Proposed Exemptions; 1st Source Bank

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10346, et al.]

Proposed Exemptions; 1st Source Bank

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

[[Page 33911]]

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.

1st Source Bank Located in South Bend, Indiana

[Application No. D-10346]

Proposed Exemption

The Department is considering granting an exemption under the

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

Code and in accordance with the procedures set forth in 29 C.F.R. Part

2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990).1

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

\1\ For purposes of this exemption, references to specific

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

also to the corresponding provisions of the Code.

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

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

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

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

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

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

September 19, 1996, to the in-kind transfer to separate series of an

open-end investment company registered under the Investment Company Act

of 1940 (the Funds) to which 1st Source Bank or any of its affiliates

(collectively, the Bank) serves as investment advisor, and may provide

other services, of the assets of various employee benefit plans (the

Plans) that are held in certain collective investment funds (the CIFs)

maintained by the Bank or otherwise held by the Bank as trustee,

investment manager, or in any other capacity as fiduciary on behalf of

the Plans, in exchange for shares of such Funds; provided that the

following conditions are met:

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

each affected Plan and who is independent of and unrelated to the Bank,

as defined in paragraph (G) of Section III below, receives in advance

of the investment by the Plan in any of the Funds a full and detailed

written disclosure of information concerning such Fund, including, but

not limited to:

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

which such Plan is considering investing,

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

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

services (Secondary Services), as defined in paragraph (H) of section

III below, and all other fees to be charged to or paid by the Plan and

by such Funds to the Bank, including the nature and extent of any

differential between the rates of such fees,

(3) The reasons why the Bank may consider such investment in the

Funds to be appropriate for the Plan,

(4) A statement describing whether there are any limitations

applicable to the Bank with respect to which assets of a Plan may be

invested in the Funds, and, if so, the nature of such limitations, and

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

exemption and/or a copy of the final exemption;

(B)(1) With respect to each of the Funds in which a Plan invests,

the Bank will provide the Second Fiduciary of such Plan:

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

Fund,

(b) Upon the request of such Second Fiduciary, with a report or

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

the current statement of additional information or some other written

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

the Bank;

(2) On the basis of the information described above in paragraph

(A) of this section I, the Second Fiduciary authorizes in writing the

in-kind transfer of assets of the Plans in exchange for shares of the

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

Funds, and the fees received by the Bank in connection with its

services to the Funds, such authorization by the Second Fiduciary to be

consistent with the responsibilities, obligations, and duties imposed

on fiduciaries by Part 4 of Title I of the Act;

(C) No sales commissions or other fees are paid by the Plans in

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

transfer of Plan assets in the CIFs, and no redemption fees are paid in

connection with the sale of such shares by the Plans to the Fund;

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

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

by the Bank in any capacities as fiduciary on behalf of such Plans are

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

(E) The Plans receive shares of the Funds that have a total net

asset value that is equal to the value of the assets of the Plans or

the CIFs exchanged for such shares on the date of transfer, based on

the current market value of the assets of the Plans or the CIFs;

(F) The current market value of the assets of the Plans or the CIFs

to be transferred in-kind in exchange for shares is determined in a

single valuation performed in the same manner and at the close of

business on the same day, using independent sources in accordance with

the procedures set forth in Rule 17a-7(b) (Rule 17a-7), issued by the

Securities and Exchange Commission under the Investment Company Act of

1940, and the procedures established by the Funds pursuant to Rule 17a-

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

all securities for which a current market price cannot be obtained by

reference to the last sale price for transactions reported on a

recognized securities exchange or NASDAQ be valued based on an average

of the highest current independent bid and lowest current independent

offer, as of the close of business on the day preceding the CIF or Plan

transfers determined on the basis of reasonable inquiry from at least

three sources that are broker-dealers or pricing services independent

of the Bank;

[[Page 33912]]

(G) For all conversion transactions that occur after the date of

publication in the Federal Register of a notice proposing this

exemption: Not later than thirty (30) days after completion of each in-

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

of the Funds, the Bank sends by regular mail to the Second Fiduciary,

as defined in paragraph (G) of Section III below, a written

confirmation which contains the following information:

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

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

Investment Company Act of 1940;

(2) The price of such asset involved in the transaction; and

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

in determining the value of such assets;

(H) No later than ninety (90) days after completion of each in-kind

transfer of assets of the Plans or the CIFs in exchange for shares of

the Funds, the Bank sends by regular mail to the Second Fiduciary, who

is acting on behalf of each affected Plan and who is independent of and

unrelated to the Bank, as defined in paragraph (G) of section III

below, a written confirmation that contains the following information:

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

before the transfer, the related per unit value, and the aggregate

dollar value of the units transferred; and

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

affected Plan following the transfer, the related per share net asset

value, and the aggregate dollar value of the shares received;

(I) The combined total of all fees received by the Bank for the

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

provision of services to any of the Funds in which the Plans may

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

meaning of section 408(b)(2) of the Act;

(J) The Bank does not receive any fees payable pursuant to Rule

12b-1 under the Investment Company Act of 1940 in connection with the

transactions described herein;

(K) The Plans are not sponsored by the Bank;

(L) All dealings between the Plans and any of the Funds are on a

basis no less favorable to the Plans than dealings between the Funds

and other shareholders holding the same class of shares as the Plans;

and

(M) The requirements of Prohibited Transaction Class Exemption 77-4

(42 FR 18732, April 8, 1977) are met with respect to all arrangements

under which investment advisory fees are paid to the Bank directly or

indirectly by Plans with assets invested in the Funds.

Section II--General Conditions

(A) The Bank maintains for a period of six years the records

necessary to enable the persons, as described in paragraph (B) 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 the Bank, the

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

period, and

(2) No party in interest, other than the Bank, shall be subject to

the civil penalty that may be assessed under section 503(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 (B) of this section;

(B)(1) Except as provided in paragraph (B)(2) of this section II

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

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

section II above are unconditionally available at their customary

location for examination during normal business hours by--

(a) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

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

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

duly authorized employee or representative of such fiduciary, and

(c) Any participant or beneficiary of the Plans or duly authorized

employee or representative of such participant or beneficiary;

(2) None of the persons described in paragraphs (B)(1)(b) and

(B)(1)(c) of this section II shall be authorized to examine trade

secrets of the Bank or commercial or financial information which is

privileged or confidential.

Section III--Definitions

For purposes of this exemption:

(A) The term ``Bank'' means 1st Source Bank and any affiliate of

the Bank, as defined in paragraph (B) of this section III.

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

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

intermediaries, controlling, controlled by, or under common control

with the person,

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

such person, and

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

officer, director, partner or employee.

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

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

individual.

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

investment company or companies registered under the Investment Company

Act of 1940 for which the Bank serves as investment adviser, and may

also provide custodial or other services as approved by such Funds.

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

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

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

and statement of additional information, and other assets belonging to

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

each portfolio, by the number of outstanding shares.

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

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

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

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

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

is independent of and unrelated to the Bank. For purposes of this

exemption, the Second Fiduciary will not be deemed to be independent of

and unrelated to the Bank if:

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

controlled by, or is under common control with the Bank,

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

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

partner, or employee of the Bank (or is a relative of such person), or

(3) Such Second Fiduciary directly or indirectly receives any

compensation or other consideration for his or her own personal account

in connection with any transaction described in this exemption.

If an officer, director, partner, or employee of the Bank (or a

relative of such persons) is a director of such Second Fiduciary, and

if he or she abstains from participation in (i) the choice of the

Plan's investment manager/advisor, (ii) the approval of any purchase or

sale by the Plan of shares of the Funds, and (iii) the approval of any

change of fees charged

[[Page 33913]]

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

described in section I above, then paragraph (G)(2) of section III

above shall not apply.

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

investment management, investment advisory, or similar service, which

is provided by the Bank to the Funds, including but not limited to

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

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

September 19, 1996.

Summary of Facts and Representations

1. The Bank is a state chartered banking association having its

principal office in South Bend, Indiana. The Bank has total nontrust

assets of approximately $1.74 billion and trust assets of approximately

$1.17 billion. The 1st Source Corporation, with headquarters in South

Bend, owns all of the outstanding stock of the Bank.

2. The Plans involved in the transactions for which the Bank

requests exemptive relief are numerous plans for which the Bank has

acted or will act as fiduciary and has exercised or will exercise

investment discretion with respect to all or a portion of the assets of

such Plans.2 For this reason, specific information relating

to each individual Plan does not appear in the application. However, it

is anticipated that the Plans include or will include various employee

benefit plans, as defined by section 3(3) of the Act, and certain plans

or trusts as defined by section 4975(e)(1) of the Code. These Plans are

sponsored or maintained by parties unrelated to the Bank 3

and include, among others, pension, profit sharing, stock bonus, and

other retirement plans qualified for tax purposes under section 401(a)

of the Code, voluntary employees' beneficiary associations and other

welfare benefit plans, and individual retirement accounts and

simplified employee pension plans described in section 408 of the Code.

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

\2\ The Department herein is not proposing relief for

transactions afforded relief by section 404(c) of the Act.

\3\ The Department herein is not proposing relief for

transactions involving any plan sponsored by the Bank or its

affiliates.

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

The Bank represents that, as fiduciary, it exercises investment

discretion with respect to all or a portion of the assets of

approximately 443 such Plans having total assets under management by

the Bank of approximately $443 million. The Bank receives compensation

for serving as fiduciary with respect to these Plans in accordance with

standard published fee schedules or as otherwise agreed upon by the

Bank and the sponsors of such Plans.4 The Bank represents

that it generally receives separate compensation for investment

management services and for administrative services other than

investment management. These administrative services include, among

others, acting as custodian of the Plan's assets, maintaining Plan

records, preparing periodic reports concerning the status of the Plan

and its assets, and accounting for Plan contributions and benefit

distributions and other receipts and disbursements. Depending on the

terms of the Plan's governing documents, the Bank's compensation is

paid either from the Plan's assets or by its sponsor.

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

\4\ The Department expresses no opinion as to whether the

provision of services by the Bank or its affiliates to the Plans

satisfies the requirements for statutory exemption, as set forth in

section 408(b)(2) of the Act and 29 CFR 2550.408(b)(2) of the

Department's regulation. To the extent that such provision of

services to the Plan by the Bank or its affiliates does not satisfy

the requirements of section 408(b)(2) of the Act, the Department,

herein, is offering no relief.

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

3. The transactions for which the Bank requests exemptive relief

involve the Funds, each which constitutes a separate investment

portfolio or a series of portfolios having a separate prospectus and

representing a distinct investment vehicle. In the aggregate, the Funds

comprise an Ohio business trust registered as an open-end investment

company under the Investment Company Act of 1940 (the 1940 Act). The

Funds currently include a diversified equity fund, an income equity

fund, a special equity fund and an intermediate fixed income fund,

along with the a money market portfolio. Additional series may be

established in the future, and the existing portfolios may be modified,

reorganized, or terminated.

4. BISYS Fund Services Limited Partnership, located in Columbus,

Ohio (BISYS), acts as the administrator of the Funds and the

distributor of shares of the Funds. BISYS Fund Services, Inc. (BISYS

Services), an affiliate of BISYS, is the transfer agent and shareholder

servicing agent of the Funds. The Bank represents that BISYS and BISYS

Services are unrelated to the Bank. The Funds pay a monthly fee to

BISYS for its services. Although the Funds have adopted a plan of

distribution in accordance with Rule 12b-1 under the 1940 Act, such

plan relates only to retail shareholders and the Bank represents that

the Funds do not currently pay any 12b-1 fees to any entity. When sale

commissions or ``loads'' or redemption fees are charged in connection

with purchases or sales of Fund shares, the Funds implement procedures

which exempt the Plans from any such charges. The Bank represents, and

the conditions of this proposed exemption require, that in the event

the Funds pay any such fees in the future, no portion of such fees will

be paid, directly or indirectly to the Bank or any of its affiliates in

connection with the acquisition or holding of Fund shares by any Plan

with respect to which the Bank or any of its affiliates acts as a

fiduciary.

5. The Bank, through the 1st Source Trust Investment Division, acts

as investment adviser to the Funds. The Bank receives compensation from

the Funds or from BYSIS or BYSIS Services for the services provided to

the Funds, and expects to receive compensation for any additional

services it may provide in the future.5 The Bank's

compensation is computed daily and paid monthly in accordance with

various agreements between the Bank and the Funds, BYSIS, or BYSIS

Services. These agreements are approved by the trustees of the Funds

and by the shareholders of the Funds. The Fund trustees will also

approve any changes in the compensation paid to the Bank for services

rendered with respect to the Funds.

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

\5\ The Department notes that pursuant to paragraph (K) of

Section I of the proposed exemption, in any compensation

arrangements between the Bank and BYSIS or BYSIS Services, the Bank

is prohibited from receiving any fees payable pursuant to Rule 12-b1

of the Investment Company Act of 1940 in connection with any of the

transactions described herein.

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

6. Investors in the Funds, including Plans, are able to purchase or

sell Fund shares in accordance with the standard procedures described

in the prospectus for each portfolio. In addition, the Bank makes

available to Plans an automated cash management procedure (the ACMP),

or ``sweep'' arrangement, whereby otherwise uninvested cash balances of

Plan may be invested automatically overnight in the Money Market

Portfolio.6 Under the ACMP, the Bank's computerized system

will automatically scan or ``sweep'' the accounts of the affected Plans

as of the end of each business day to determine whether such accounts

have positive or negative net cash balances. Based on this information,

the system will automatically invest the cash of Plans having positive

balances down to the last $.01 in shares of the Money Market Portfolio

or, in the case of Plans having negative cash balances, automatically

liquidate Fund shares held by the Plan

[[Page 33914]]

as necessary to eliminate the negative balance. The purchases and sales

of Fund shares will be effected and posted to the accounts as of the

business day following the business day on which the cash balance sweep

occurs. The procedure will be fully automated, and the Bank will have

no discretion with respect to the timing of the sweep. The Money Market

Portfolio will be required to maintain a constant net asset value of

$1.00 per share at all times. The Bank will not charge separate or

additional fees to Plans participating in the ACMP. A Plan may

participate in the ACMP only with the written approval of an

independent fiduciary of the Plan based on written disclosures provided

by the Bank. The Bank represents that it expects that substantially all

Plans served by the Bank will elect to participate in the ACMP.

However, a Plan participating in the ACMP may terminate participation

at any time by notifying the Bank, orally or in writing. The Bank will

take the steps necessary to terminate a Plan's participation as soon as

practicable after receipt of the notice. The Bank will impose no fee,

charge, or penalty of any kind in connection with a Plan's termination

of its participation in the ACMP.

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

\6\ In this proposed exemption the Department is not proposing

any exemptive relief for any transactions relating to the ACMP or

the investments by the Plans in the Money Market Portfolio.

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

7. The Bank represents that it maintains collective investment

funds (the CIFs) in accordance with Regulation 9 promulgated by the

Comptroller of the Currency (12 CFR Part 9) and Internal Revenue

Service Revenue Ruling 81-100 (1981-1 C.B. 326). The Bank has decided

for business reasons to discontinue certain of the CIFs. The Bank

believes that the interests of the Plans are better served by the

investment of Plan assets in shares of the Funds rather than through

the CIFs, for a variety of reasons, summarized as follows: Each of the

Funds is valued on a daily basis, and the daily valuation permits

almost immediate investment of contributions to a Plan in various types

of investments, maximum flexibility in transferring Plan assets from

one type of investment to another, and daily redemption of Fund shares

for purposes of making distributions or other disbursements under a

Plan. In addition, information concerning the investment performance of

each of the Funds is available in newspapers of general circulation.

This allows Plan sponsors and participants to monitor Fund performance

on a daily basis. As shareholders of the Funds, the Plans receive

disclosures mandated by the Securities and Exchange Commission and have

the opportunity to exercise voting and other shareholder rights

conferred by the 1940 Act. Finally, Fund shares may be distributed in

kind to retiring or terminating participants, whereas interests in CIFs

generally must be liquidated or withdrawn to effect distributions.

While the CIFs are currently valued on a daily basis, the Funds offer

the additional benefits of access to information on investment

performance and the availability of disclosure documents.

8. The proposed exemption applies to the in-kind transfer of Plan

assets from investment in the CIFs to investment in shares of the

Funds, subject to the prior written authorization of an independent

fiduciary. No sales commissions are paid by the Plans in connection

with the in-kind transfers. All or a pro-rata portion of the assets of

the Plans are transferred in-kind in exchange for shares of the Funds.

The net asset value of the shares in the Funds received by the Plans

equals the value of the assets transferred to the Funds on the date of

transfer. In this regard, the proposed exemption requires that each

Plan receive Fund shares in connection with the transfer of assets of a

terminating CIF which have a net asset value that is equal to the value

of the Plan's pro rata share of the CIF assets on the date of the

transfer, based on the current market value of such assets as

determined in a single valuation as the close of the same business day

using independent sources in accordance with procedures established by

the Fund which comply with Rule 17a-7 of the 1940 Act. A written

confirmation of each transfer transaction is sent to each Plan

involved. The proposed exemption does not apply to any receipt by the

Bank of compensation for services rendered to any of the Funds where

Plan assets have been invested in shares of the Funds. In this regard,

with respect to the Bank's receipt of compensation from the Funds for

investment advisory services, and the continued receipt of fees from

the Plans for services rendered, the proposed exemption requires the

Bank to meet all requirements of Prohibited Transaction Class Exemption

77-4 (PTE 77-4, 42 FR 18732, April 8, 1977). With respect to Plan

assets invested in shares of the Funds, the Bank's sole compensation

for investment advisory services will be the fees paid by the Funds to

the Bank. The Bank represents that in accordance with PTE 77-4, no Plan

will pay fees to the Bank for investment management services with

respect to Plan assets invested in shares of the Fund, and that

procedures are proposed which ensure this result, described as follows:

9. Fees: Under the current fee structure, the Bank charges the

Plans, on a quarterly basis, fees for serving as trustee (Plan-level

Fees). Plan-level Fees consist of separate fees for basic

administration services, such as reporting, which do not include

investment advisory or management services (Admin Fees), and for

discretionary investment management services (Investment Fees). The

Bank also receives fees, computed and charged daily, from the Funds for

investment advisory and management services rendered to the Funds

(Fund-level Fees). Under the arrangements of the proposed exemption,

the structure of Plan-level fees does not change. The Admin Fee is

charged regardless of whether Plan assets are invested in the Funds.

The Investment Fee is also charged, but only with respect to Plan

assets not invested in the Funds. To the extent that Plan assets are

invested in the Funds, the Bank does not charge the Investment Fee with

respect to such assets. A division of the Bank, 1st Source Trust

Investment Division, receives the Fund-level Fees directly from the

Funds. The Bank represents that the total combined Plan-level Fees and

Fund-level Fees received by the Bank do not and will not exceed

``reasonable compensation'' within the meaning of section 408(b)(2) of

the Act.7

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

\7\ The Department expresses no opinion as to whether the Plan-

level Fees and the Fund-level Fees constitute ``reasonable

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

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

10. The Bank as fiduciary will not invest Plan assets in shares of

the Funds unless a fiduciary of each affected Plan who is unrelated to

the Bank (the Second Fiduciary) has authorized such investment. The

Bank represents that the Second Fiduciary with respect to each Plan

will be the Plan's administrator, sponsor, or a committee appointed by

the sponsor to act as a named fiduciary of the Plan. The Bank will not

be permitted to invest a Plan's assets in shares of the Funds unless

the Second Fiduciary has received full written disclosures concerning

the Funds and all compensation received by the Bank in connection with

its services to the Funds and, based on such information, authorized

the investment under the following procedures:

The Second Fiduciary of each Plan will receive a current prospectus

of the Fund portfolios and a written statement describing the

compensation received by the Bank in connection with its services to

the Funds. The statement will describe applicable limitations, if any,

on investments by the Plan in shares of the Funds. On the basis of such

information, the Second Fiduciary will authorize in writing the

investment

[[Page 33915]]

of Plan assets in shares of the Funds and the compensation received by

the Bank. The authorization will be terminable at will by the Second

Fiduciary, without penalty to the Plan. In the event of any termination

of the authorization, the Bank will sell shares of the Funds held by

the Plan within one (1) business day following receipt by the Bank of

written notice of such termination, unless due to circumstances beyond

the control of the Bank, the sale of such shares cannot be executed

within one business day, in which case the Bank will have an additional

business day to complete such sale.

The exemption also requires the Bank to make certain disclosures to

the Second Fiduciary after the transfer transactions in confirmation

thereof. Within 30 days after completion of each in-kind transfer of

assets of the Plans or the CIFs in exchange for shares of the Funds,

the Bank is required to provide the Second Fiduciary with a written

confirmation of the transaction which discloses the identity of each of

the assets that was valued for purposes of the transaction in

accordance with Rule 17a-7(b)(4) of the Investment Company Act of 1940,

the price of each such asset involved in the transaction, and the

identity of each pricing service or market maker consulted in

determining the value of such assets. Additionally, within 90 days

after completion of each in-kind transfer of assets of the Plans or the

CIFs in exchange for shares of the Funds, the Bank is required to

provide the Second Fiduciary with a written confirmation of the

transaction which discloses (1) the number of CIF units held by each

affected Plan immediately before the transfer, the related per unit

value, and the aggregate dollar value of the units transferred; and (2)

the number of shares in the Funds that are held by each affected Plan

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

aggregate dollar value of the shares received. The Bank represents that

for the conversion transactions which have occurred prior to the

publication of this proposed exemption in the Federal Register, all of

this confirmatory information has been provided to the Second Fiduciary

after the completion of each in-kind transfer of assets in exchange for

shares of the Funds.

11. The Bank represents that the transactions for which the

exemption is requested took place on and after September 9, 1996.

Hence, the Bank requests that the exemption be effective retroactively

to that date.

12. In summary, the Bank represents that the transactions described

herein will satisfy the criteria of section 408(a) of the Act for the

following reasons:

(a) The Funds provide the Plans with a more effective investment

vehicle than the CIFs maintained by the Bank without any increase in

investment management, advisory or similar fees paid to the Bank;

(b) With respect to the transfer of a Plan's CIF assets into a Fund

in exchange for Fund shares, a Second Fiduciary authorized in writing

such transfer prior to the transaction only after full written

disclosure of information concerning the Fund;

(c) Each Plan receives shares of a Fund in connection with the

transfer of assets of a terminating CIF which have a net asset value

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

assets on the date of the transfer, based on the current market value

of such assets as determined in a single valuation at the close of the

same business day using independent sources in accordance with

procedures established by the Fund which comply with Rule 17a-7 of the

1940 Act;

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

pursuant to Rule 12b-1 of the 1940 Act, are paid by a Plan in

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

transfer of CIF assets;

(e) The Plans will not pay any ``loads'', redemption fees or sales

commissions charged by the Funds in connection with the purchases or

sales of Fund shares;

(f) The Bank will provide ongoing disclosures to Second Fiduciaries

of the Plans to verify the fees paid to the Bank and its affiliates by

the Fund; and

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

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

such dealings with other shareholders of the Fund.

FOR FURTHER INFORMATION CONTACT: Mr. Ron Willett of the Department,

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

John Hancock Mutual Life Insurance Company (JH), Located in Boston,

Massachusetts

[Application Nos. D-10416-10420]

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: (1) The acquisition by a separate

account maintained by JH (the FPGT Account) from Willamette Industries,

Inc. (Willamette) of certain oil and gas rights (the Deer Creek Oil and

Gas Rights), subject to existing leases (the Leases) of such rights to

Enerfin Resources Northwest Limited Partnership (Enerfin), a party in

interest with respect to the plans invested in the FPGT Account; and

(2) the continuation of the Leases following the acquisition by the

FPGT Account, provided the following conditions are satisfied: (a) As

part of its decision to enter into the separate account contract

establishing the FPGT Account, an independent fiduciary determines that

the acquisition of the Deer Creek Oil and Gas Rights is in the interest

of the participants of the plans investing in the FPGT Account and that

the price paid for the rights is no more than the fair market value of

such rights; (b) an independent fiduciary determines that the

continuation of the Leases is in the best interests of the FPGT

Account; and (c) an independent fiduciary will monitor the performance

of Enerfin under the Leases, as well as any proposed modifications or

renewals of the Leases, and will take such steps as are necessary to

protect the interests of the FPGT Account with respect to the Leases.

Summary of Facts and Representations

1. JH, a Massachusetts corporation, is a mutual life insurance

company. JH offers group annuity contracts to contract holders,

including retirement plans. Certain of these contracts provide that, in

accordance with contract holder direction, the premiums or

contributions received under these group annuity contracts will be

allocated to segregated asset accounts or ``separate accounts''. A

separate account may be established to back a group of substantially

identical group annuity contracts issued to a group of unrelated

customers (a ``pooled separate account'').

2. JH currently holds legal title to large holdings in timberland.

Beneficial ownership in these assets has been allocated to a number of

JH pooled and single customer separate accounts known as the

``ForesTree'' separate accounts. JH currently has established a total

of fifteen such pooled and non-pooled ForesTree separate accounts which

are invested only in timberland. Twenty contract holders currently

participate in these ForesTree separate accounts. These contract

holders

[[Page 33916]]

include both plans covered under the Act and non-ERISA governmental

plans. The group annuity contracts state that JH shall be the sole

owner of the ForesTree separate account assets and that JH shall have

the right to control, manage and administer the account, including the

sole discretion to select investments in accordance with the investment

policy established by JH for the account.

3. The timberland investments allocated to the ForesTree separate

accounts are managed by Hancock Natural Resource Group, Inc. (HNRG),

which was established in 1995. HNRG is an indirect, wholly owned

subsidiary of JH. Before 1995, HNRG was operated as a unit within JH.

HNRG manages 2.2 million acres of timberland currently valued at

approximately $2.2 billion. Pursuant to an agreement with JH, HNRG is

responsible for all decisions regarding the acquisition and disposition

of timberland properties and for the management of the properties,

including matters such as timber harvesting and reforestation, road

building and maintenance, leases of interests to third parties,

acquisition of insurance and payment of taxes. On-site work is

performed by independent forest managers under contract with HNRG.

4. JH is engaged in traditional life insurance business, including

the sale of all types of life insurance for both the individual and

group markets, and the sale of annuity products and long-term care

insurance. The premiums received by JH are invested by the company as

part of its general account. Currently, JH's general account is

approximately $30 billion, which is invested in numerous public and

private bonds, mortgages, real estate and other investments.

5. One of the investments in JH's general account is a limited

partnership interest in Enerfin. The JH general account is the sole

limited partner of Enerfin and is entitled to 99% of the partnership

profits. Enerfin III-95, an entity unrelated to JH, is Enerfin's

general partner. Enerfin is engaged in the business of leasing oil and

gas rights from the fee owners of these mineral interests.

6. JH has entered into an agreement to purchase from Willamette

approximately 100,000 acres of timberland located in the State of

Oregon known as the Columbia Tree Farm (the Farm). JH is and has always

been unaffiliated with Willamette. The purchase price for the Farm is

$350 million. The Farm consists of six parcels. Under its agreement

with Willamette, JH has a right to purchase some or all of these six

parcels before November 15, 1997. Under this agreement, each of the six

parcels has been allocated a portion of the total purchase price. This

purchase price (and each parcel's allocable share of the purchase

price) represents no more than the fair market value of the land and

its timber since the price was negotiated at arm's-length between JH

and Willamette. In determining the purchase price for the Farm (and the

underlying parcels), JH did not take into account any of the oil and

gas rights that are appurtenant to the timberland.

7. The Farm is being acquired on behalf of various HNRG pension

clients and will be allocated to JH ForesTree separate accounts in

which those clients invest. The applicant has requested the exemption

proposed herein for certain transactions involving the separate account

to which one of the Farm parcels (the Deer Creek Parcel) is to be

allocated. This single customer separate account, the FPGT Account,

will be established for the First Plaza Group Trust, a collective trust

holding assets of certain qualified plans sponsored by General Motors

Corporation and its subsidiaries. The named fiduciary with respect to

investment activities of each of the plans participating in the First

Plaza Group Trust is General Motors Investment Management Corporation

(GMIMCo), a wholly owned subsidiary of General Motors Corporation.

GMIMCo qualifies as an In-House Asset Manager as that term is defined

in Prohibited Transaction Exemption 96-23 (61 FR 15975, April 10,

1996). 8

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

\8\ The applicant represents that JH and GMIMCo did not purport

to rely on PTE 96-23 for the transactions which are the subject of

the exemption proposed herein because such reliance may have

required GMIMCo to exercise a level of discretion with respect to

the transactions that would be inappropriate given the fiduciary

structure of the separate account and could adversely impact the

parties' compliance with other applicable law.

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

8. The following plans participate in the First Plaza Group Trust:

(a) General Motors Hourly Rate Employees Pension Plan, a defined

benefit plan which had 609,669 participants and approximately $40

billion in assets as of December 31, 1996;

(b) General Motors Retirement Plan for Salaried Employees, a

defined benefit plan with 218,299 participants and approximately $24

billion in assets as of December 31, 1996;

(c) Saturn Individual Retirement Plan for Represented Team Members,

a defined contribution plan with 7,315 participants and approximately

$103 million in assets as of December 31, 1996;

(d) Saturn Personal Choices Retirement Plan for Non-Represented

Team Members, a defined benefit plan with 2,445 participants and

approximately $11.5 million in assets as of December 31, 1996;

(e) Employees' Retirement Plan for GMAC Mortgage Corporation, a

defined benefit plan with 2,700 participants and approximately $38.8

million as of December 31, 1996;

(f) National Car Rental System, Inc. Hourly Paid Employees' Pension

Plan, a defined benefit plan with 2,716 participants and approximately

$4.3 million as of December 31, 1996; and

(g) National Car Rental system, Inc. Salaried Employees' Pension

Plan, a defined benefit plan with 1,718 participants and approximately

$27.6 million in assets as of December 31, 1996.

9. The Deer Creek Parcel is subject to the Leases, two existing oil

and gas leases with Enerfin, an affiliate of JH. These Leases are the

result of arm's-length negotiations between the prior fee owners of the

Deer Creek Parcel and Enerfin's predecessor in interest and were

entered into prior to any discussion by JH regarding the purchase of

the timberland. As is typical of oil and gas leases, the Leases are

long-term leases. While the Leases may terminate if Enerfin fails to

develop the mineral rights, if those rights are developed the Leases

will continue as long as the Deer Creek Parcel is producing oil or gas.

The Leases, which were originally granted in 1985 and 1988, have an

approximate current fair market value of $109,000 to the holder of the

mineral rights. This value was determined by an appraisal conducted on

April 30, 1996 by Forrest A. Garb and Associates (Garb), International

Petroleum Consultants of Dallas, Texas, an independent appraiser, which

set a total value of $607,000 for all the mineral rights subject to

Enerfin leases. On February 11, 1997, at the request of GMIMCo, Garb

reviewed the April 30, 1996 appraisal and concluded that the fair

market value allocated to the Deer Creek Parcel mineral interests was

$109,000.

10. In order to avoid a potential prohibited transaction prior to

the granting of the exemption proposed herein, JH purchased for the

FPGT Account Willamette's interest in the Deer Creek Parcel exclusive

of the Oil and Gas Rights. Closing on the purchase took place on

February 14, 1997, pursuant to the agreement between JH and Willamette

(see rep. 6, above). Ownership of the Deer Creek Oil and Gas Rights

will remain with Willamette. The $52,052,432 purchase price originally

established between

[[Page 33917]]

Willamette and JH for the Deer Creek Parcel was reduced by the fair

market value of the Oil and Gas Rights because it originally included

such rights. Once the exemption proposed herein is granted, JH on

behalf of the FPGT Account will purchase the Deer Creek Oil and Gas

Rights from Willamette. The transfer of the Deer Creek Oil and Gas

Rights to the FPGT Account will not in any way affect the obligations

and rights of Enerfin or the lessor under the Leases. Following the

transfer, the lease payments will be paid by Enerfin to the new lessor,

JH (on behalf of the FPGT Account).

11. As part of its decision to enter into the separate account

contract establishing the FPGT Account, GMIMCo has reviewed and

approved the acquisition of the Deer Creek Oil and Gas Rights,

including the purchase price and the underlying Enerfin Leases. GMIMCo

will also monitor Enerfin's performance under the Leases, including any

proposed modification of the Leases, and will take any steps necessary

to protect the interest of the plans. It is not contemplated that any

changes will be made to the Leases.

12. The applicant represents that denial of the exemption proposed

herein would preclude the FPGT Account from taking advantage of the

investment opportunity offered by the Deer Creek Parcel solely because

of pre-existing and relatively insignificant Leases to a partnership

owned by JH. The Leases were originally entered into between Enerfin's

predecessor in interest and unrelated third parties and are arm's-

length contracts that, if anything, add to the value of the Deer Creek

Parcel. The Leases will provide additional cash flow income to the FPGT

Account that was not taken into account at the time the purchase price

for the Deer Creek Parcel was established.

13. In summary, the applicant represents that the proposed

transactions satisfy the criteria contained in section 408(a) of the

Act because: (a) the consideration to be paid for the Deer Creek Oil

and Gas Rights has been determined by arm's-length negotiations between

JH, acting on behalf of plans invested in the FPGT Account, and

Willamette, and has been validated by an independent appraisal

performed by Garb; (b) the Leases are pre-existing contracts that were

negotiated at arm's-length between unrelated parties; (c) as part of

its decision to enter into a separate account contract establishing the

FPGT Account, a plan fiduciary unaffiliated with JH has reviewed and

approved all terms of the acquisition of the Deer Creek Oil and Gas

Rights, including the underlying Enerfin Leases; and (d) the

independent fiduciary will monitor Enerfin's performance under the

Leases to ensure that the plans' interests are protected.

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

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

AmSouth Bank of Alabama (AmSouth) Located in Birmingham, Alabama

[Application No. D-10422]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

Section I--Transactions

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

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

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

(F) of the Code, shall not apply to the receipt of fees by AmSouth from

the AmSouth Mutual Funds, or any other diversified open-end investment

companies registered under the Investment Company Act of 1940 (the

Funds), for acting as an investment adviser for the Funds as well as

for providing other services to the Funds which are ``Secondary

Services'' as defined in Section III(h), in connection with the

investment by the Client Plans in shares of the Funds, provided that

the conditions set forth in Section II below are met.

Section II--Condition

(a) Each Client Plan satisfies either (but not both) of the

following:

(1) The Client Plan receives a cash credit of such Plan's

proportionate share of all fees charged to the Funds by AmSouth for

investment advisory services, including any investment advisory fees

paid by AmSouth to third party sub-advisers, no later than one business

day after the receipt of such fees by AmSouth. The crediting of all

such fees to the Client Plans by AmSouth is audited by an independent

accounting firm on at least an annual basis to verify the proper

crediting of the fees to each Plan; or

(2) The Client Plan does not pay any Plan-level investment

management fees, investment advisory fees, or similar fees to AmSouth

with respect to any of the assets of such Plan which are invested in

shares of any of the Funds. This condition does not preclude the

payment of investment advisory or similar fees by the Funds to AmSouth

under the terms of an investment management agreement adopted in

accordance with section 15 of the Investment Company Act of 1940 (the

1940 Act), nor does it preclude the payment of fees for Secondary

Services to AmSouth pursuant to a duly adopted agreement between

AmSouth and the Funds.

(b) The price paid or received by a Client Plan for shares in a

Fund is the net asset value per share at the time of the transaction,

as defined in Section III(e), and is the same price which would have

been paid or received for the shares by any other investor at that

time.

(c) AmSouth, including any officer or director of AmSouth, does not

purchase or sell shares of the Funds from or to any Client Plan.

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

with the purchase or sale of shares of the Funds and no redemption fees

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

the Funds.

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

by AmSouth for the provision of services to a Client Plan, and in

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

Client Plan may invest, are not in excess of ``reasonable

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

(f) AmSouth does not receive any fees payable pursuant to Rule 12b-

1 under the 1940 Act in connection with the transactions.

(g) The Client Plans are not employee benefit plans sponsored or

maintained by AmSouth.

(h) The Second Fiduciary receives, in advance of any initial

investment by the Client Plan in a Fund, full and detailed written

disclosure of information concerning the Funds, including but not

limited to:

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

considering investing;

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

similar services, any secondary services as defined in Section III(h),

and all other fees to be charged to or paid by the Client Plan and by

the Funds, including the nature and extent of any differential between

the rates of such fees;

(3) The reasons why AmSouth may consider such investment to be

appropriate for the Client Plan;

(4) A statement describing whether there are any limitations

applicable to AmSouth with respect to which assets of a Client Plan may

be invested in the

[[Page 33918]]

Funds, and if so, the nature of such limitations; and

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

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

documents are published in the Federal Register.

(i) After consideration of the information described above in

paragraph (h), the Second Fiduciary authorizes in writing the

investment of assets of the Client Plan in each particular Fund and the

fees to be paid by such Funds to AmSouth.

(j) All authorizations made by a Second Fiduciary regarding

investments in a Fund and the fees paid to AmSouth are subject to an

annual reauthorization wherein any such prior authorization referred to

in paragraph (i) shall be terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by AmSouth of written

notice of termination. A form expressly providing an election to

terminate the authorization described in paragraph (i) above (the

Termination Form) with instructions on the use of the form must be

supplied to the Second Fiduciary no less than annually; provided that

the Termination Form need not be supplied to the Second Fiduciary

pursuant to this paragraph sooner than six months after such

Termination Form is supplied pursuant to paragraph (l) below, except to

the extent required by such paragraph in order to disclose an

additional service or fee increase. The instructions for the

Termination Form must include the following information:

(1) The authorization is terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by AmSouth of written

notice from the Second Fiduciary; and

(2) Failure to return the Termination Form will result in continued

authorization of AmSouth to engage in the transactions described in

paragraph (i) on behalf of the Client Plan.

(k) For each Client Plan using the fee structure described in

paragraph (a)(1) above with respect to investments in a particular

Fund, the Second Fiduciary of the Client Plan receives full written

disclosure in a Fund prospectus or otherwise of any increases in the

rates of fees charged by AmSouth to the Funds for investment advisory

services, prior to the effective date of such increase.

(l)(1) For each Client Plan using the fee structure described in

paragraph (a)(2) above with respect to investments in a particular

Fund, an increase in the rate of fees paid by the Fund to AmSouth

regarding any investment management services, investment advisory

services, or similar services that AmSouth provides to the Fund over an

existing rate for such services that had been authorized by a Second

Fiduciary in accordance with paragraph (i) above; or

(2) For any Client Plan under this proposed exemption, an addition

of a Secondary Service (as defined in Section III(h) below) provided by

AmSouth to the Fund for which a fee is charged, or an increase in the

rate of any fee paid by the Funds to AmSouth for any Secondary Service

that results either from an increase in the rate of such fee or from

the decrease in the number of kind of services performed by AmSouth for

such fee over an existing rate for such Secondary Service which had

been authorized by the Second Fiduciary of a Client Plan in accordance

with paragraph (i) above;

AmSouth will, at least 30 days in advance of the implementation of

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

provide a written notice (which may take the form of a proxy statement,

letter, or similar communication that is separate from the prospectus

of the Fund and which explains the nature and amount of the additional

service for which a fee is charged or of the increase in fees) to the

Second Fiduciary of the Client Plan. Such notice shall be accompanied

by a Termination Form with instructions as described in paragraph (j)

above.

(m) On an annual basis, AmSouth provides the Second Fiduciary of a

Client Plan investing in the Funds with:

(1) A copy of the current prospectus for the Funds in which the

Client Plan invests and, upon such fiduciary's request, a copy of the

Statement of Additional Information for such Funds which contains a

description of all fees paid by the Funds to AmSouth;

(2) A copy of the annual financial disclosure report prepared by

AmSouth which includes information about the Fund portfolios as well as

audit findings of an independent auditor within 60 days of the

preparation of the report; and

(3) Oral or written responses to inquiries of the Second Fiduciary

as they arise.

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

invests, in the event such Fund places brokerage transactions with

AmSouth, AmSouth will provide the Second Fiduciary of such Plan at

least annually with a statement specifying:

(1) The total, expressed in dollars, of brokerage commissions of

each Fund that are paid to AmSouth by such Fund;

(2) The total, expressed in dollars, of brokerage commissions of

each Fund that are paid by such Fund to brokerage firms unrelated to

AmSouth;

(3) The average brokerage commissions per share, expressed as cents

per share, paid to AmSouth by each Fund; and

(4) The average brokerage commissions per share, expressed as cents

per share, paid by each Fund to brokerage firms unrelated to AmSouth.

(o) All dealings between the Client Plans and the Funds are on a

basis no less favorable to the Plans than dealings with other

shareholders of the Funds.

(p) AmSouth maintains for a period of six years the records

necessary to enable the persons described below in paragraph (q) 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 AmSouth, the

records are lost or destroyed prior to the end of the six-year period,

and (2) no party in interest other than AmSouth or an affiliate shall

be subject to the civil penalty that may be assessed under section

502(i) of the Act or to the taxes imposed by section 4975 (a) and (b)

of the Code if the records are not maintained or are not available for

examination as required by paragraph (q) below.

(q)(1) Except as provided below in paragraph (b)(2) and

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

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

their customary location for examination during normal business hours

by--

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service, (ii) Any fiduciary of the

Client Plans who has authority to acquire or dispose of shares of the

Funds owned by the Client Plans, or any duly authorized employee or

representative of such fiduciary, and

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

authorized employee or representative of such participant or

beneficiary;

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

shall be authorized to examine trade secrets of AmSouth, or commercial

or financial information which is privileged or confidential.

Section III--Definitions

For purposes of this proposed exemption:

(a) The term ``AmSouth'' means AmSouth Bank of Alabama and any

affiliate thereof as defined below in paragraph (b) of this section.

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

[[Page 33919]]

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

intermediaries, controlling, controlled by, or under common control

with the person;

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

such person; and

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

officer, director, partner, or employee.

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

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

individual.

(d) The term ``Fund'' or ``Funds'' shall include the AmSouth Mutual

Funds or any other diversified open-end investment company or companies

registered under the 1940 Act for which AmSouth serves as an investment

adviser and may also serve as a custodian, dividend disbursing agent,

shareholder servicing agent, transfer agent, Fund accountant, or

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

(h) of this Section) which has been approved by such Funds.

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

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

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

prospectus and statement of additional information, and other assets

belonging to the Fund or portfolio of the Fund, less the liabilities

charged to each such portfolio or Fund, by the number of outstanding

shares.

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

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

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

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

(g) The term ``Second Fiduciary'' means a fiduciary of a Client

Plan who is independent of and unrelated to AmSouth. For purposes of

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

independent of and unrelated to AmSouth if:

(1) Such fiduciary directly or indirectly controls, is controlled

by, or is under common control with AmSouth;

(2) Such fiduciary, or any officer, director, partner, employee, or

relative of the fiduciary is an officer, director, partner or employee

of AmSouth (or is a relative of such persons);

(3) Such fiduciary directly or indirectly receives any compensation

or other consideration for his or her own personal account in

connection with any transaction described in this proposed exemption.

If an officer, director, partner or employee of AmSouth (or

relative of such persons), is a director of such Second Fiduciary, and

if he or she abstains from participation in (i) the choice of the

Client Plan's investment adviser, (ii) the approval of any such

purchase or sale between the Client Plan and the Funds, and (iii) the

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

connection with any of the transactions described in Sections I and II

above, then paragraph (g)(2) of this section shall not apply.

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

investment management, investment advisory, or similar service, which

is provided by AmSouth to the Funds, including (but not limited to)

custodian services, transfer and dividend disbursing agent services,

administrator or sub-administrator services, accounting services,

shareholder servicing agent services and brokerage services.

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

Second Fiduciary which expressly provides an election to the Second

Fiduciary to terminate on behalf of a Client Plan the authorization

described in paragraph (i) of Section II. Such Termination Form may be

used at will by the Second Fiduciary to terminate an authorization

without penalty to the Client Plan and to notify AmSouth in writing to

effect a termination by selling the shares of the Funds held by the

Client Plan requesting such termination within one business day

following receipt by AmSouth of the form; provided that if, due to

circumstances beyond the control of AmSouth, the sale cannot be

executed within one business day, AmSouth shall have one additional

business day to complete such sale.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption

will be effective as of April 16, 1997.

Summary of Facts and Representations

1. AmSouth is an Alabama banking corporation that serves as

trustee, investment manager and/or custodian to a number of employee

benefit plans. As of October 31, 1996, AmSouth and its affiliates--

AmSouth Bank of Tennessee and AmSouth Bank of Florida--had

approximately $20 billion in assets under administration, of which $6.4

billion were assets of employee benefits plans covered under the Act as

well as other benefit plans. AmSouth and its affiliates are

subsidiaries of AmSouth Bancorporation. References made herein to

AmSouth are intended to refer both to AmSouth and its affiliates.

2. AmSouth acts as a trustee, directed trustee, investment manager,

and/or custodian for the Client Plans. The Client Plans may include

various pension, profit sharing, and stock bonus plans as well as

voluntary employees' beneficiary associations, supplemental

unemployment benefit plans, simplified employee benefit plans,

retirement plans for self-employed individuals (i.e. Keogh Plans) and

individual retirement accounts (IRAs). Some of the Client Plans may be

participant-directed individual account plans.

As custodian of a Client Plan, AmSouth is responsible for

maintaining custody over all or a portion of the Client Plan's assets,

for providing trust accounting and valuation services, for asset and

transaction reporting, and for execution and settlement of directed

transactions. Where AmSouth serves as trustee or directed trustee, it

is responsible for ownership of the assets of the Client Plan, and may

provide additional trust services such as benefit payments, loan

processing, and participant accounting. Where AmSouth is also acting as

the investment manager, AmSouth has investment discretion over the

Client Plan's assets and is responsible for implementing the Plan's

funding policies and investment objectives within the guidelines

established by the plan sponsor or named fiduciary.

The Client Plans pay fees in accordance with fee schedules

negotiated with AmSouth. Fees for custodian, trustee and investment

management services are based on a percentage of assets in the account,

subject to certain minimum fee amounts. AmSouth also may provide other

services to a Client Plan, as selected by the Client Plan sponsor or

named fiduciary. Fees may be paid by the Client Plan or the Client Plan

sponsor, depending on the particular circumstances.

The specific Client Plans of AmSouth for which this proposed

exemption is being requested are those to which AmSouth or an affiliate

is a fiduciary and whose assets either (i) are currently invested in

the Funds, or (ii) may be invested in the Funds in the future.

However, AmSouth does not seek relief for investments in the Funds

by any employee benefit plans maintained by AmSouth or an affiliate for

its own employees (the Bank Plans). 9

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

\9\ AmSouth represents that it will comply with the requirements

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

8, 1977), with respect to any investments in the Funds made by the

Bank Plans. PTE 77-3 permits the acquisition or sale of shares of a

registered, open-end investment company by an employee benefit plan

covering only employees of such investment company, employees of the

investment adviser or principal underwriter for such investment

company, or employees of any affiliated person (as defined therein)

of such investment adviser or principal underwriter, provided

certain conditions are met. The Department is expressing no opinion

in this proposed exemption regarding whether any of the transactions

with the Funds by the Bank Plans would be covered by PTE 77-3.

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

[[Page 33920]]

3. The AmSouth Mutual Funds, a Massachusetts business trust

organized on October 1, 1987, are registered as an open-end investment

company with the Securities and Exchange Commission (SEC) under the

1940 Act.

AmSouth Mutual Funds consist of eleven investment portfolios (each

a ``Fund'') representing distinct investment vehicles, which have their

own prospectuses or joint prospectuses with one or more other Funds.

The shares of each Fund represent proportionate interests in the assets

of that Fund.

The nine Funds currently available for investment by the Client

Plans in connection with the transactions described herein are the

following: (i) The AmSouth Equity Fund; (ii) the AmSouth Regional

Equity Fund; (iii) the AmSouth Balanced Fund; (iv) the AmSouth Bond

Fund; (v) the AmSouth Limited Maturity Fund; (vi) the AmSouth

Government Income Fund; (vii) the AmSouth Prime Obligations Fund;

(viii) the AmSouth U.S. Treasury Fund; and (ix) the AmSouth Tax Exempt

Fund.10

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

\10\ The applicant states that the Client Plans generally do not

invest in tax-free or tax-exempt Funds because the investment

returns of such Plans are already tax-exempt.

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

The overall management of the Funds, including the negotiation of

investment advisory contracts, rests with the Board of Trustees of the

Funds, all of whose current members are independent of AmSouth and its

affiliates. The Board of Trustees of each Fund is elected by the

shareholders of the Fund.

AmSouth serves as the investment adviser to each Fund within the

meaning of the 1940 Act. AmSouth receives investment advisory fees from

the Funds that vary between 0.30 percent and 0.80 percent of a Fund's

average net assets on an annual basis, depending on the particular Fund

and subject to voluntary fee waivers by AmSouth.

AmSouth also serves as a sub-administrator for the Funds. As sub-

administrator, AmSouth is responsible for assisting the administrator

of the Funds in clerical, recordkeeping and administrative services

relating to the legal compliance and day-to-day operations of the

Funds. AmSouth receives fees from the administrator of the Funds for

its services as the sub-administrator in accordance with an agreement

between the Funds and the administrator. In addition, AmSouth was

selected by the Funds to serve as custodian for the Funds, effective as

of April 16, 1997, pursuant to the conditions of this proposed

exemption. Thus, AmSouth receives fees for custody services provided to

the Funds in accordance with custodial services agreements between

itself and such Funds.

The other service providers to the Funds are currently independent

of and unaffiliated with AmSouth. These service-providers include: (i)

The administrator, ASO Services Company, Inc.; (ii) the distributor,

BISYS Fund Services, L.P. (formerly the Winsbury Company); and (iii)

the transfer agent and fund accountant, BISYS Funds Services of Ohio,

Inc.

Purchases of shares of the Funds may be subject to a sales charge.

However, sales charges are waived for investments by investors for whom

AmSouth or an affiliate acts as a fiduciary, including the Client

Plans. AmSouth and its affiliates also will not receive any fees

payable pursuant to Rule 12b-1 under the 1940 Act in connection with

the transactions involving the Client Plans.

4. AmSouth represents that there are material advantages to the

Client Plans from the use of the Funds as investment vehicles. AmSouth

states that the Funds provide a means for Client Plans of all sizes to

receive the benefits of AmSouth's investment management expertise and

greater diversification than would be available through a separate

account arrangement. The Funds are also valued on a daily basis. The

daily valuation permits: (i) Immediate investment of Client Plan

contributions in varied types of investments; (ii) greater flexibility

in transferring assets from one type of investment to another; and

(iii) daily redemption of investments for purposes of making

distributions. Information concerning the investment performance of

most of the Funds is available each day in newspapers of general

circulation, which allows Client Plan sponsors and participants to

monitor the performance of their investments on a daily basis. Fund

shares can be given to participants in Client Plan distributions, thus

avoiding the expense and delay of liquidating plan investments and

facilitating roll-overs into IRAs.

Investments by Client Plans in the Funds occur through direct

purchases of shares of the Funds on an ongoing basis. No sales

commissions or redemption fees are charged in connection with the

purchase or sale of Fund shares by Client Plan customers of AmSouth.

5. Because AmSouth is considered a fiduciary with respect to a

Client Plan as to which it serves as trustee and serves as an

investment adviser to the Funds (and receives fees for such investment

advisory services), AmSouth has required that any Client Plan's

investments in the Funds meet the conditions of Prohibited Transaction

Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8, 1977) to avoid engaging

in a prohibited transaction in connection with such

investments.11

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

\11\ PTE 77-4, in pertinent part, permits the purchase and sale

by an employee benefit plan of shares of a registered, open-end

investment company when a fiduciary with respect to the plan is also

the investment adviser for the investment company, provided that,

among other things, the plan does not pay an investment management,

investment advisory or similar fee with respect to the plan assets

invested in such shares for the entire period of such investment.

Section II(c) of PTE 77-4 states that this condition does not

preclude the payment of investment advisory fees by the investment

company under the terms of an investment advisory agreement adopted

in accordance with section 15 of the Investment Company Act of 1940.

Section II(c) states further that this condition does not preclude

payment of an investment advisory fee by the plan based on total

plan assets from which a credit has been subtracted representing the

plan's pro rata share of investment advisory fees paid by the

investment company.

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

In order to meet the conditions of PTE 77-4 that a Client Plan not

pay duplicative fees for investment advisory services, AmSouth states

that it has not charged a Client Plan any direct fees for investment

management with respect to assets that are invested in the Funds. These

Client Plans have paid fees to AmSouth solely for non-investment trust

or custody services. AmSouth states that the fees it has received for

investment management of a Client Plan's assets have come solely from

the Funds in accordance with the respective advisory agreements between

such Funds and AmSouth.

AmSouth states that Client Plans have not paid any commissions or

other sales charges in connection with their investments in the Funds,

as required under PTE 77-4. In addition, the applicant states that all

of the other conditions of PTE 77-4, including advance written

disclosure of information to a Client Plan regarding the fees to be

received by AmSouth from each Fund and advance written authorization

from an independent fiduciary of such Client Plan for investment in the

Fund and the receipt of fees from the Fund by AmSouth, have been

met.12

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

\12\ The Department is expressing no opinion in this proposed

exemption as to whether the transactions with the Funds by Client

Plans managed by AmSouth have met the conditions necessary for an

exemption under PTE 77-4.

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

[[Page 33921]]

6. AmSouth is requesting an individual exemption that, like the

relief provided by PTE 77-4, would permit the receipt of fees by

AmSouth or an affiliate from the Funds for acting as investment adviser

as well as for providing non-advisory services (i.e. ``Secondary

Services'' as defined herein). The applicant states that the conditions

of this proposed exemption are based on PTE 77-4. However, there are

two differences between the conditions of PTE 77-4 and the conditions

proposed herein:

(i) the use of a ``termination form'' under this proposed exemption

would take the place of the PTE 77-4 requirement that an independent

plan fiduciary (referred to therein as a ``Second Fiduciary'')

affirmatively approve any changes in the rates of fees charged by the

mutual funds; and

(ii) the Client Plans subject to this proposed exemption may, as an

alternative to not paying a plan-level investment management fee to

AmSouth for any assets invested in the Fund shares (referred to as an

``offset'' fee structure), receive a cash credit of such Plan's

proportionate share of the Funds' investment advisory fees (referred to

as a ``crediting'' fee structure).

AmSouth will charge investment advisory fees to the Funds in

accordance with the investment advisory agreements between AmSouth and

the Funds. These agreements will be approved by the independent members

of the Board of Trustees of the Funds, in accordance with the

applicable provisions of the 1940 Act, and any subsequent changes in

the fees will have to be approved by such Trustees. These fees also

will not be increased without the approval of the shareholders of the

affected Funds. The fees will be paid monthly by the Funds. In

addition, AmSouth will charge fees for custody services it provides to

the Funds in accordance with custodial services agreements with the

Funds.

AmSouth will avoid charging the Client Plans duplicative investment

management fees by either: (a) crediting the Client Plan's pro rata

share of the Fund advisory fees back to the Client Plan; or (b) waiving

any investment management fee for the Client Plan at the Plan-level.

Crediting Fee Structure

7. The ``crediting'' fee structure will be designed to preserve the

negotiated fee rates of the Client Plans so as to minimize the impact

of the change to the Funds on a Client Plan's fees. AmSouth will charge

a Client Plan its standard fees as applicable to the particular Client

Plan for serving as trustee, directed trustee, investment manager or

custodian. At the beginning of each month, and in no event later than

one business day after the payment of investment advisory fees by the

Funds to AmSouth for the previous month, AmSouth will credit to each

Client Plan in cash its proportionate share of all investment advisory

fees charged by AmSouth to the Funds for the previous month. The credit

will include the Client Plan's share of any investment advisory fees

paid by AmSouth to third party sub-advisors.

AmSouth states that the credit will not include the custodial fees

or other fees for secondary services payable by the Funds to AmSouth

because such services rendered at the Fund-level will not be

duplicative of any services provided directly to the Client Plan. For

example, the custodial services to the Funds will involve maintaining

custody and providing reporting relative to the individual securities

owned by the Funds. The services to the Client Plans will involve

maintaining custody over all or a portion of the Client Plans' assets

(which may include Fund shares, but not the assets underlying the Fund

shares), providing trust accounting and participant accounting (if

applicable), providing asset and transaction reporting, execution and

settlement of directed transactions, processing benefit payments and

loans, maintaining participant accounts, valuing plan assets,

conducting non-discrimination testing, preparing Forms 5500 and other

required filings, and producing statements and reports regarding

overall plan and individual participant holdings. AmSouth states that

these trust services will be necessary regardless of whether the Client

Plans' assets are invested in the Funds. Thus, AmSouth represents that

its receipt of fees for both secondary services at the Fund-level and

trustee services at the Plan-level will not involve the receipt of

``double fees'' for duplicative services to the Client Plans because a

Fund will be charged for custody and other services relative to the

individual securities owned by the Fund, while a Client Plan will be

charged for the maintenance of Plan accounts reflecting ownership of

the Fund shares and other assets.13

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

\13\ The Department notes that although certain transactions and

fee arrangements are the subject of an administrative exemption, a

Client Plan fiduciary must still adhere to the general fiduciary

responsibility provisions of section 404 of the Act. Thus, the

Department cautions the fiduciaries of the Client Plans investing in

the Funds that they will have an ongoing duty under section 404 of

the Act to monitor the services provided to the Client Plans to

assure that the fees paid by the Client Plans for such services are

reasonable in relation to the value of the services provided. Such

responsibilities will include determinations that the services

provided are not duplicative and that the fees are reasonable based

on the level of services provided.

The Department also notes that AmSouth, as a trustee and

investment manager for a Client Plan in connection with the decision

to invest Client Plan assets in the Funds, will have a fiduciary

duty to monitor all fees paid by a Fund to AmSouth, its affiliates,

and third parties for services provided to the Fund to ensure that

the totality of such fees will be reasonable and will not involve

the payment of any ``double'' fees for duplicative services to the

Fund by such parties.

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

AmSouth represents that for each Client Plan, the combined total of

all fees it receives directly and indirectly from the Client Plans for

the provision of services to the Plans and/or to the Funds will not be

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

408(b)(2) of the Act.14

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

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

exemption as to whether the fee arrangements discussed herein will

comply with section 408(b)(2) of the Act and the regulations

thereunder (see 29 CFR 2550.408b-2).

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

8. AmSouth will maintain a system of internal accounting controls

for the crediting of all fees to the Client Plans. In addition, AmSouth

has retained the services of Ernst & Young LLP (the Auditor), an

independent accounting firm, to audit annually the crediting of fees to

the Client Plans under this program. Such audits will provide

independent verification of the proper crediting to the Client Plans.

In its annual audit of the credit program, the Auditor will: (i)

verify on a test basis the investment advisory fees paid by the Funds

to AmSouth; (ii) verify on a test basis the daily factors used to

determine the investment advisory fees; (iii) verify on a test basis

the credits paid in total for a one-month period; (iv) recompute, on a

test basis using the daily factors described above, the amount of the

credit determined for selected plans; (v) verify on a test basis the

proper assignment of identification fields for receipt of fee credits

to the plans; and (vi) verify on a test basis that the credits were

posted to the plans within one business day.

In the event either the internal audit by AmSouth or the

independent audit by the Auditor identifies an error made in the

crediting of fees to the Client Plans, AmSouth will correct the error.

With respect to any shortfall in credited fees to a Client Plan,

AmSouth will make a cash payment to the Client Plan equal to the amount

of the error plus interest paid at money market rates offered by

AmSouth for the period involved. Any excess credits made to a Client

Plan will be corrected by an appropriate deduction from the Client Plan

account or reallocation of cash during the next payment period after

[[Page 33922]]

discovery of the error to reflect accurately the amount of total

credits due to the Client Plan for the period involved.

9. AmSouth represents that the use of the ``crediting'' fee

structure will be available for investments made by Client Plans in the

Funds in situations where: (i) the Client Plan sponsor wishes to pay

all fees of the Client Plan, including investment management; and (ii)

fees charged by AmSouth at the Plan-level are negotiated. With respect

to (i) above, AmSouth states that the Client Plan sponsor would not be

able to take over payment of the investment management fees if the

``offset'' structure (as discussed further below) were used because in

such instances the investment management fees would be paid directly

out of the Client Plan's investment in the Funds. With respect to (ii)

above, AmSouth states that from time to time Plan-level fees are

negotiated to amounts which are below AmSouth's published fee schedules

due to competitive pressures in the marketplace. When the negotiated

fees paid at the Plan-level are less than the investment advisory fees

paid to AmSouth by the Funds, the ``credit'' method would be used as it

would be the most beneficial and practical method available to

accommodate these Client Plans.

The use of the ``crediting'' fee structure must be approved prior

to the Client Plan's initial investment in the Funds by a Second

Fiduciary acting for the Client Plan. The Second Fiduciary will receive

full and detailed written disclosure of information concerning the

Funds in advance of any investment by the Client Plan in the Funds,

including the Fund prospectuses as well as a separate statement

describing the crediting fee structure.

After consideration of such information, the Second Fiduciary will

authorize in writing the investment of assets of the Client Plan in one

or more specified Funds and the fees to be paid by the Funds to

AmSouth. In addition, the Second Fiduciary of each Client Plan invested

in a particular Fund will receive full written disclosure, in a

statement separate from the Fund prospectus, of any proposed increases

in the rates of fees charged by AmSouth to the Funds for secondary

services which are above the rates reflected in the Fund prospectuses,

at least thirty (30) days prior to the effective date of such increase.

In the event that AmSouth provides an additional secondary service

for which a fee is charged or there is an increase in the rate of fees

paid by the Funds to AmSouth for any secondary service, including any

increase resulting from a decrease in the number or kind of services

performed by AmSouth for such fees in connection with a previously

authorized secondary service, AmSouth will, at least 30 days in advance

of the implementation of such additional service or fee increase,

provide written notice to the Second Fiduciary explaining the nature

and the amount of the additional service for which a fee will be

charged or the nature and amount of the increase in fees of the

affected Fund.15 Such notice will be made separate from the

Fund prospectus and will be accompanied by a Termination Form. The

Second Fiduciary also will receive full written disclosure in a Fund

prospectus or otherwise of any increases in the rate of fees charged by

AmSouth to the Funds for investment advisory services prior to the

effective date of such increases, even though these fees will be

credited to the investing Client Plans.

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

\15\ With respect to increases in fees, the Department notes

that an increase in the amount of a fee for an existing secondary

service (other than through an increase in the value of the

underlying assets in the Funds) or the imposition of a fee for a

newly-established secondary service shall be considered an increase

in the rate of such fees. However, in the event a secondary service

fee has already been described in writing to the Second Fiduciary

and the Second Fiduciary has provided authorization for the fee, and

such fee was temporarily waived, no further action by AmSouth would

be required in order for the Bank to receive such fee at a later

time. Thus, for example, no further disclosure would be necessary if

AmSouth had received authorization for a fee for custodial services

from Plan investors and subsequently determined to waive all or a

portion of the fee for a period of time in order to attract new

investors but later charged the full fee.

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

The authorizations made by a Second Fiduciary of any Client Plan

will be terminable at will, without penalty to the Client Plan, upon

receipt by AmSouth of written notice of termination. A form (the

Termination Form) expressly providing an election to terminate the

authorization, with instructions on the use of the form, will be

supplied to the Second Fiduciary no less than annually. However, the

Termination Form will not need to be supplied to the Second Fiduciary

for an annual reauthorization sooner than six months after such

Termination Form is supplied for an additional service or for an

increase in fees (as discussed above), unless another Termination Form

is required to disclose additional services or fee increases. The

Termination Form will instruct the Second Fiduciary that the

authorization is terminable at will by the Client Plan, without penalty

to the Client Plan, upon receipt by AmSouth of written notice from the

Second Fiduciary, and that failure to return the Termination Form will

result in the continued authorization of AmSouth to engage in the

subject transactions on behalf of the Client Plan.

The Termination Form will be used to notify AmSouth in writing to

effect a termination by selling the shares of the Funds held by the

Client Plan, requesting such termination within one business day

following receipt by AmSouth of the form. If, due to circumstances

beyond the control of AmSouth, the sale cannot be executed within one

business day, AmSouth will be obligated to complete the sale within the

next business day.

Offset Fee Structure

10. AmSouth represents that small and mid-size Client Plans that

invest in the Funds would be offered an ``offset'' fee structure (i.e.

a waiver of the investment management fee for the Client Plan at the

Plan-level) rather than a ``crediting'' fee structure (i.e. a credit of

the Client Plan's pro rata share of Fund-level advisory fees back to

the Client Plan). These Client Plans typically would be so-called

``401(k)'' Plans (i.e. deferred compensation arrangements pursuant to

section 401(k) of the Code) that are designed to be simple,

standardized products using fixed fee arrangements. In addition,

AmSouth typically would offer the ``offset'' fee structure for other

plan products when Plan-level fees are not negotiated to an amount

which is below AmSouth's published fee schedule.16 In these

cases, if the Second Fiduciary authorizes the ``offset'' fee structure

under this proposed exemption, AmSouth will waive Plan-level investment

management fees that would otherwise be charged for the Client Plan's

assets invested in the Funds, so that the Plan-level fees will be

``offset'' and the Client Plan will pay only one investment management

fee for those assets, at the Fund-level.17 This ``offset''

[[Page 33923]]

fee structure, which is similar to one of the fee structures described

in PTE 77-4, will ensure that AmSouth does not receive any duplicative

investment management, advisory or similar fees as a result of

investments in the Funds by the Client Plans.

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

\16\ AmSouth states that larger Client Plans often may negotiate

Plan-level fees to amounts below AmSouth's published fee schedule.

If, as a result of the negotiations, the Plan-level investment

management fees are less than the Fund-level investment advisory

fees, the Client Plan would benefit more from a Fund-level fee

credit than an ``offset'' of the Plan-level fees for assets invested

in the Funds.

\17\ In this regard, the Department notes that when a Second

Fiduciary authorizes a particular fee structure to prevent AmSouth

from receiving ``double fees'' for investment management and

investment advisory services, AmSouth's disclosures to the Second

Fiduciary should, in a clear and concise manner, reveal sufficient

information to the Second Fiduciary to enable such Fiduciary to

determine the nature and extent of any differentials between the

rates of fees charged at the Plan-level and the rates of fees

charged at the Fund-level. Such information would enable the Second

Fiduciary to adhere to its duties and responsibilities under section

404 of the Act to act prudently when approving and monitoring the

services provided to the Client Plan and would help ensure that the

fees paid for such services are reasonable.

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

Disclosures, approvals, and notifications with regard to any

changes in fees or secondary services will be handled in the same

manner as for the ``credit'' fee structure described in paragraph 9

above, with one exception. The exception is that notifications with

regard to increases in rates of investment advisory fees for the Funds

will conform to the procedures for increases in rates of secondary

service fees as described in paragraph 9. Therefore, in such instances,

there will be prior written notification of the fee increase to the

Second Fiduciary for the Client Plan, in a statement separate from the

Fund prospectus, and a Termination Form will be provided. The reason

for the exception is that the total fees paid by the Client Plan, under

the ``offset'' fee structure, will be directly affected by any

increases in the rates of Fund-level investment advisory fees because

such fees will not be credited back to the Client Plan.

11. AmSouth states that a Second Fiduciary will always receive a

written statement giving full disclosure of the fee structures prior to

any investment in the Funds. The disclosure statement will explain why

AmSouth believes that the investment of assets of the Client Plan in

the Funds may be appropriate. The disclosure statement also will

describe whether there are any limitations on AmSouth with respect to

which Client Plan assets may be invested in shares of the Funds and, if

so, the nature of such limitations.18

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

\18\ See section II(d) of PTE 77-4 which requires, in pertinent

part, that an independent plan fiduciary receive a current

prospectus issued by the investment company and a full and detailed

written disclosure of the investment advisory and other fees charged

to or paid by the plan and the investment company, including a

discussion of whether there are any limitations on the fiduciary/

investment adviser with respect to which plan assets may be invested

in shares of the investment company and, if so, the nature of such

limitations.

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

12. On an annual basis, the Second Fiduciary of a Client Plan

investing in the Funds will receive copies of the current Fund

prospectuses and, upon such fiduciary's request, a copy of the

Statement of Additional Information for such Funds as well as copies of

the annual financial disclosure reports containing information about

the Fund and independent auditor findings.

In addition, if the Funds obtain brokerage services in the future

from any broker-dealers that are affiliates of AmSouth, AmSouth will

provide at least annually to the Second Fiduciary of Client Plans

investing in the Funds written disclosures indicating the following:

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

Fund that are paid to AmSouth by such Fund; (ii) the total, expressed

in dollars, of brokerage commissions of each Fund that are paid by such

Fund to brokerage firms unrelated to AmSouth; (iii) the average

brokerage commissions per share, expressed as cents per share, paid to

AmSouth by each Fund portfolio; and (iv) the average brokerage

commissions per share, expressed as cents per share, paid by each Fund

portfolio to brokerage firms unrelated to AmSouth. All such brokerage

services would be provided in accordance with section 17(e) of the 1940

Act and Rule 17e-1 thereunder. Such provisions require, among other

things, that the commissions, fees or other remuneration for any

brokerage services provided by an affiliate of an investment company's

investment adviser be reasonable and fair compared to what other

brokers receive for comparable transactions involving similar

securities.

13. No sales commissions will be paid by the Client Plans in

connection with the purchase or sale of shares of the Funds. In

addition, no redemption fees will be paid in connection with the sale

of shares by the Client Plans to the Funds. AmSouth states that it will

not receive any fees payable pursuant to Rule 12b-1 under the 1940 Act

in connection with the transactions covered by this proposed exemption.

AmSouth states further that all other dealings between the Client Plans

and the Funds will be on a basis no less favorable to the Client Plans

than such dealings will be with the other shareholders of the Funds.

14. In summary, AmSouth represents that the transactions described

herein will satisfy the statutory criteria of section 408(a) of the Act

because: (a) the Funds will provide the Client Plans with an effective

investment vehicle without any duplicative investment management,

advisory or similar fees paid to AmSouth; (b) AmSouth will require

annual audits by an independent accounting firm to verify the proper

crediting to the Client Plans of investment advisory fees charged by

AmSouth to the Funds under the ``crediting'' fee structure; (c) with

respect to any investments in a Fund by the Client Plans and the

payment of any fees by the Fund to AmSouth, a Second Fiduciary will

receive full written disclosure of information concerning the Fund,

including a current prospectus and a statement describing the fee

structure, and will authorize in writing the investment of the Client

Plan's assets in the Fund and the fees paid by the Fund to AmSouth; (d)

any authorizations made by a Client Plan regarding investments in a

Fund and fees to be paid to AmSouth, or any increases in the rates of

fees for secondary services which will be retained by AmSouth, will be

terminable at will by the Client Plan, without penalty to the Client

Plan, upon receipt by AmSouth of written notice of termination from the

Second Fiduciary; (e) no commissions or redemption fees will be paid by

the Client Plan in connection with either the acquisition of Fund

shares or the sale of Fund shares; (f) AmSouth will not receive any

fees payable pursuant to Rule 12b-1 under the 1940 Act in connection

with the subject transactions; and (g) all dealings between the Client

Plans and the Funds will be on a basis which is at least as favorable

to the Client Plans as such dealings are with other shareholders of the

Funds.

Notice to Interested Persons

Notice of the proposed exemption shall be given to all Second

Fiduciaries of Client Plans that were invested in the Funds as of the

effective date of the proposed exemption (i.e. April 16, 1997). In

addition, notice of the proposed exemption shall be given to Client

Plans that are currently invested in the Funds, as of the date the

notice of the proposed exemption is published in the Federal Register,

where AmSouth is providing services to the Funds and receives fees

which would be covered by the proposed exemption, if granted.

Notice to interested persons shall be provided by first class mail

within thirty (30) days following the publication of the proposed

exemption in the Federal Register. Such notice shall include a copy of

the notice of proposed exemption as published in the Federal Register

and a supplemental statement (see 29 CFR 2570.43(b)(2)) which informs

all interested persons of their right to comment on and/or request a

hearing with respect to the proposed exemption. Comments and requests

for a public hearing are due within sixty () days following the

publication of the proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,

telephone (202) 219-8194. (This is not a toll-free number.)

[[Page 33924]]

Alloy Die Casting Co. Employees' Profit Sharing Plan and Trust (the

Plan) Located in Anaheim, California

[Application No. D-10439]

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 section 406(a), 406(b)(1) and (b)(2) of

the Act and the sanctions resulting from the application of section

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

Code, shall not apply to the proposed cash sale by the Plan to the

Alloy Die Casting Co./W.E. Holmes, Inc. (Alloy), the Plan sponsor and a

party in interest with respect to the Plan, of units (the Units) in the

Krupp Insured Plus-II Limited Partnership (the Partnership), provided:

(a) the sale is a one-time transaction for cash; (b) no commissions or

other expenses are paid by the Plan in connection with the sale; and

(c) the Plan will receive the greater of: (1) $13.05 per Unit, or (2)

$1.15 above the highest bid price for the Units at the most recent

sealed bid auction for the Units which has occurred prior to the time

of the sale.

Summary of Facts and Representations

1. Alloy, an Anaheim, California corporation, is the sponsor of the

Plan. The Plan is a profit sharing plan which had 148 participants and

aggregate assets with an approximate fair market value of $3,873,829 as

of December 31, 1996.

2. On July 21, 1987, the Plan bought 51,282 Units in the

Partnership for $1 million. The Plan's cost basis was $19.50 per Unit.

Through February 27, 1997, the Plan had received distributions from the

Partnership in the amount of $14.88 per Unit. Consequently, the

unrecovered cost to the Plan of the Units is currently $4.62 per Unit.

3. Alloy was sold in 1996, and the Plan is in the process of being

terminated and liquidated. All assets of the Plan, with the exception

of the Units, have been converted into cash or short-term equivalents.

4. The Partnership is a Massachusetts limited partnership which

invests primarily in federally insured mortgages on multi-family

residential properties through the purchase of mortgage-backed

securities. Krupp Insured Plus Corp. (Krupp) and Mortgage Services

Partners Limited Partnership are the general partners of the

Partnership. The applicant represents that the Units cannot be

converted into short-term cash equivalents because transfers of the

Units are subject to certain restrictions whereby Unit holders are not

able to liquidate their investment.19 As a result of these

restrictions, it is not administratively feasible for the Plan to

distribute the Units to the participants; instead, it must sell the

Units in order to distribute each participant's pro-rata share of the

value of such Units in cash.

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

\19\ The Department notes that the decisions to acquire and hold

the Units are governed by the fiduciary responsibility requirements

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

Department herein is not proposing relief for any violations of Part

4 of the Act which may have arisen as a result of the acquisition

and holding of the Units.

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

5. The applicant represents that there is no established market for

the Units. Alloy has therefore requested the exemption proposed herein

to purchase the Units from the Plan for cash. The applicant represents

that no commissions will be paid in connection with the transaction.

Alloy has offered to pay the Plan $1.15 per Unit in excess of the fair

market value of the Units as determined by the highest bid price at the

most recent sealed bid auction for the Units which has occurred prior

to the time of the sale. The applicant states that Krupp has

represented that the most recent sealed bid auction took place on

February 14, 1997, at which time the average price paid per Unit was

$11.55, and the highest price paid per Unit was $11.90. Thus, Alloy has

offered to pay the Plan the higher of: (a) $13.05 per Unit, or (b)

$1.15 per Unit above the highest bid price for the Units at the most

recent sealed bid auction which has occurred prior to the date of the

sale.

6. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 408(a) of the Act

because: (a) the sale would be a one-time transaction for cash, and no

commissions or other expenses would be paid by the Plan in connection

with the transaction; (b) the transaction will provide liquidity for

the Plan which is currently being terminated; c) the purchase price for

the Units will exceed the Plan's original cost for the Units less

distributions received from the Partnership; and (d) the Plan will

receive not less than $1.15 more per Unit than the highest bid price at

the most recent sealed bid auction for the Units.

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;

(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.

[[Page 33925]]

Signed at Washington, DC, this 18th day of June, 1997.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 97-16361 Filed 6-20-97; 8:45 am]

BILLING CODE 4510-29-P