statement

for its PACE Program account on or about October 15, 1995. This

statement would show the outside fee to be charged for the calendar

quarter October 1 through December 31, as adjusted by subtracting

the quarterly offset from the quarterly outside fee as determined

above. The net quarterly outside fee that would be paid to PMAS

would be determined as follows:

$3.75 - $.19 = $3.56.

The Plan investor that elects to receive an invoice directly

would be asked to pay the outside fee for that quarter within 30

days of the date on which the statement was mailed (e.g., November

15, 1995). If the outside fee were not paid by that date, PMAS would

debit the account of the Plan investor (as with other investors) for

the amount of the outside fee (pursuant to the authorization

contained in the PACE Program Investment Advisory Agreement, and as

described in the PACE Program Description appended to the

Prospectus).25 A Plan investor that elects to have the outside

fee debited from its account would receive, in November, a statement

as of October 31 reflecting the outside fee and the quarterly offset

therefrom.

\25\ PaineWebber explains that the foregoing example illustrates

the fact that Plan investors will get the benefit of the fee offset

contemporaneously upon the payment of the outside fee. Because the

inside fee is paid monthly and the fee offset is computed quarterly,

the applicants also explain that PMAS does not receive the benefit

of a ``float'' as a result of such calculations because the fee

offset will always be realized no later than the time that the

outside fee is paid. Since the inside fee is paid at the end of each

calendar month, the applicants further explain that Plan investors

will realize the full benefit of the offset before the time that the

inside fee is paid for the second and third months of the calendar

quarter.

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

Assuming the Plan investor's investment in and allocation among

the Portfolios remains constant throughout the quarter, (a) the Plan

investor's fees for the quarter for asset allocation and related

services provided by PMAS (net outside fee) and (b) the fees paid by

the Portfolios for investment management services provided by

Mitchell Hutchins (inside fee) would be as follows:

$3.56 (net outside fee)+(.25) [($50+$200+$250+$250+$250).20%]

(administrative services fee)+(.25) [($50).15% + ($200).20% + ($250

+ $250 + $250).30%] (inside fee) = $4.74.

Assuming the Plan investor's investment in and allocation among

the Portfolios remains constant throughout the year, the total net

outside fee and inside fee borne by the Plan investor for the year

would be as follows:

4(($4.74) = $18.96 or 1.89% per $1,000 invested.

20. PaineWebber notes that a potential conflict may exist by reason

of the variance in retained inside fees between the different

Portfolios. For example, Mitchell Hutchins will retain a lower inside

fee with respect to assets invested in the PACE Money Market

Investments Portfolio than all other Portfolios. PaineWebber recognizes

that this factor could result in the recommendation of a higher fee-

generating Portfolio to an investing Plan. Nonetheless, PMAS will be

subject to and intends to comply fully with the standards of fiduciary

duty that require that it act solely in the best interest of the Plan

when making investment recommendations.

21. The books of the Trust will be audited annually by independent,

certified public accountants selected by the Trustees and approved by

the investors. All investors will receive copies of an audited

financial report no later than sixty days after the close of each Trust

fiscal year. All Trust financial statements will be prepared in

accordance with generally accepted accounting principles and relevant

provisions of the federal securities laws. The books and financial

records of the Trust will be open for inspection by any investor,

including the Department, the Service and SEC, at all times during

regular business hours.

22. In summary, it is represented that the transactions will

satisfy the statutory criteria for an exemption under section 408(a) of

the Act because:

(a) The investment of a Plan's assets in the PACE Program will be

made and approved by a Plan fiduciary or participant that is

independent of PaineWebber and its affiliates such that the Independent

Fiduciary or Directing Participant will maintain complete discretion

with respect to participating in the PACE Program.

(b) An Independent Fiduciary or Directing Participant will have

full discretion to redeem his or her shares in the Trust.

(c) No Plan will pay a fee or commission by reason of the

acquisition or redemption of shares in the Trust and PMAS nor will its

affiliates receive 12b-1 Fees in connection with the transactions.

(d) Prior to making an investment in the PACE Program, each

Independent Fiduciary or Directing Participant will receive offering

materials and disclosures from PMAS which disclose all material facts

concerning the purpose, fees, structure, operation, risks and

participation in the PACE Program.

(e) PMAS will provide written documentation to an Independent

Fiduciary or Directing Participant of its

[[Page 11892]]

recommendations or evaluations based upon objective criteria.

(f) With the exception of Mitchell Hutchins which will manage the

PACE Money Market Investments Portfolio, any Sub- Adviser appointed to

exercise investment discretion over a Portfolio will always be

independent of PaineWebber and its and its affiliates.

(g) The quarterly investment advisory fee that is paid by a Plan to

PMAS for investment advisory services rendered to such Plan will be

offset by such amount as is necessary to assure that Mitchell Hutchins

retains 20 basis points from any Portfolio (with the exception of the

PACE Money Market Investments Portfolio) on investment assets

attributable to the Plan investor. However, the quarterly fee paid to

Mitchell Hutchins for administrative services will be retained by

Mitchell Hutchins and will not be offset against the outside fee.

(h) Each participating Plan will receive copies of the Trust's

semi-annual and annual report which will include financial statements

for the Trust that have been prepared by independent, certified public

accountants and investment management fees paid by each Portfolio.

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

written disclosures to an Independent Fiduciary or, if applicable,

Directing Participant, with respect to (1) the total, expressed in

dollars, of each Portfolio's brokerage commissions that are paid to

PaineWebber and its affiliates; (2) the total, expressed in dollars, of

each Portfolio's brokerage commissions that are paid to unrelated

brokerage firms; (3) the average brokerage commissions per share by the

Trust to brokers affiliated with the PaineWebber, expressed as cents

per share; and (4) the average brokerage commissions per share by the

Trust to brokers unrelated to the PaineWebber and its affiliates,

expressed as cents per share for any year in which brokerage

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

Plan's assets are invested.

For Further Information Contact: Ms. Jan D. Broady of the

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

Herzog, Heine, Geduld, Inc., Located in New York, New York

[Application No. D-10018]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

32847, August 10, 1990). If the exemption is granted, the sanctions

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

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

extension of credit between Herzog, Heine, Geduld, Inc. (HHG) and

various individual retirement accounts for which HHG serves as passive

trustee or custodian (the HHG IRA or HHG IRAs) resulting from the

proposed in-kind transfer to HHG IRAs at the direction of the owners of

such HHG IRAs of certain senior subordinated notes (the Notes) issued

by HHG, and thereafter the holding of such Notes by the HHG IRAs;

provided that: (1) officers, directors, and employees in HHG who are

also owners of HHG IRAs do not participate in the proposed

transactions; (2) the owners of the HHG IRAs have exclusive

responsibility and control over the investment of the assets of such

accounts; (3) HHG has no discretionary authority or control with

respect to the investment of the assets of the HHG IRAs involved in the

proposed transactions, nor does HHG render investment advice (within

the meaning of 29 CFR 2510.3-21(c)) with respect to those assets; (4) a

separate accounting of the assets in the HHG IRAs, including the Notes

which have been acquired by such accounts, will be maintained by HHG;

(5) the value of the Notes in each HHG IRA will at no time exceed 25

percent (25%) of the value of the assets of each HHG IRA; (6) the HHG

IRAs will pay no fees or commissions in connection with the

transactions; and (7) the combined total of all fees received by HHG

for the provision of services to the HHG IRAs is not in excess of

``reasonable compensation'' within the meaning of section 4975(d)(2) of

the Code.\26\

\26\ Pursuant to 29 CFR 2510.3-2(d), the HHG IRAs are not within

the jurisdiction of Title I of the Act. However, there is

jurisdiction under Title II of the Act, pursuant to section 4975 of

the Code.

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

Summary of Facts and Representations

1. HHG is a full service broker/dealer, registered with the

Securities and Exchange Commission under the Securities Exchange Act of

1934. HHG also provides fully disclosed clearing services to other

broker/dealers. HHG is a member of the New York Stock Exchange (NYSE)

and is a leading market maker in NASDAQ and over-the-counter

securities. As of September 29, 1995, HHG had total liabilities of

$746.1 million, shareholders' equity of $107.5 million and $31.9

million in liabilities subordinated to the claims of general creditors.

2. It is represented that HHG has for many years offered individual

retirement accounts to its customers. In this regard, HHG has been

approved, since February 11, 1982, by the Internal Revenue Service to

serve as a passive trustee or custodian for individual retirement

accounts, Keoghs, and custodial accounts established under section

403(b)(7) of the Code. In its capacity as a custodian, HHG is a

disqualified person with respect to the HHG IRAs, pursuant to section

4975(e)(2) of the Code.

It is represented that HHG has considerable experience in dealing

with individual retirement accounts that contain investments of all

types, including debt instruments. As of January 25, 1995, HHG

maintained approximately 8,000 individual retirement accounts for its

customers representing approximately $365 million dollars in assets.

3. In 1992 and 1993, HHG issued the Notes which are the subject of

this proposed exemption in minimum face amounts on each of the Notes of

$250,000. The Notes issued in 1992 pay interest quarterly at the annual

rate of 11 percent (11%) on an aggregate principal amount of

$7,500,000. The Notes issued in 1993 pay interest quarterly at the

annual rate of 10 percent (10%) on an aggregate principal amount of

$7,500,000. It is represented, as of February 19, 1996, that HHG had

made all interest payments to the holders of the Notes. The Notes were

issued for a term of five (5) years each. In this regard, the maturity

date for the Notes issued in 1992 is January 1, 1997, and the maturity

date for the Notes issued in 1993, is April 1, 1998. The Notes will pay

principal in a balloon payment at maturity. The Notes are described as

Senior Subordinated Notes of HHG. In this regard, the Notes are

unsecured, rank equally with all other outstanding subordinated debt of

HHG, and are subordinate to any senior claim of present or future

creditors of HHG. A senior claim is defined as any present or future

obligation of HHG, except those obligations which are the subject of

subordination agreements.

The Notes were only offered for sale to investors who met the

``accredited investor'' net worth and income standards described in

Regulation D, promulgated under the Securities Act of 1933.\27\ It is

represented that the Notes

[[Page 11893]]

were acquired by all investors at face value, and were purchased in the

same manner and on the same terms by all investors. It is represented

that potential investors in the Notes received certain disclosures

prior to making the investment. Such disclosures included, among other

things, an outline of the nature of the Notes, a description of the

risk factors involved in investing in the Notes, and detailed financial

disclosures about HHG. It is represented that each investor

acknowledged receipt of these disclosures in writing. In addition, it

is represented that prior to acquiring the Notes, each purchaser

certified in writing that the ``accredited investor'' net worth and

income standards had been satisfied.

\27\ In general, the ``accredited investor'' net worth and

income standards described in Regulation D promulgated under the

Securities Act of 1933 provide that an ``accredited investor'' is

one of the following: (a) an individual with a net worth (or joint

net worth with a spouse) in excess of $1,000,000; (b) an individual

who had an individual income in excess of $200,000 in each of the

two most recent years or joint income with that person's spouse in

excess of $300,000 in each of those years, and has a reasonable

expectation of reaching the same income level in the current year;

or (c) a trust with total assets in excess of $5,000,000.

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

It is represented that the entirety of the Notes has been issued

and are being held by individual investors and by individual retirement

accounts unrelated to HHG. In this regard, approximately 90 percent

(90%) of the Notes were sold to customers other than owners of

individual retirement accounts, and at least 50 percent (50%) of the

Notes are held by persons independent of HHG and/or the HHG IRAs.

There is no public trading market for the Notes. The Notes are not

registered under the Securities Act of 1933, because the Notes are

issued to ``accredited investors;'' and therefore, are exempt from

registration, pursuant to an exemption described in section 4(2) and/or

section 3(b) of the Securities Act of 1933 and by Regulation D. The

Notes may not be sold or transferred, except in a transaction exempt

from the registration requirements of federal and state securities

laws. In addition, the Notes may not be sold or transferred, unless HHG

is furnished with a satisfactory opinion of counsel to the effect that

an exemption from the registration requirements of federal and state

securities laws is available. Further, any proposed sale to another

member of the NYSE is subject to a right of first refusal by HHG.

4. In 1992 and 1993 when the Notes were issued, HHG offered them

for purchase by certain of its customers. However, the owners of HHG

IRAs who met the ``accredited investor'' standards were not permitted

to acquire the Notes, because HHG believed that prohibited transactions

would arise, if the owners of such accounts were to direct HHG, the

custodian of such HHG IRAs, to purchase the Notes on behalf of the HHG

IRAs with funds from such HHG IRAs. Instead, HHG suggested that the

owners of HHG IRAs who were interested in purchasing the Notes for

their accounts set up other individual retirement accounts with other

custodians or trustees (the Non-HHG IRAs or the Non-HHG IRA) and then

arrange for these Non-HHG IRAs to purchase the Notes. Accordingly, it

is represented that some owners of HHG IRAs transferred funds from

their HHG IRAs into Non-HHG IRAs at other brokerage firms or banks and

directed the trustees or custodians of such Non-HHG IRAs to purchase

the Notes.\28\

\28\ The Department expresses no opinion herein, as to whether

the prohibited transactions provisions, as set forth in section 4975

of the Code, have been violated in connection with the purchase of

the Notes by the Non-HHG IRAs at the direction of the owners of such

accounts who are also officers, directors, or employees of HHG and

the subsequent holding of the Notes in such Non-HHG IRAs by trustees

or custodians other than HHG. The Department notes that the proposed

relief is limited to the transactions described herein, and no

relief has been provided in connection with the acquisition and

holding of the Notes by the Non-HHG IRAs.

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

HHG believes that the HHG IRAs which transferred funds from their

HHG IRAs to Non-HHG IRAS in order to purchase the Notes contained

assets with an aggregate fair market value of $4,400,000. It is

estimated that for the average owner of a Non-HHG IRA the Notes

constituted less than 30 percent (30%) of the total assets of such

owner's account.

5. HHG seeks to permit the acquisition and holding of the Notes by

the HHG IRAs. In order to accomplish this goal, the owners of the Non-

HHG IRAs would transfer assets that include the Notes from the Non-HHG

IRAs into the HHG IRAs. It is anticipated that the Notes would be

transferred in kind at the direction of the owners of the Non-HHG IRAs

from the current trustee of the Non-HHG IRAs to HHG. It is represented

that such transfers will be direct custodian to custodian transfers. In

this regard, each holder of a Non-HHG IRA who wishes to transfer the

assets in such account to the custodianship of HHG will complete and

sign a customer account transfer form, and direct that the assets be

transferred in kind from the former custodian of the Non-HHG IRA to

HHG.

6. HHG believes the transactions described in the paragraph above

may be prohibited, pursuant to section 4975(c) of the Code in that such

transactions may result in a direct or indirect lending of money or

other extension of credit between a plan and a disqualified person with

respect to such plan. Accordingly, HHG seeks exemptive relief from the

prohibited transaction provisions, as set forth in section 4975(c)(1)

(A) through (D) of the Code.

7. It is represented that the proposed transactions would be in the

interest of the affected HHG IRAs, in that owners of the HHG IRAs would

not need, solely for the purpose of acquiring and holding the Notes, to

incur the additional custodial fees and other expenses related to

maintaining the Non-HHG IRAs. In this regard, it is represented that

HHG charges for an HHG IRA a custodial fee of $25 annually,\29\ which

HHG maintains is considerable less than the amount charged by trustees

or custodians of the Non-HHG IRAs which currently hold the Notes.

\29\ The Department, herein, expresses no opinion as to whether

the provision of services by HHG to the HHG IRAs and the

compensation received therefor satisfies the terms and conditions of

the statutory exemption, as set forth in section 4975(d)(2) of the

Code. To the extent that such provision of services to the HHG IRAs

by HHG does not satisfy the requirements of section 4975(d)(2) of

the Code, the Department, herein, is offering no relief.

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

8. It is represented that the proposed transactions would be

protective of the rights of participants in the HHG IRAs and their

beneficiaries, in that the percentage of the assets of the HHG IRAs

involved in the Notes will at no time exceed 25 percent (25%) of the

value of the assets of such accounts.

Further, it is represented that HHG has no discretion to direct any

investment of any HHG IRA which will be involved in the proposed

transactions. Under the terms of the HHG IRAs, the owners of such

accounts, as fiduciaries, have exclusive responsibility for and control

over the investment of the assets of such accounts. In this regard, it

is represented that the owners of the Non-HHG IRAs which purchased the

Notes are sophisticated investors who, in most cases, are long standing

customers of HHG and are familiar with the firm. It is represented that

the owners of the Non-HHG IRAs made the original decision to purchase

the Notes with the assets in the Non-HHG IRAs, and, if the proposed

exemption is granted, the same individuals who are also the owners of

the HHG IRAs will make the decision to transfer all or a portion of the

assets in the Non-HHG IRA, including the Notes, into an HHG IRA. It is

estimated, as of the date of the application, that eleven (11)

participants and beneficiaries may be affected by the requested

exemption, as they may be

[[Page 11894]]

given the opportunity to transfer Notes from Non-HHG IRAs to HHG IRAs,

but will not be obligated to make such a transfer. Of these eleven

(11), two individuals are officers of HHG who are employed in the

securities trading department of HHG. Under the terms of this proposed

exemption, officers, directors and employees of HHG who are also owners

of HHG IRAs will not be permitted to participate in the proposed

transactions.

9. It is represented that the requested exemption is

administratively feasible in that HHG already maintains an individual

retirement program, is approved by the IRS to serve as a custodian for

individual retirement accounts, and has experience dealing with such

accounts. HHG believes that the owners of HHG IRAs would prefer to hold

their investments in the Notes in HHG IRA custodial accounts, because

it would be less expensive and would be administratively less awkward

for both HHG and the owners of the HHG IRAs. In this regard, it is

represented that HHG will maintain a separate accounting of all of the

holdings in the HHG IRAs, including the Notes that may be acquired, for

each owner of an HHG IRA. Further, it is represented that the HHG IRAs

will not pay commissions as a result of the transfer of the Notes into

the custodianship of HHG.

10. In summary, HHG, the applicant, represents that the proposed

transactions meet the statutory criteria of section 4975(c)(2) of the

Code because:

(a) officers, directors, or employees in HHG who are also owners of

HHG IRAs will not be permitted to participate in the proposed

transactions;

(b) the owners of the HHG IRAs have exclusive responsibility and

control over the investment of the assets of such accounts;

(c) HHG has no discretionary authority or control with respect to

the investment of the assets of the HHG IRAs to be involved in the

proposed transaction, nor does HHG render investment advice (within the

meaning of 29 CFR 2510.3-21(c)) with respect to those assets;

(d) a separate accounting of the assets in the HHG IRAs, including

the Notes which have been acquired by such accounts, will be maintained

by HHG;

(e) the percentage of the assets of the HHG IRAs involved in the

Notes will at no time exceed 25 percent (25%) of the value of the

assets of such accounts;

(f) the HHG IRAs will pay no fees or commissions in connection with

the transactions;

(g) the combined total of all fees received by HHG for the

provision of services to the HHG IRAs are not in excess of ``reasonable

compensation'' within the meaning of section 4975(d)(2) of the Code;

and

(h) the owners of the HHG IRAs will avoid the administrative burden

and expense of maintaining the Non-HHG IRAs.

For Further Information Contact: Angelena C. Le Blanc of the Department

(202) 219-8883. (This is not a toll-free number.)

Pierre W. Mornell, M.D., A Sole Proprietorship, Defined Benefit Plan

(the Plan) Located in Mill Valley, California

[Application No. D-10170]

Proposed Exemption

The Department is considering granting an exemption under the

authority of 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 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 sale of certain unimproved real property located in Mill

Valley, California (the Property) by the Plan to Pierre W. Mornell and

Linda C. Mornell, parties in interest with respect to the Plan;

provided that the following conditions are satisfied:

(A) All terms and conditions of the transaction are no less

favorable to the Plan than those which the Plan could obtain in an

arm's-length transaction with an unrelated party;

(B) The Plan receives a cash purchase price for the Property in the

amount of the fair market value of the Property; and

(C) The Plan does not incur any expenses or suffer any loss with

respect to the transaction.

Summary of Facts and Representations

1. The Plan is a defined benefit pension plan with one participant

and total assets of $287,585 as of November 1, 1995. The Plan is

sponsored by the medical practice of Pierre W. Mornell, M.D. (Dr.

Mornell), which is a sole proprietorship (the Employer) located in Mill

Valley, California. The Plan's sole participant is Dr. Mornell, who

also serves as the Plan's trustee and administrator.30

\30\ Since Dr. Mornell is the sole proprietor and the only

participant in the Plan, there is no jurisdiction under Title I of

the Act pursuant to 29 CFR 2510.3-3(b). However, there is

jurisdiction under Title II of the Act pursuant to section 4975 of

the Code.

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

2. The Property is a vacant parcel of 3,420 square feet of land

located in Mill Valley, California at 19 Park Avenue, zoned for multi-

family residential development. Dr. Mornell represents that the

Property was purchased by the Plan in 1989 from parties unrelated to

himself, his medical practice, and his spouse, and that the terms and

conditions of that transaction were negotiated at arm's length with the

sellers. The Plan paid a purchase price of $225,000, of which $90,000

was represented by a five-year promissory note (the Note) payable to

the seller, secured by a first deed of trust on the Property, due on or

before August 1, 1994. Dr. Mornell represents that the Note was timely

paid in full by the Plan.

3. Dr. Mornell represents that as Plan trustee he caused the Plan

to purchase the Property in 1989, and to invest a large percentage of

the Plan's assets therein, for a variety of reasons, summarized as

follows: During 1989, the value of real estate in the market in which

the Property is situated was appreciating rapidly, and Dr. Mornell

believed that the Property's value would continue to appreciate after

purchase by the Plan. The Property is situated adjacent to a corner lot

along a main thoroughfare in an affluent suburban community, and Dr.

Mornell, as trustee, represents that he believed that the risk of a

significant decline in the Property's value was small, due to these

factors. Dr. Mornell notes that he was and is the sole participant in

the Plan, and was aware that he would be the only person who would be

adversely affected if the Property did not prove to be a favorable

investment. Dr. Mornell represents that it had been his intention that

the Property be developed by the construction of income-producing

improvements thereon, but the value of the Property ceased to

appreciate. Instead, Dr. Mornell represents that the Property's value

commenced to decline before any improvements had been added to the

Property, and the Property has never produced any income of any kind.

Since the Property has proven to be an unfavorable investment, Dr.

Mornell desires that the Plan divest of the Property and reinvest in

other, more diversified assets with more potential for favorable

return. Accordingly, Dr. Mornell and his spouse, Linda C. Mornell

(together, the Mornells) propose to purchase the Property from the Plan

and are requesting an exemption to permit this transaction under the

terms and conditions described herein.

4. It is proposed that the Mornells will make a single cash payment

to the Plan for the Property in the amount of no less than the fair

market value of the

[[Page 11895]]

Property, and in no event less than $215,000. The Property has been

appraised by T.B. Combs (Combs), a professional real estate appraiser

in Mill Valley, California. Combs represents that as of October 15,

1996, the Property had a fair market value of $215,000. The Plan will

not incur any expenses related to the transaction. Dr. Mornell

represents that the proposed transaction is in the best interests and

protective of the Plan because it will enable the Plan to dispose of an

non-income-producing asset and will receive a cash purchase price

representing the Property's fair market value, which can be reinvested

in more diverse assets with better prospects for favorable returns.

5. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 4975(c)(2) of the Code

for the following reasons: (a) The Plan, in which Dr. Mornell is the

sole participant, will receive cash for the Property for reinvestment

in more diverse assets; (b) The purchase price will be the fair market

value of the Property as determined by Combs' appraisal; (c) the Plan

will not incur any expenses related to the proposed transaction; and

(d) Dr. Mornell is the only participant affected by the transaction,

and he desires that the transaction be consummated.

Notice to Interested Persons

Since Dr. Mornell is the only Plan participant to be affected by

the proposed transaction, the Department has determined that there is

no need to distribute the notice of proposed exemption to interested

persons. Comments and requests for a hearing are due within 30 days

from the date of publication of this notice of proposed exemption in

the Federal Register.

For Further Information Contact: Ronald Willett of the Department,

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

Gail L. Belt Self Employed Retirement Plan (the Plan) Located in

Vienna, Virginia

[Application No. D-10219]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

32847, August 10, 1990). If the exemption is granted, the 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 sale of a parcel of real property (the Property) by the

Plan to Ms. Gail L. Belt, a disqualified person with respect to the

Plan for $115,000, provided the following conditions are satisfied: a)

the sale is a one-time transaction for cash; b) the Plan pays no

commissions or expenses in connection with the transaction; c) the Plan

receives not less than the greater of the fair market value of the

Property or its cost in acquiring the Property; d) the fair market

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

appraiser; and e) Ms. Belt is the only Plan participant to be affected

by the transaction, and she desires that the transaction be

consummated.31

31 Since Ms. Belt is the sole owner of the Plan sponsor and the

only participant in the Plan, there is no jurisdiction under Title I

of the Act pursuant to 29 CFR 2510.3-3(b). However, there is

jurisdiction under Title II of the Act pursuant to section 4975 of

the Code.

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

Summary of Facts and Representations

1. Ms. Belt is a self-employed real estate agent in Northern

Virginia. Her primary business is facilitating the buying and selling

of residential real estate. She is a realtor for Coldwell Banker,

Stevens Realtors, located in Vienna, Virginia. Ms. Belt is the sole

trustee and sole participant in the Plan, which is a defined

contribution Plan with current assets of approximately $1,080,597.

2. In August, 1993, Ms. Belt, in her capacity as sole trustee for

the Plan, acquired the Property as a Plan investment. The Property was

purchased from Edward and Edith Schultz, parties unrelated to Ms. Belt

and the Plan, for a purchase price of $110,000. The Property consists

of an unimproved plot of land located at 1747 Lockerbie Lane, Vienna,

Virginia.

3. The Plan now wishes to sell the Property to Ms. Belt. The

applicant represents that the Property is not increasing in value in

the current real estate market, and the Plan has ongoing administrative

expenses for the Property. In addition, the Plan has been unable to

procure liability insurance to cover any possible injuries on the site.

Finally, the Plan would be disposing of an illiquid asset.

4. Mr. Douglas S. Waldron of Residential Appraisal Group, Inc., an

independent licensed residential real estate appraiser in Annandale,

Virginia, has appraised the Property as having a fair market value of

$115,000 as of February 5, 1996. The applicant represents that Ms. Belt

will pay this amount to the Plan since it exceeds the Plan's purchase

price for the Property, plus expenses.

5. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 4975(c)(2) of the Code

because: a) the sale is a one-time transaction for cash; b) the Plan

will pay no commissions or other expenses in connection with the

transaction; c) the Plan will receive the greater of its acquisition

price for the Property plus expenses, or the current fair market value

of the Property as determined by a qualified, independent appraiser;

and d) Ms. Belt is the sole participant in the Plan to be affected by

the transaction, and she desires that the transaction be consummated.

Notice to Interested Persons

Since Ms. Belt is the only Plan participant to be affected by the

proposed transaction, the Department has determined that there is no

need to distribute the notice of proposed exemption to interested

persons. Comments and requests for a hearing are due within 30 days

from the date of publication of this notice of proposed exemption in

the Federal Register.

For Further Information Contact: Gary H. Lefkowitz of the

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

General Information

The attention of interested persons is directed to the following:

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

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

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

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

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

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

accordance with section 404(a)(1)(b) of the act; nor does it affect the

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

[[Page 11896]]

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and 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 19th day of March, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 96-6991 Filed 3-21-96; 8:45 am]

BILLING CODE 4510-29-P