Proposed Exemptions; McCrosky, Feldman, Cochrane & Brock, P.C.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10261, et al.]

Proposed Exemptions; McCrosky, Feldman, Cochrane & Brock, P.C.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

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

date of publication of this Federal Register Notice. Comments and

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

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

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

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

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

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

hearing.

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

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

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

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

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

Exemption. The applications for exemption and the comments received

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

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

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

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

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

exemption as published in the Federal Register and shall inform

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

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

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

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

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

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

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

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

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

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

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

statement of the facts and representations.

McCroskey, Feldman, Cochrane & Brock, P.C. Profit Sharing Plan and

Trust (the Plan), Located in Muskegon, Michigan

[Application No. D-10261].

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

(b)(2) of the Act and the sanctions resulting from the application of

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

(E) of the Code, shall not apply to the proposed cash sale (the Sale)

by the Plan of certain improved real property located at 1440 and 1442

Peck Street in Muskegon, Michigan (the Muskegon Property) to the

McCroskey Development Partnership (the Partnership), a party in

interest with respect to the Plan; provided that the following

conditions are satisfied:

(A) All terms and conditions of the Sale are no less favorable to

the Plan than those which the Plan could obtain in an arm's-length

transaction with an unrelated party;

(B) The Sale is a one-time transaction for cash in which the Plan

incurs no expenses;

[[Page 41432]]

(C) The Plan receives a purchase price for the Muskegon Property

which is no less than the greater of (1) the fair market value of the

Muskegon Property established at the time of the sale by an independent

qualified appraiser, or (2) $350,000;

(D) Within sixty days of the publication in the Federal Register of

a notice granting this proposed exemption, if granted, McCroskey,

Feldman, Cochrane & Brock, P.C. (the Employer) files Form 5330 with the

Internal Revenue Service and pays the applicable excise taxes which are

due with respect to the continuation of a lease of the Muskegon

Property by the Plan to the Employer after September 27, 1989; and

(E) Within sixty days of the publication in the Federal Register of

a notice granting this proposed exemption, if granted, the Employer's

payment of rent to the Plan for the Muskegon Property from September

27, 1989 through the date of the Partnership's purchase of the Property

from the Plan is reviewed by an independent fiduciary to determine

whether such rent was at all times no less than the fair market rental

value of the Muskegon Property, and, to the extent such rent is

determined to have been less than the fair market rental value, the

Employer pays the Plan the amount of such deficiency together with

interest thereon at a rate determined by the independent fiduciary to

be appropriate to compensate the Plan for lost income on such

deficiency amount.

Summary of Facts and Representations

1. The Plan is a defined contribution profit sharing plan with

individual accounts for each of its participants. The Plan is sponsored

by McCroskey, Feldman, Cochrane & Brock, P.C. (the Employer), a

Michigan professional corporation operating a law firm located in

Muskegon, Michigan. The Plan had approximately 38 participants and

beneficiaries and total assets of approximately $6,209,646 as of

December 31, 1996. The trustees of the Plan are J. Walter Brock and

Gary T. Neal (the Trustees), each of whom is an employee and an 11.11

percent shareholder of the Employer.

2. On September 23, 1975, the Plan purchased three lots of real

property (the Original Property) from a partnership called the

Advocates, whose partners were the shareholders of the Employer. Two

lots of the Original Property are adjacent lots located in Muskegon

County, Michigan (the Muskegon Property) at 1440 Peck Street and 1442

Peck Street in Muskegon, MI. The Plan paid a purchase price of $250,000

for the lot at 1440 Peck Street and a purchase price of $25,000 for the

adjacent lot at 1442 Peck Street. The remainder of the Original

Property was a third lot, located in Calhoun County (the Calhoun

Property) at 5906 Morgan Road in Battle Creek, Michigan, and the

purchase price for this lot was $42,500. The Employer represents that

the Plan's purchase of the Original Property from the Advocates met the

requirements of section 408(e) of the Act, pertaining to the purchase

of qualifying employer real property, and was therefore exempt from the

prohibited transactions provisions of section 406 of the

Act.1

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\1\ The Department expresses no opinion as to whether the Plan's

purchase of the Original Property satisfied the conditions of

section 408(e) of the Act.

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3. Upon acquisition of the Original Property by the Plan, the

Employer commenced to lease all three lots of the Original Property

from the Plan for use as office locations for the Employer's law

practice. The Employer represents that the Plan's leases of the

Original Property to the Employer (the Original Leases) constituted

leases of qualifying employer real property in satisfaction of the

requirements of section 408(e) of the Act and were therefore exempt

from the prohibitions of section 406 of the Act.2

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\2\ The Department expresses no opinion as to whether the

Original Lease satisfied the conditions of section 408(e) of the

Act.

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The initial Original Lease was for a ten-year term and provided for

rent at appraised rental values. Rent was set at $3,600 per month, as

determined by the August 1975 appraisal, for a total of $43,228 per

year. The lease was triple net, and also specified that rent was to be

a fixed sum for the first five years, and that for the second five

years, annual rent would be determined by appraisal, and would reflect

any change in the rental value of the property. The Employer represents

that its continued lease of the Original Property from the Plan

subsequent to the second term of the Original Lease was pursuant to

extensions of the Original Lease and that rentals of no less than the

subject property's fair market rental value were paid to the Plan in

accordance with appraisals conducted in 1988, 1993 and 1995.

On September 27, 1989, the Plan sold the Calhoun Property to an

unrelated party, the United Association of Plumbers and Pipefitters

Union Local 335 (the Union). The Employer represents that it was

relocating its business to the Muskegon Property and was forced to

abandon the Calhoun Property. The Employer represents that the Union is

independent of and unrelated to the Employer and the Plan. Since the

Plan sold the Calhoun Property to the Union, the Employer has continued

to occupy the Muskegon Property and lease it from the Plan pursuant to

extensions of the Original Lease. The Employer states that the two lots

constituting the Muskegon Property are treated as one parcel for

address and appraisal purposes, referred to as 1440 Peck Street,

because the structural improvements on each lot are components of a

single commercial structure which lies on parts of both lots.

Hereinafter, references to the Muskegon Property are intended to

include both 1440 and 1442 Peck Street.

4. In anticipation of upcoming increased Plan liquidity needs, and

in recognition that the continuation of the Employer's use and lease of

the Muskegon Property since the Plan's sale of the Calhoun Property has

constituted a prohibited transaction under section 406 of the Act, the

Trustees have determined to terminate the Plan's lease of the Muskegon

Property to the Employer by causing the Plan to sell the Muskegon

Property. A partnership comprised of shareholders of the Employer, the

McCroskey Development Partnership (the Partnership), has expressed to

the Trustees a willingness to purchase the Muskegon Property at its

full fair market value, and the Trustees are now proposing to cause the

Plan to sell the Muskegon Property to the Partnership for cash. The

Trustees and the Employer are requesting an exemption to enable this

sale transaction under the terms and conditions described herein.

5. If the exemption is granted, the Partnership will pay the Plan a

cash purchase price for the Muskegon Property of no less than the fair

market value of the Muskegon Property as of the date of the sale and in

no event less than $350,000. The Muskegon Property was appraised as of

April 11, 1995 by Stephen P. Nedeau, MAI, SRA (Nedeau), who determined

that as of that date the Muskegon Property had a fair market value of

$350,000. Commensurate with the sale transaction, the Trustees will

cause the appraisal by Nedeau to be updated as of the sale date, and

the purchase price will be cash in the amount of (a) the Muskegon

Property's fair market value according to such updated appraisal, or

(b) $350,000, whichever is greater. The Plan will pay no expenses

related to the transaction.

6. The Department is not proposing exemptive relief for the

continuation of the lease by the Employer of the Muskegon Property from

the Plan (the Continued Lease) after September 27, 1989, the date on

which the Plan sold the Calhoun Property. The Employer

[[Page 41433]]

recognizes that the Continued Lease has constituted a prohibited

transaction under the Act and the Code for which no exemptive relief is

proposed herein. Accordingly, the Employer represents that it will pay

the excise taxes which are applicable under section 4975(a) of the Code

by reason of such Continued Lease within sixty (60) days of the

publication in the Federal Register of a notice granting the exemption

proposed herein.

7. The Employer represents that the rentals paid to the Plan during

the Continued Lease have provided the Plan with appropriate amounts of

rent in accordance with updated appraisals of the Muskegon Property.

However, because the amount of annual rent has remained constant under

the Continued Lease, as an additional condition of this exemption, if

granted, the Employer will cause a review of the rentals paid to the

Plan and the Muskegon Property's fair market rental values during the

Continued Lease by an independent Plan fiduciary in order to determine

whether the Plan received rentals of no less than the fair market

rental values of the Muskegon Property during the Continued Lease. The

Employer represents that the independent fiduciary for this purpose

will be either Nedeau, who performed the most recent appraisal of the

Muskegon Property, or the trust department of FMB Lumberman's Bank in

Muskegon, Michigan, which represents itself to be independent of the

Employer. In the event such independent fiduciary determines that rent

payments received by the Plan were less than the Muskegon Property's

fair market rental value for any period during the Continued Lease, the

Employer will pay the Plan the amount of any such deficiency with

interest on such amount at a rate determined by the independent

fiduciary to compensate the Plan appropriately for lost income.

8. In summary, the applicant represents that the transaction

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

section 4975(c)(2) of the Code because: (1) The proposed sale will be a

one-time cash transaction; (2) The Plan will experience no losses nor

incur any expenses from the transaction; (3) The Plan will receive cash

for the Muskegon Property in the amount of no less than the Muskegon

Property's updated fair market value as of the sale date and in no

event less than $350,000; and (4) The transaction will enable the

termination of the ongoing Continued Lease of the Muskegon Property by

the Plan to the Employer, which constitutes a prohibited transaction.

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

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

TCW Group, Inc., Trust Company of the West, TCW Funds Management, Inc.,

TCW Galileo Funds, Inc. (collectively; TCW), Located in Los Angeles,

California

[Application No. D-10319]

Proposed Exemption

Section I. Covered Transactions

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).3 If

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

and the sanctions resulting from the application of section 4975 of the

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

shall not apply to the acquisition or redemption of units (the Units)

in the TCW Life Cycle Trusts (the Trusts, as defined in Section III)

established in connection with such Plans' participation in the TCW

Portfolio Solutions Program (the Program) by individual account plans

described in section 3(34) of the Act (the Plans), including Plans

sponsored by TCW, and the acquisition or redemption of shares (the

Shares) in the TCW Galileo Funds (the Funds, as defined in Section III)

by the Trusts.

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\3\ For purposes of this proposed exemption, reference to

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

also to the corresponding provisions of the Code.

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

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

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

apply to the provision of advice, and to the receipt of fees as a

result thereof, in connection with the investment by the Plans in the

Trusts under the Program.

This proposed exemption is subject to the following conditions set

forth below in Section II.

Section II. General Conditions

A. The terms of each purchase or redemption of the Units in the

Trusts are at least as favorable to an investing Plan as those

obtainable in an arm's length transaction with an unrelated party.

B. The participation of a Plan in the Program will be expressly

authorized in writing by a fiduciary of the Plan who is independent of

TCW.4 With respect to the Plans sponsored by TCW, this

condition will be deemed satisfied for purposes of the purchase or

redemption of Units in the Trusts, if the purchase and redemption of

Shares in the Funds by the Trusts meets the conditions of Prohibited

Transaction Exemption (PTE) 77-3 (42 FR 18743, April 8, 1977).

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\4\ In the case of a Plan sponsored by TCW, such fiduciary need

not be independent of TCW.

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C. Participation in the Program will be limited to Plans which have

a minimum of $5,000,000 in plan assets as of the most recent year.

D. No Plan will pay a fee or commission by reason of the

acquisition or redemption of Units in the Trusts or Shares in the

Funds.

E. The price paid or received by the Plans for the Units in the

Trusts is the ``net asset value'' per Unit, at the time of the

transaction. The Trusts will buy and sell shares in the Funds on the

same basis as other shareholders.

F. The total fees paid to TCW and its affiliates by each Plan for

the provision of services in connection with its investment in the

Units of the Trusts under the Program does not exceed ``reasonable

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

this regard, the total amount paid by a Trust to TCW or unaffiliated

third persons for services necessary to operate the Trusts, and for TCW

to provide what may be considered investment advice, will not exceed 1%

per annum of the average daily ``net asset value'' of the shares of the

Funds and cash held by such Trust.

G. TCW will not receive any fees from the Plans whose participants

(the Participants) receive recommendations concerning investment in a

Trust, nor from the Trusts in which the Plans invest. Notwithstanding

the foregoing, TCW will not be precluded from receiving: (i) fees from

the Funds which are paid by other investors in the Funds, and which are

permissible under the Investment Company Act of 1940, as amended (the

1940 Act); (ii) reimbursement for ``direct expenses'' within the

meaning of 29 CFR 2550.408c-2 in connection with the operation of the

Program; or (iii) reimbursement for direct expenses which TCW pays to

unaffiliated third persons for goods and services provided to the

Trusts and/or Plans under the Program.

H. Any investment advice given to the Participants by TCW under the

Program will be based on the responses provided by the Participants to

worksheet questions which are developed and designed by an independent

financial

[[Page 41434]]

expert (the Financial Expert, as defined in Section III (F)) and the

independent behavioral expert (the Behavioral Expert as defined in

Section III (G), collectively; the Experts).

I. Any investment advice given to the Participant will be

implemented only at the express direction of the Participant.

J. Under the Program, TCW will give investment advice to the

Participants that is limited to the Trusts, a Money Market Fund, a

Guaranteed Investment Contact (GIC) or a similar investment vehicle

that may or may not be affiliated with TCW.5

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\5\ TCW will not receive any fees or other compensation with

respect to recommendations regarding investments in an unrelated

Money Market Fund, GIC or similar investment vehicle.

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K. The compensation of neither Expert is affected by the decisions

made by the participants and beneficiaries regarding investment of the

assets of their accounts among the Trusts.

L. To the extent any assistance is provided by TCW, or unaffiliated

third persons, to the Participants in completing the worksheets and

questions designed by the Experts, such assistance is provided by

individuals whose compensation is not affected by the investment by the

participants and beneficiaries of the assets of their accounts among

the Trusts.

M. With respect to its participation in the Program, an independent

Plan fiduciary must receive, prior to the Plan's investment in any of

the Trusts, complete and detailed written information regarding the

Trusts and the Funds which will include, but may not be limited to:

(1) A description of the Program;

(2) The allocation of the Funds in each Trust specified by the

Financial Expert, and the basis upon which the Funds in each Trust will

be rebalanced so that the Funds' proportionate value in each Trust

equals that specified by the Financial Expert;

(3) Upon request by the Plan Fiduciary, the current basis upon

which the asset allocation of the Trusts was derived;

(4) Full disclosure of all the expenses charged to the Trusts, and

how such expenses are allocated;

(5) Full disclosure of all the fees charged by the Funds, which may

be accomplished by providing the current prospectus for each of the

Funds comprising a Trust; and

(6) A copy of the proposed exemption and, if granted, the final

exemption, as published in the Federal Register.

N. (1) Prior to investing in a Trust, each Participant will receive

full disclosures which will include, but may not be limited to:

(a) Disclosure regarding composition of the Trusts, and a

description of the underlying Funds;

(b) Upon request, a Participant will also receive a copy of the

Funds' prospectus;6 and

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\6\ TCW anticipates that most Plans which participate in the

Program will comply with section 404(c) of the Act. Section 404(c)

of the Act requires, in part, that specific disclosures be provided

by the Plans to the participants and beneficiaries. See 29 CFR

2550.404c-1 (b)(2)(i)(A) and (b)(2)(i)(B)(2) (iv) and (v).

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(c) The Participant can meet with a facilitator familiar with the

Program, or contact such a facilitator using a toll-free number.

(2) Subsequent to his participation in the Program, each

Participant will receive the following disclosures which will include,

but may not be limited to:

(a) Written confirmations of purchase and redemption transactions

for each Participant within 10 days of each such transaction;

(b) Telephone access to the quotations of the Participant's account

balance; and

(c) A periodic newsletter describing the Trusts' performance during

the preceding period, market conditions and economic outlook and, if

applicable, prospective changes in the asset allocation model and the

reasons for the change.

O. Each Plan Fiduciary will receive the following written

disclosures with respect to its ongoing participation in the Program

which will include, but may not be limited to:

(1) A quantitative annual report which will include--

(a) Performance Summary for each Fund;

(b) Schedule of Investments for each Fund;

(c) Statements of Assets and Liabilities for each Fund;

(d) Statements of Operations for each Fund;

(e) Statements of Changes in Net Assets for each Fund;

(f) Notes to Financial Statements, which include but are not

limited to, primary investment objective of each Fund;

(g) The performance and rate of return achieved for each Trust and

the Funds in which the Trust is invested; and

(h) A breakdown of all expenses and fees at the Fund and Trust

levels.

P. (1) Except as provided in Section II(P)(2) below, the

independent Plan Fiduciary will receive, at least 30 days advance

notice of any material change in the information described in Section

II(M) (2) or (3) regarding the composition of the Trusts or the basis

on which the Trusts' assets are rebalanced, and will receive at least

30 days advance notice of any material increase in expenses at the

Trust level described in Section II(M)(4);

(2) The Financial Expert will have the sole responsibility for

determining the materiality of any changes in the information in

Section II(M) (2) or (3). TCW will determine the materiality of any

changes described in Section II(M)(4) regarding the expenses charged to

the Trusts. For any changes in the information in Section II(M) (2) or

(3) which are not material, the independent Plan Fiduciaries will be

notified within 10 days of such change. For any changes in the

information in Section II(M)(4) which are not material the independent

Plan Fiduciary will be notified at least quarterly. Independent Plan

Fiduciaries will be afforded, at all times, a reasonable opportunity to

terminate their Plans' participation in the Program as described in

Section II(Q)(2) below; and

(3) Under extraordinary circumstances outside the control of TCW,

the independent Plan Fiduciary may not be provided advance notice by

TCW of material changes in the information listed in Section II(M) (2)

or (3) regarding the composition of the Trusts or the basis on which

the Trusts' assets are rebalanced. Under such circumstances, the Plan

Fiduciaries will be notified within 10 days of any such change. The

Financial Expert will determine whether the circumstance is

extraordinary and if the change in the composition of the Trusts or in

the basis for rebalancing is material.

Q. (1) The Units in the Trusts will be redeemed by TCW, at no

charge. Redemption requests received in proper form prior to the close

of trading on the New York Stock Exchange (NYSE) will be affected at

the net asset value per Unit determined on that day. Redemption

requests received after the close of regular trading on the NYSE will

be effected at the net asset value at the close of business of the next

day, except on weekends or holidays when the NYSE is closed; and

(2) The Plans can redeem their Units in the Trusts on five business

days (or less) notice.

R. The Trusts permit participants and beneficiaries to purchase or

redeem an interest in the Trust on any day that the shares of the Funds

contained within the Trust can be purchased or redeemed. This paragraph

(R) does not preclude any Plan from restricting such purchases and

redemptions to a less frequent basis.

S. All transactions involving securities owned by the Funds will be

executed through brokers in which TCW has no interest and who are

unrelated to

[[Page 41435]]

TCW. TCW will not receive any consideration from such brokers in

connection with their selection, or for effecting or executing such

transactions other than research which will benefit the shareholders of

the Funds, including the Trusts. TCW brokerage practices will

reasonably comply with the requirements of section 28(e) of the

Securities and Exchange Act of 1934.

T. (1) The independent Fiduciaries of Plans participating in the

Program will receive full written disclosure, in a statement separate

from a Fund prospectus, of any proposed increases in the rates of

advisory or other fees charged by TCW to the Funds for services (or of

any material increase in expenses charged by TCW to the Funds or fees

charged by TCW for internal accounting services for the Funds) at least

30 days prior to the effective date of such increase, accompanied by a

termination form (the Termination Form, as described in (2) below) and

shall receive full written disclosure in a Fund prospectus, or

otherwise, of any such increases in the rate of fees charged by TCW to

the Funds; and

(2) The Termination Form shall provide an election to terminate

participation in the Program and shall contain instructions on the use

of the form that includes the following information: (a) the

authorization to participate in the Program is terminable at will by

the Plan, without penalty to the Plan, upon receipt by TCW of written

notice from the Plan; and (b) failure to return the Termination Form

will result in the continued authorization of the Plan's participation

in the Program, including investment in the Trusts.

U. TCW maintains, for a period of six years, the records necessary

to enable the persons described in paragraph (V) of this Section II to

determine whether the conditions of this exemption have been met,

including a record of each recommendation made to the participants and

beneficiaries, and their subsequent investment choices, except that--

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

occurred if, due to the circumstances beyond the control of TCW and/or

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

the six-year period; and

(2) No party in interest, other than TCW, 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 not available for examination as required

by paragraph (V)(1) of this Section II below.

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

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

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

this Section II are unconditionally available at their customary

location for examination during normal business hours by--

(a) Any duly authorized employee or representative of the

Department, the Internal Revenue Service, or the Securities and

Exchange Commission,

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

representative of such fiduciary,

(c) Any contributing employer to any participating Plan, or any

duly authorized employee or representative of such employer, and

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

any duly authorized representative of such participant or beneficiary.

(2) None of the persons described in paragraphs (1) (b)-(d) of this

paragraph (v) shall be authorized to examine trade secrets of TCW, or

commercial or financial information which is privileged or

confidential.

Section III. Definitions

A. The term Trust or Trusts means a commingled trust or trusts

which satisfy the requirements of IRS Revenue Ruling 81-100, 1981-1

C.B. 326 which invest exclusively in one or more of the portfolios of

TCW Galileo Funds, Inc., cash or cash equivalents.

B. The term Fund or Funds means one or more of the portfolios of

TCW Galileo Funds, Inc., an open-end investment company registered

under the Investment Company Act of 1940, as amended (the 1940 Act).

C. The term TCW means the TCW Group, Inc., and any affiliates

thereof as defined below in paragraph (D) of this Section III.

D. The term 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.

E. The term control means the power to exercise a controlling

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

individual.

F. The term Financial Expert means Professor Jeffrey F. Jaffe,

Ph.D., or a successor Financial Expert. Less than 5 percent (5%) of

Professor Jaffe's gross income, for federal income tax purposes, in his

prior tax year, will be paid by TCW in the immediately subsequent tax

year. If the Financial Expert has any income which is not included in

the gross income (e.g., interest income which is exempt from federal

income taxes), such income may be added to his gross income for his

purpose. In the event TCW determines to replace Professor Jaffee or any

of his successors, TCW will send a letter to the Department 60 days

prior to such replacement. The letter will specify that the successor

Financial Expert has responsibilities, experience and independence

similar to those of Professor Jaffee. If the Department does not object

to the successor, the new appointment will become effective on the 60th

day after the Department receives such letter.

G. The term Behavioral Expert means Professor Shlomo Benartzi, or a

successor Behavioral Expert. In the event TCW determines to replace

Professor Benartzi or any of his successors, TCW will send a letter to

the Department 60 days prior to such replacement. The letter will

specify that the successor has responsibilities, experience and

independence similar to that of Professor Benartzi. If the Department

does not object to the successor, the new appointment will become

effective on the 60th day after the Department receives such letter.

H. The term net asset value of a Trust is defined to mean the fair

market value of shares in the Funds and cash, minus the accrued

expenses of a Trust.

EFFECTIVE DATES: If granted, this exemption will be effective as of the

date this notice of proposed exemption is published in the Federal

Register.

Summary of the Facts and Representations

1. The TCW Group, Inc., is the holding company for a group of

wholly-owned subsidiaries that provide a broad range of investment

management services. Trust Company of the West is a trust company

chartered by the State of California, and is one of the largest trust

companies in the United States. TCW Funds Management, Inc., TCW Asset

Management Company, and Continental Asset Management Corp., are

investment advisors registered with the Securities and Exchange

Commission under the Investment Advisors Act of 1940. TCW Group Inc.

also contains other registered investment advisor entities. As of

September 30, 1996, TCW Group, Inc. was owned 90% by employees and 10%

by directors.

[[Page 41436]]

TCW is primarily in the business of providing investment management

services. TCW manages pools of tax-exempt capital for pension and

profit sharing funds, jointly trusteed retirement, health and welfare

funds, public employee retirement funds, endowments and foundations.

TCW also manages a number of mutual funds for retail investors, and

manages assets for insurance companies, foreign investors, and high net

worth individuals.

As of September 30, 1996, TCW had more than $50 billion in assets

under management, representing over 1,200 institutional and private

clients. As of the same date, TCW had a staff of more than 500

individuals, including over 200 investment and administrative

professionals. This investment staff includes more than 50 portfolio

managers/analysts, approximately 60 research personnel and 14 traders.

TCW also employs more than 40 client relations professionals and more

than 60 administrative professionals.

2. TCW intends to offer the Program entitled ``TCW Portfolio

Solutions'' under which TCW will render investment advice to the

Participants 7 in the Plans. Participation by Plans in the

Program will be approved by Plan Fiduciaries who are independent of

TCW. It is represented that virtually all of the Plans participating in

the Program will be designed to comply with the provisions of section

404(c) of the Act. The Plans will be individual account plans described

in section 3(34) of the Act. Once the Program is approved by the Plan

Fiduciary, TCW will provide each Participant, who wants to receive a

recommendation regarding investments, with a worksheet (Worksheet), in

writing or electronically, as described below. The Worksheets consist

of a series of questions, designed to assess the Participants'

retirement needs and levels of risk tolerance. Upon completion of the

Worksheets, a Participant's responses will be analyzed and each

Participant will receive a written recommendation by TCW of an

appropriate Life Cycle Trust (i.e. Trust) for investment. Initially,

the Program will offer four separate commingled Trusts (more may be

added in the future), and, if not otherwise available under a Plan, a

separate Money Market Fund and a Guaranteed Investment Contract (GIC).

At the request of the Plan, the Money Market Fund, the GIC, or a

similar investment vehicle may or may not be affiliated with

TCW.8

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\7\ For purposes of this proposed exemption, the term

Participants includes participants and beneficiaries who have the

power to direct the investments of their account balances.

\8\ See Footnote 3, supra.

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Each Trust is a group trust established pursuant to IRS Revenue

Ruling 81-100, 1981-1 C.B. 326. Application will be made to the

Internal Revenue Service (IRS) for a favorable determination as to the

tax-exempt status of each Trust. TCW is the trustee of each Trust. Each

Trust will invest exclusively, but in varying proportions, in the Funds

which are the thirteen mutual funds (more funds may be added in the

future) offered by TCW Galileo Funds, Inc., an open-end investment

company.9

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\9\ Upon the request of a very large plan, TCW may construct an

individual arrangement utilizing separate Trusts complying with the

safeguards discussed herein.

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3. An independent Financial Expert will develop a methodology for

assessing the Participants' retirement funding needs. An independent

Behavioral Expert will develop a methodology for assessing the

Participants' levels of loss aversion. A computer program will be

designed by programmers unaffiliated with TCW which will incorporate

the methodologies designed by the two Experts. Information from the

Participant's Worksheet will be input into the computer program and

will produce an investment recommendation presented by TCW to the

Participant. This recommendation will result solely from the output of

the computer program, and neither TCW nor any of its affiliates will be

able to change or affect the output. The recommendation will reflect

the methodology developed by the Financial Expert, except that the

methodology developed by the Behavioral Expert may result in a more

conservative recommendation for a Participant whose Worksheet responses

reflect a high risk aversion level. The more conservative

recommendation may result from the Participant's risk profile, which is

developed through the responses to questions on the Worksheet regarding

risk tolerance and will only be used to recommend the same or a more

conservative Trust than would have been recommended if only questions

regarding the financial requirements of the Participant were contained

in the Worksheets. Under the Program, the Participant retains

discretion and may disregard the recommendation of TCW and invest in

another Trust or in the separate Money Market Fund or GIC offered under

the Program.

The mix of the Funds in the Trusts will accommodate different

investment strategies and risk tolerances. Each Trust will be designed

to provide an asset allocation model (Asset Allocation Model) for four

different profiles of Participants. The four profiles will be based on

the Participants' financial objectives, time horizon, other savings

(including amounts held in other plans), and risk tolerance. The

independent Financial Expert will periodically adjust the Asset

Allocation Models based on investment goals and risk tolerances

assigned to each Asset Allocation Model, as well as any changes in the

economy and market conditions. The Trusts range from aggressive

(portfolios invest in equities) to conservative (portfolios invest in

fixed income instruments). The Trusts may comprise some or all of the

Plan's investment alternatives. As described in paragraph 19 below, TCW

will incur expenses for operating the Program at the Trust level, such

as, for example, expenses paid to third parties. TCW will receive only

reimbursement of direct expenses for operating the Program. The

structure of the Program is described in more detail below.

4. TCW Galileo Funds, Inc. (Galileo) is an open-end management

investment company registered under the Investment Company Act of 1940,

as amended (the 1940 Act).10 Galileo currently offers shares

in thirteen Funds. Galileo may create additional Funds, and such

additional Funds may be considered for investment by the Trusts under

the rebalancing of the Trusts to be performed periodically by the

Financial Expert.11 The Funds have a Registration Statement

under the Securities Act of 1933, as amended (the 1933 Act) and the

1940 Act. The Registration Statement has been declared effective by the

Securities and Exchange Commission (SEC) and is updated at least

annually to assure

[[Page 41437]]

compliance with the securities laws. The Funds are no-load mutual funds

which trade at their respective net asset value. The Trusts trade at

the net asset value of the amalgam of the Funds in which they are

invested, plus any cash they hold. The Funds are available to

institutional investors and individuals with a high net worth, and

require a minimum initial investment of $250,000 and a minimum of

$25,000 for additional investments.

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\10\ The applicant represents that Galileo is strictly regulated

and its fees have to be approved by an independent Board of

Directors. Specifically, section 15 of the 1940 Act contains certain

procedures for the adoption and renewal of investment advisory

contracts. This section 15 requires, among other things, that the

terms of investment advisory agreements must be approved by a

majority of directors, including a majority of the independent

directors, cast in person at a meeting called for purpose of voting

on such approval. Section 15(c) of the 1940 Act imposes a duty on

the directors to request and evaluate, and the investment advisor to

furnish, whatever information is necessary to evaluate the

investment advisory agreement.

The standards regarding the approval of an investment advisory

agreement are governed by section 36(b) of the 1940 Act, which

provides that an investment advisor to a registered investment

company has a fiduciary duty with respect to its receipt of

compensation for services and other payments.

\11\ It is the sole responsibility of the Financial Expert to

determine whether to include an additional Fund as an investment

under one or more of the Trusts.

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5. Galileo has entered into a contract with TCW Funds Management,

Inc. (the Adviser), pursuant to which Galileo has employed the Adviser

to: manage the investment of its assets; administer its day-to-day

operations; place purchase and sale orders of the Funds' securities;

and manage Galileo's business affairs (subject to control by the Board

of Directors of Galileo). Under the advisory agreement (the Advisory

Agreement), the Funds pay the Adviser certain fees for the services

rendered, facilities furnished, and the Funds' expenses paid by the

Adviser. (See Table I). The Funds are entirely no-load, and do not

charge fees to purchase or exchange shares. Also, the Funds do not

charge any ongoing marketing expenses (i.e. fees pursuant to Rule 12b-1

under the 1940 Act).

6. The following Table I illustrates the expenses and fees incurred

by the Funds' shareholders for the fiscal year ending October 31, 1996.

The applicant represents that these fees and expenses are subject to

change. Expenses are expressed as a percentage of each Fund's average

net asset value.12

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\12\ For the Convertible Securities Fund and Money Market Funds

offered inside the Trusts, the Adviser has agreed to reduce its

investment management fee. Alternatively, the Adviser will pay these

Funds' operating expenses, so as to limit each respective Fund's

total expenses to 0.95% and 0.40%, of its average net asset value

until December 31, 1997.

Table I.--Shareholder Transaction Expenses For All Portfolios

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

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

Sales Load Imposed on Purchases.............. None.

Sales Load Imposed on Reinvested Dividends... None.

Contingent Deferred Sales Load............... None.

Redemption Fees.............................. None.

Exchange Fees................................ None.

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

Fund Name

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

Core Long term

Annual fund operating expenses Money High fixed mortgage Mortgage Mid-cap Convertible Core Small Earnings Asia Emerging Latin

market yield income backed backed growth securities equity cap momentum Pacific markets America

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

Management fees................................ .21% .75% .40% .50% .50% .93% .62% .75% 1.00% 1.00% 1.00% 1.00% 1.00%

Rule 12b-1 fees................................ (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)

Other expenses................................. .19% .15% .36% .18% .19% .27% .33% .07% .14% .43% .44% .41% .44%

Total fund operating expenses.................. .40% .90% .76% .68% .69% 1.20% .95% .82% 1.14% 1.43% 1.44% 1.41% 1.44%

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

None.

The independent Fiduciaries of Plans participating in the Program

will receive full written disclosure, in a statement separate from a

Fund prospectus, of any proposed increases in the rates of advisory or

other fees charged by TCW to the Funds for services (or of any material

increase in expenses charged by TCW to the Funds or fees charged by TCW

for internal accounting services for the Funds) at least 30 days prior

to the effective date of such increase, accompanied by a termination

form (the Termination Form, as described below) and shall receive full

written disclosure in a Fund prospectus, or otherwise, of any such

increases in the rate of fees charged by TCW to the Funds.

The Termination Form shall provide an election to terminate

participation in the Program and shall contain instructions on the use

of the form that includes the following information: (a) The

authorization to participate in the Program is terminable at will by

the Plan, without penalty to the Plan, upon receipt by TCW of written

notice from the Plan; and (b) failure to return the Termination Form

will result in the continued authorization of the Plan's participation

in the Program, including investment in the Trusts.

7. TCW will engage the Financial Expert to construct Asset

Allocation Models for the Trusts, using generally accepted principles

of modern portfolio theory. The Program also permits the creation of

individualized Trusts whose asset class composition may be modified by

the Plan's Independent Fiduciary. However, the Financial Expert has to

approve such modification as being appropriate for that particular

Trust. TCW represents that investment in such individualized Trusts

will be limited to the Plan for which such a Trust was created.

Initially, the Financial Expert will be Professor Jeffrey Jaffe,

Ph.D., who is currently on the faculty of the Wharton School. Mr. Jaffe

received a Ph.D. in finance in 1973 from the University of Chicago's

Graduate School of Business. He has been a frequent contributor to the

Quarterly Economic Journal, the Journal of Finance, the Journal of

Financial and Quantitative Analysis, and the Financial Analysts

Journal. Mr. Jaffe is the Academic Director of several Wharton

Executive Education Programs, which he also teaches. In the event that

TCW determines to replace Professor Jaffe or any of his successors, TCW

will send a letter to the Department 60 days prior to such replacement.

The letter will specify that the successor Financial Expert has the

responsibilities, experience and independence similar to those of

Professor Jaffe. If the Department does not object to the Successor

Financial Expert, the new appointment will become effective on the 60th

day after the Department receives such letter.

Mr. Jaffe, as the Financial Expert, has no pre-existing

relationship with TCW and its affiliates. Mr. Jaffe is independent from

and is not under the control of TCW and its affiliates. The investment

decisions made by the Participants will not affect the fees paid to the

Financial Expert. Mr. Jaffe will receive compensation from TCW for

serving as the Financial Expert. Less than 5% of Professor Jaffe's

gross income, for federal income tax purposes, in his prior tax year,

will be paid by TCW in the immediately subsequent tax year. If

Professor Jaffe, as the Financial Expert, has any income which is not

included in the gross income (e.g., interest income which is exempt

from federal income taxes), such income may be added to his gross

income for this purpose.

8. As stated above, the Asset Allocation Models will be developed

and maintained by the Financial Expert and will be assigned specific

investment goals and risk tolerances. Under each Asset Allocation

Model, the Trusts will invest in specific Funds and will hold certain

amounts of these Funds so as to be in compliance with the prescribed

Asset Allocation Model. TCW may assist the Financial Expert by

providing certain background information for the

[[Page 41438]]

development of the Asset Allocation Models. In this regard, TCW may

supply the Financial Expert with algorithms, studies, analytics,

research, models, papers and any other relevant materials. The

Financial Expert may also seek the assistance of other entities in

formulating the Asset Allocation Models. In all cases, however, the

Financial Expert retains the sole control and discretion for the

development and maintenance of the Asset Allocation Models.

The Trusts' holdings of the Funds will be periodically rebalanced

by TCW to maintain compliance with specific Asset Allocation Models.

However, the rebalancing procedures will not involve any discretion on

the part of TCW or its affiliates. In this connection, the Financial

Expert will develop a mechanical formula to rebalance the relative

value of the Funds in each Trust on a pre-determined basis. The

Financial Expert also will determine the timing of the rebalancing and

may also periodically adjust the Asset Allocation Model.

9. TCW will also retain a behavioral expert (the Behavioral Expert)

to formulate a risk profile for each Participant based on each

Participant's risk tolerance. As described below, the Behavioral Expert

is Schlomo Benartzi, a professor at UCLA's Anderson School of

Management. Professor Benartzi received his Ph.D. in Behavioral Finance

and Mental Accounting from Cornell University's Johnson School of

Management. The Behavioral Expert is independent of and is not under

common control of TCW and its affiliates. The fees paid to the

Behavioral Expert by TCW for serving as the Behavioral Expert will not

be affected by the investment decisions made by the Participants.

10. The Program will be made available to Plans which have a

minimum of $5 million in assets. The Plan Fiduciaries will determine

whether the Program is appropriate for their Plans. To assist the Plan

Fiduciaries in making this determination, TCW will provide: a brochure

describing the Program; a contract containing the terms and conditions

of the Program which must be executed by the Plan Fiduciary before the

Program is offered to the relevant Plan Participants; full disclosure

concerning the composition of the Trusts and, upon request, the basis

by which the Asset Allocation Model for each Trust was derived (TCW may

require Plan Fiduciaries to keep such basis confidential, except as

required by law); a reference guide/disclosure document providing

detailed information as to how the Program works; the fees charged to

the Funds; the expenses charged at the Trust level; and related

information.

TCW will also provide the Plan Fiduciaries with a quantitative

annual report, based on raw data supplied by the Plans. The annual

report will enable the Plan Fiduciaries to determine whether the

Program has increased or maintained Plan participation, or has achieved

more appropriate asset allocation for the investment of the Plan

Participants' accounts. Such report will disclose the extent to which

the Plan Participants followed TCW's recommendations. The annual report

will also include the performance and rate of return achieved for each

Trust and the Funds in which it is invested, and will contain a

breakdown of all expenses and fees at the Fund and Trust levels.

11. The applicants represent that the Program will assist Plan

Fiduciaries in achieving increased Plan participation, and assisting

Participants in attaining appropriate asset allocation for their

individual accounts. In accordance with their responsibilities under

Title I of the Act, the Plan Fiduciaries will review the Program before

offering it under their Plans.13

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\13\ In this regard, the general standards of fiduciary conduct

promulgated under the Act apply to the Plan Fiduciaries

participation in the Program. Section 404 of the Act requires, among

other things, that a fiduciary discharge his or her duties solely in

the interest of the participants and beneficiaries and in a prudent

fashion. Accordingly, the Plan Fiduciary must act prudently when

deciding to enter the Program, and in considering the fees to be

paid to TCW or third parties thereunder. The Department expects the

Plan Fiduciary, prior to entering into the Program, to fully

understand the operation of the Program and the compensation paid

thereunder, following disclosure by TCW of all relevant information

pertaining to the Program.

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12. Under the Program, TCW will provide each Plan Participant, in

writing or otherwise, with Worksheets to elicit from the Participants

their retirement funding needs and level of loss aversion. The

Worksheets will consider each Participant's savings, liquidity needs,

present and future marginal income tax brackets, other financial assets

(e.g., amounts in other plans), personal assets, other funding sources

(e.g., inheritance), and investment time horizon. The Worksheets will

be developed by the Behavioral Expert and the Financial Expert. The

risk profile, developed through the use of the Worksheets, will be used

by TCW only to recommend to the Participants the same or a less

aggressive Trust than it would have recommended if the risk profile had

not been developed and was not considered. TCW will disclose to the

Participants the reason for, and the effects of, the risk profile.

The Worksheets will be provided in different formats to accommodate

all Participants. It is anticipated that the Worksheets will be

provided in hard-copy with written instructions at employee meetings

and general information meetings, through the Intranet (a secured

access subset of the Internet), on computer terminals at the office of

the Plan Fiduciary, on the Plan Fiduciary's page on the world-wide web,

etc. If a computer-proficient Participant does not understand a

question, he will be able to receive a detailed answer via the

computer. The Participant can also meet with a facilitator familiar

with the Program, or contact the facilitator by telephone using an 800

toll-free number. The facilitator may, if the Participant chooses,

complete the Worksheets based on information furnished by or on behalf

of the Participant. The compensation of such personnel will not be

affected by particular Trust recommendations or the allocation of

investments in the Trusts and/or Money Market Fund, Guaranteed

Investment Contract or similar vehicle. However, such personnel may

receive enhanced compensation based on the amount invested in the

entire Program by all Participants, or by the Participants which they

or their teams assist.

13. All the recommendations made by TCW to the Participants

regarding specific Trusts, will be based solely from inputting the

Participant information into the computer program which is designed

using parameters provided by the Financial Expert and the Behavioral

Expert. Any computer programmers who are retained to formulate such

programs will have no affiliation with TCW. Neither TCW nor any of its

affiliates will have any discretion regarding the output of the

Program. Under the Program, the Participant retains discretion and may

disregard the recommendation of TCW and invest in another Trust.

Further, if the Participant does not complete the Worksheet, the

Participant may elect which Trust to invest in. The Program imposes no

limit on the frequency with which a Participant may change his

investment election. However, Plan sponsors may impose other limits

concerning frequency. The Program is designed to recommend a single

Trust to the Plan Participants. However, if a Plan wishes to permit its

Participants to invest in more than one Trust, TCW will modify the

Program to permit such investments. However, only one Trust will be

recommended by TCW.

[[Page 41439]]

14. The applicant believes that short-term market volatility has

influenced investors to ``buy high and sell low''. In this regard,

DALBAR Financial Services, Inc., (DALBAR) prepared a study titled

Quantitative Analysis of Investor Behavior which tracked investor cash

flows in and out of mutual funds during the period January 1984 through

September 1993. 14 The study concluded that the investors'

tendency to bail out of equity and bond funds during dips in the

market, and buy back during recoveries, hurt overall performance. Over

the 10 year period studied, investors in equity funds which were

advised by sales force personnel outperformed direct market investors

by more than 20%.

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\14\ An updated DALBAR study for the period September 1993

through June 1996, reached the same conclusion.

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

The applicants represent that the Plans' Participants also fall

prey to market volatility because they, as a group, are less

sophisticated than individuals who invest on their own in mutual funds.

15. The Program is designed to correct this tendency of ``buying

high, selling low''. First, Worksheets will analyze investor behavior

of each Participant and determine the appropriate Trust for investment.

Since each Trust is a portfolio containing varying percentages of

different asset classes represented by its investments in the Funds,

this design accounts for the fact that investment performance of

different asset classes is imperfectly correlated, and should buffer

short-term fluctuations in the portfolio's overall value.

16. The applicants request exemptive relief for the provision of

investment advice to the Plans' Participants which may result in an

investment by a Participant in a particular Trust.15 In this

regard, TCW generally receives higher net fees (and, potentially,

higher net profits) if a Participant invests in the more aggressive

Trusts. It is represented that the Program offers the following

safeguards for the Plans and their Participants to address this

potential conflict of interest. (a) An independent Financial Expert

will construct, maintain and modify Asset Allocation Models of the

Trusts. (b) A separate trust (Separate Trust) may be constructed by the

Plan Fiduciary based on different weightings of the Funds. A Separate

Trust may be utilized if the Financial Expert approves such

modification. (c) The Financial Expert will develop, maintain, and if

necessary, modify a basis for rebalancing each Trust. The rebalancing

will maintain the prescribed asset allocation for each Trust also

developed by the Financial Expert. Rebalancing will not involve any

investment discretion by TCW or its affiliates. (d) The Funds are

independently viable in the institutional market where the minimum

investment is generally $250,000. (e) TCW will not receive any fees

other than those charged by the Funds. However, TCW may receive

reimbursement for direct expenses associated with operating the

Program, including expenses it pays to third parties. (f) The Program

only will be available to Plans which have a minimum of $5 million in

plan assets. (g) TCW will provide a Plan Fiduciary with full written

disclosure regarding the composition of the Trusts. Upon request, TCW

will also provide the basis from which the asset allocations for each

Trust were derived. The basis on which the Trusts' assets are

rebalanced is developed, maintained, and if necessary, modified by the

Financial Expert. TCW will fully disclose all amounts charged at the

Fund levels by providing the Plan Fiduciaries with a copy of the Funds'

prospectus. (h) TCW will also disclose to the Plan Fiduciary all the

expenses charged to the Trusts prior to the Plan's investment in any of

the Trusts. Such disclosures may be provided in a brochure, a contract

executed by the Plan Fiduciary, or otherwise. (i) TCW will provide the

Plan Fiduciary with a quantitative annual report which will enable the

Plan Fiduciary to determine if the Program has attained its objectives.

(j) Recommendation to a Participant will be based solely on that

Participant's response in the Worksheets. TCW has no discretion to vary

the recommendations which were based on the Participant's funding needs

and behavioral profile as it relates to loss aversion. However,

Participants may elect not to follow the recommendations rendered by

TCW. (k) TCW will hire an independent Behavioral Expert to develop and

formulate the risk profile. Such a risk profile will gauge whether a

Participant will maintain the optimal Trust position if a large loss

occurs. If the Participant is not likely to maintain the optimal

position in the event of such a loss, a more conservative Trust will be

recommended.

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\15\ The Department recently issued Interpretive Bulletin 96-1,

29 CFR 2509.96-1 (the IB), which encourages and facilitates the

provision of investment education to participants and beneficiaries.

The IB describes information which will not constitute investment

advice. Therefore, a person will not become a fiduciary by providing

such information. However, the applicants represent that their

assistance to Plan Participants pursuant to the Program may be

considered to be investment advice.

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Prior to investing in a Trust, each Participant will receive full

disclosure concerning the composition of the Trusts, and a description

of the underlying Funds. Upon request, a Participant will also receive

a copy of the Funds' prospectus.16

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\16\ See Footnote 4, supra.

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Subsequent to their participation in the Program, the Participants

will be provided with written confirmations of the Participant's

purchase and redemption transactions within 10 days of each such

transaction. Also, quotations of the Participants' account balances

will be available by telephone. Both the Participants and Plan

Fiduciaries will receive a periodic newsletter describing the Trusts'

performance during the preceding period, market conditions and economic

outlook and, if applicable, prospective changes in the Asset Allocation

Model and the reasons for change.

17. Furthermore, the Program provides the following safeguards with

respect to the purchase and sale of Units in the Trusts. (a) The Plan

Fiduciaries have the discretion to select and retain the Program for

their Plans. (b) The Plans pay no more or receive no less for a Unit in

the Trusts than the Plans would have paid or received in an arm's-

length transaction with an unrelated party. (c) The Plans can redeem

their Units in the Trusts on five business days (or less) notice.

Redemption requests received in proper form prior to the close of

trading on the NYSE will be affected at the net asset value per Unit

determined on that day. Redemption requests received after the close of

regular trading on the NYSE will be effected at the net asset value at

the close of business of the next day, except on weekends or holidays

when the NYSE is closed. (d) Except as provided below, the independent

Plan Fiduciary will receive, at least 30 days advance notice of any

material change in the information regarding the composition of the

Trusts or the basis on which the Trusts' assets are rebalanced, and

will receive at least 30 days advance notice of any material increase

in expenses at the Trust level. The Financial Expert will have the sole

responsibility for determining the materiality of any changes in the

information regarding the composition of the Trusts or the basis on

which the Trusts' assets are rebalanced. TCW will determine the

materiality of any changes in expenses charged to the Trusts. For any

immaterial changes in the information regarding the composition of the

Trusts or the basis on which the Trusts' assets are

[[Page 41440]]

rebalanced, the independent Plan Fiduciary will be notified within 10

days of such change. For any immaterial changes in the expenses charged

to the Trusts, the independent Plan Fiduciary will be notified at least

quarterly. Independent Plan Fiduciaries will be afforded, at all times,

a reasonable opportunity to terminate their Plans' participation in the

Program, as described in item (c) above. Under extraordinary

circumstances outside the control of TCW, the independent Plan

Fiduciary may not be provided advance notice by TCW of material changes

regarding the composition of the Trusts or the basis on which the

Trusts' assets are rebalanced. Under such circumstances, the Plan

Fiduciaries will be notified within 10 days of any such change. The

Financial Expert will determine whether the circumstance is

extraordinary and if the change in the composition of the Trusts or in

the basis for rebalancing is material. (e) The broker-dealers who

effectuate and execute trades for the Funds, are engaged on a ``best

execution'' 17 basis and are independent of TCW and its

affiliates (Third Party Brokers). (f) The Plan pays no fee or

commission by reason of the acquisition or redemption of Units in the

Trusts.18

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\ 17\ Best execution takes into account such factors as price

(including the applicable dealer spread or commission, if any), size

of the order, difficulty of execution and operating facilities of

the firm involved. The applicants state that research, which will

benefit all the shareholders in the Funds, including the Plans, may

be provided by the Third Party Brokers.

\18\ Pursuant to this condition, the applicants cannot pay or

receive any sales fee or commission. However, this does not prevent

third parties from paying or receiving fees or commissions.

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18. TCW will also offer the Program to Participants in the Plans

sponsored by TCW. In this regard, TCW represents that the Plans

sponsored by TCW will purchase or redeem Units in the Trusts which

acquire Shares in the Funds.

The applicants represent that the purchase or redemption of Units

in the Trusts may be prohibited. Therefore, the applicants request

relief for the purchase or redemption of Units in the Trusts by Plans

sponsored by TCW. Such request for relief, however, does not extend to

the selection, acquisition or sale of shares in the Funds by the Trusts

since the applicant represents that such transactions are afforded

relief by Prohibited Transaction Class Exemption 77-3, 42 FR 18734

(April 8, 1977) (PTE 77-3).19

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\19\ PTE 77-3 provides relief for the acquisition or sale of

shares of a registered open-end investment company by an ``in-

house'' employee benefit plan, that is, a plan covering only

employees of the mutual fund, the fund's investment adviser, or

principal underwriter or an affiliate of such persons.

The plan may not pay any investment management, investment

advisory or similar fee to the fund adviser, underwriter or

affiliate, except in the form of investment advisory fees paid by

the fund under an investment advisory agreement. The plan also may

not pay a sales commission in acquiring or selling the fund shares,

and may only be charged a redemption fee under certain conditions.

Any other dealings with the plan, must be on a basis no less

favorable to the plan than such dealings with other fund

shareholders. The Department expresses no opinion herein as to

whether the conditions of PTE 77-3 will be met under the proposed

transactions.

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In this connection, neither the applicants nor any person in which

they have an interest will provide services to the Trusts other than

for reimbursement of ``direct expenses'' within the meaning of 29 CFR

2550.408c-2.

19. The applicants represent that the combined total amounts

received by TCW and its affiliates for services performed for the

Trusts under the Program will constitute no more than reasonable

compensation within the meaning of 29 CFR 2550.408b-2(d) and 2250.408c-

2. The only fees, other than direct expenses, that TCW will receive for

such services are the fees charged by the Funds to all investors. There

will be no separate fee at the Trust level for asset allocation

services.

The Plans' Fiduciaries will receive full disclosure of the services

that will be provided by or for the Trusts, and of the Trusts'

expenses. These expenses will include, but will not be limited to,

expenses for the Financial and Behavioral Experts and the development

of the analytical and risk tolerance components of the Worksheets,

expenses for printing and mailing reports, expenses for publishing a

quarterly newsletter, expenses for computer programmers, and any other

expense incurred by each Trust in the ordinary course of business.

20

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\20\ The Department expresses no opinion as to whether the

requirements of 29 CFR sections 2550.408b-2 and 2550.408c-2 would be

met with respect to the reimbursement of TCW for the provision of

the above-described services. The Department notes, however, that an

expense would not be properly reimbursable to the extent it was

incurred in connection with a service that was not otherwise exempt

under sections 408(b)(2) and 408(c) of the Act and corresponding

regulations. Thus, TCW must review each service to be provided to

the Trust to determine whether such service is a ``necessary

service'' for which reimbursement is lawful. See Department of Labor

Advisory Opinion No. 93-06A, March 11, 1993.

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TCW represents that the combined total amount payable by a Trust

for services necessary to operate the Program and for TCW to provide

what may be considered investment advice, will not exceed 1% of the

Trusts' net asset value per annum, calculated on the average daily

value of a Plan's investment in the Trust. Additional services, which

are not necessary for the operation of the Program (e.g., recordkeeping

of amounts or units in the participants' individual accounts,

preparation of account statements for participants, review of whether a

Plan complies with section 404(c) of the Act) may be provided. However,

these expenses will not be considered in determining whether the 1%

limit is exceeded. Except for these additional services, all services

provided will be necessary to operate the Program (i.e., the Program

Services). All the Trusts will share the cost of the Program Services

on a pro-rata basis, based on the amount of assets in each Trust. For

example, a Trust with $10 million in assets will pay twice as much for

Program Services as a Trust with $5 million in assets. Fees at the Fund

level are separately determined and are not affected by the fees paid

at the Trust level.

20. TCW will generally pay for direct expenses for services

performed for the Trusts and seek reimbursement from the Plans. The

applicants state that this could be a prohibited extension of credit

between a plan and a party-in-interest pursuant to sections

406(a)(1)(B), 406(a)(1)(D) and 406(b)(2) of the Act. However, the

applicants represent that these transactions are covered under

Prohibited Transaction Class Exemption 80-26, 45 FR 28545 (April 29,

1980) (PTE 80-26) 21. The applicants also represent that

they will fully comply with the applicable conditions of PTE 80-26 when

they pay such expenses on behalf of the Plans.

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\21\ PTE 80-26 permits a party in interest to make interest free

loans to a plan. The proceeds of the loan may be used only for (1)

the payment of ordinary operating expenses of the plan, including

the payment of benefits, in accordance with the terms of the plan,

and periodic premiums under an insurance or annuity contract; or (2)

a three day period, for a purpose incidental to the ordinary

operation of the plan. In addition, the loan must be unsecured and

not made by an employee benefit plan. The Department expresses no

opinion as to the applicability of PTE 80-26 or whether the

conditions of that exemption would be satisfied by the proposed

transactions.

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21. In summary, the applicant represents that the transactions

satisfy the statutory criteria for an exemption under section 408(a) of

the Act because:

A. The decision to participate in the Program will be made by a

Plan Fiduciary of a Plan which has a minimum of $5,000,000 in plan

assets;

B. Prior to making the decision to participate in the Program, the

Plan Fiduciary will receive offering materials and disclosures

concerning the Program's purpose, fees, structure, operation, and

risks;

[[Page 41441]]

C. The Plan Fiduciary will receive an annual report which will

enable him to monitor the Program's effectiveness;

D. The Asset Allocation Models of the Trusts and the rebalancing

formula will be constructed by an independent Financial Expert;

E. A risk profile for each Participant will be formulated by an

independent Behavioral Expert;

F. Investment recommendations made by TCW to the Participants will

be based solely on their responses to the Worksheets (and data which

may be supplied by the Plan or the Plan Fiduciary), and the independent

Experts are responsible for formulating the questions for the

Worksheets;

G. TCW will maintain a record of the recommendations made to the

Participants, including the investment decisions made by the

Participants;

H. Except for reimbursement of expenses for services provided to

the Trusts, TCW will not receive any fees from the operation of the

Program other than those attributable to the Funds;

I. (1) Prior to investing in a Trust, each Participant will receive

full disclosures which will include, but will not be limited to:

(a) Disclosure regarding composition of the Trusts, and a

description of the underlying Funds;

(b) Upon request, a Participant will also receive a copy of the

Funds' prospectus;

(c) The Participant can meet with a facilitator familiar with the

Program, or contact such a facilitator using a toll-free number.

(2) Subsequent to his participation in the Program, each

Participant will receive the following disclosures which will include,

but will not be limited to:

(a) Written confirmations of purchase and redemption transactions

for each Participant within 10 days of each such transaction;

(b) Telephone access to the quotations of the Participant's account

balance; and

(c) A periodic newsletter describing the Trusts' performance during

the preceding period, market conditions and economic outlook and, if

applicable, prospective changes in the asset allocation model and the

reasons for the change; and

J. The Plans can redeem their Units in the Trusts on five business

days (or less) notice.

Notice to Interested Persons

The applicant represents that because potentially interested

participants and beneficiaries cannot be identified at this time, the

only practical means of notifying such participants and beneficiaries

of this proposed exemption is by publication in the Federal Register.

Therefore, comments and requests for a hearing must be received by the

Department not later than 30 days from the date of publication of this

notice of proposed exemption in the Federal Register.

However, because the applicants have requested an effective date of

the publication of the notice of proposed exemption in the Federal

Register, the applicants represent that if a Plan invests in the

Program within thirty (30) days of the publication of the proposed

exemption in the Federal Register, the Plan Fiduciary of that Plan will

be given a copy of the notice of proposed exemption as published in the

Federal Register and a statement advising interested persons of their

right to comment and request a hearing on the proposed exemption.

Accordingly, that Plan Fiduciary and all interested persons will be

entitled to comment or request a hearing on the proposed exemption

within thirty (30) days of the Plan Fiduciary's receipt of the above

materials.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department

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

Pension and Welfare Benefits Administration, Notice of Proposed

Exemption for Certain Transactions Involving the UNUM Life Insurance

Company of America (UNUM), Located in Portland, Maine

[Application No. D-10437]

AGENCY: Department of Labor.

ACTION: Notice of proposed exemption.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed exemption from

certain of the prohibited transaction restrictions of the Employee

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

Revenue Code of 1986 (the Code). The proposed exemption would exempt

certain transactions that may occur as a result of the sharing of real

estate investments among various Accounts maintained by UNUM, including

the UNUM general account and the general accounts of UNUM's affiliates

which are licensed to do business in at least one state (collectively,

the General Account), and one or more separate accounts or investment

advisory accounts in which one or more employee benefit plans sponsored

by UNUM or its affiliates participate, or any combination thereof (the

ERISA-Covered Accounts) with respect to which UNUM is a fiduciary. As

an acknowledged investment manager and fiduciary, UNUM is primarily

responsible for the acquisition, management and disposition of the

assets allocated to the ERISA-Covered Accounts.

DATES: Written comments and requests for a public hearing must be

received by the Department on or before September 30, 1997.

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

three copies) should be sent of the Office of Exemption Determinations,

Pension and Welfare Benefits Administration, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, NW., Washington, DC

20210, Attention: Application No. D-10437. The application for

exemption and the comments received will be available for public

inspection in the Public Documents Room of the Pension and Welfare

Benefits Administration, U.S. Department of Labor, Room N-5638, 200

Constitution Avenue, NW., Washington, DC 20210.

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of an application for exemption from the

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

from 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.

The proposed exemption was requested in an application filed by UNUM

pursuant to 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).

Summary of Facts and Representations

1. UNUM is a stock life insurance company organized under the laws

of the State of Maine and subject to supervision and examination by the

Insurance Commissioner of Maine. Among the variety of insurance

products and services it offers, UNUM has long provided funding,

deposit administration, asset management and other services for pension

and profit sharing plans subject to the provisions of Title I of the

Act. UNUM has substantial experience in managing real estate

investments. Of the approximately $11.8 billion in total assets held by

UNUM and its affiliates at the close of 1995, General Account assets

included more than $261 million in equity interests in real property

and more than $1.2 billion in mortgage loans.

UNUM is owned by a parent holding company, UNUM Corporation, a

Delaware corporation, which is publicly

[[Page 41442]]

held and files reports with the Securities and Exchange Commission

under the Securities Exchange Act of 1934.

UNUM Corporation maintains the UNUM Employees Lifecycle Plan (the

UNUM Plan), which is a defined benefit pension plan on behalf of its

employees and those of certain of its subsidiaries. The UNUM Plan

presently has 7,507 participants and holds more than $218 million in

assets. Those assets are managed by UNUM under an Investment Management

Agreement. The UNUM Plan comprises an ERISA-Covered Account which may

share real estate investments under the exemption proposed herein. The

applicant represents that currently the UNUM Plan would be the only

employee benefit plan participating in an ERISA-Covered Account, but

UNUM would like to have the flexibility to share real estate

investments with additional separate accounts or investment advisory

accounts in which other employee benefit plans maintained by UNUM or

its affiliates participate. Accordingly, UNUM has requested that the

exemption proposed herein extend to such other potential ERISA-Covered

Accounts as well. The proposed exemption would apply to real estate

investments shared by two or more ERISA-Covered Accounts, and would

also apply to real estate investments shared by one or more ERISA-

Covered Accounts and the General Account. The only employee benefit

plans which will participate in the ERISA-Covered Accounts are plans

maintained by UNUM and its affiliates.

2. The applicant represents that because there are relatively few

potential investors for large scale investments such as office

buildings, shopping centers, and industrial parks, the owner or

developer of such real estate investments must offer a higher return in

order to attract investors. In many cases, UNUM's real estate accounts

would be precluded from acquiring these investments on an individual

basis because such investments would require the commitment of a

disproportionately large percentage of account assets to one or a few

investments. The sharing of large or uniquely desirable real estate

investments would permit the ERISA-Covered Accounts to participate in

more attractive and profitable real estate investments while

maintaining portfolio diversification.

3. The real estate investments which UNUM proposes to share may

either take the form of a direct investment in real property or an

interest in a joint venture partnership which holds title to, manages,

and/or develops real property. No ERISA-Covered Account will

participate in an investment for the purpose of enabling another

Account to make an investment.

4. Real estate equity investment opportunities for the Accounts are

originated by the Real Estate Equity Group (REEG), a department within

UNUM's Investment Department (the Investment Division). Real estate

equity investments are originated in accordance with general investment

criteria developed by REEG and the senior management of the Investment

Division. The specific investment criteria for each account must be

approved by the board of directors of each affiliated insurance company

participating in real estate investments and updated no less frequently

than annually. With respect to the UNUM Plan (or any other ERISA-

Covered Account), the investment strategy would be developed and

reviewed periodically in consultation with the Plan trustees and the

independent fiduciary (see below).

5. The strategy approved to date by the trustees of the UNUM Plan

(the Trustees) 22 would limit its aggregate participations

in real estate investments to 10% of Plan assets, with no more than

1.5% of Plan assets in any one property. The average amount invested in

each property by the Plan is expected to be approximately $2.5 million.

No leverage would be employed, i.e., no property would be debt

financed. There would eventually be ten or twelve properties in the

Plan's real estate portfolio, diversified among at least five cities or

regions which are geographically dispersed. No more than 30% of the

Plan's portfolio would be invested in any one city or region.

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\22\ The Trustees comprise senior actuarial, financial, human

resources and operating officers of UNUM, its parent holding company

and its affiliates.

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5. Allocations of investment opportunities among Accounts are based

upon, among other things, the extent to which each Account's projected

acquisition needs and investment objectives, established no less

frequently than annually as part of the criteria for investment of the

Account, have not been satisfied by other allocations. Under the

exemption proposed herein, real estate investments meeting an Account's

investment criteria could be shared by that Account and one or more

other Accounts for which a share in the investment meets the criteria

of such other Account(s) necessary to achieve economic, geographical

and property class diversification within the limits on investment

amounts imposed by the overall size and other holdings of the Account.

6. During the course of UNUM's holding of a real estate investment,

certain situations may arise which require a decision to be made with

regard to the management or disposition of the investment. For example,

there may be a need for additional contributions of operating capital,

or there may be an offer to purchase the investment by a third party or

a joint venture partner. When UNUM shares these investments among more

than one Account, a potential for conflict arises since the same

decision may not be in the best interest of each Account. Therefore,

the applicant has submitted a request for exemption, with certain

proposed safeguards designed to protect the interests of any

participating ERISA-Covered Account in the resolution of potential or

actual conflicts. Among the safeguards will be the appointment for each

participating ERISA-Covered Account of a fiduciary independent of UNUM

and its affiliates.

7. The independent fiduciary of any ERISA-Covered Account that

proposes to share real estate investments will be furnished with a

written description of the transactions that may occur involving such

investments which might raise questions under the conflict of interest

prohibitions of the Act with respect to UNUM's involvement in such

transactions and which are the subject of this proposed exemption. This

description must discuss the reasons why such conflicts of interest may

be present (i.e., because the General Account participates in the

investment and may benefit from the transaction or because the

interests of the various Accounts participating in the investment may

be adverse with respect to each other). The description must also

disclose the principles and procedures to be used to resolve any

anticipated impasses, as will be outlined below. In addition, the

independent fiduciary of any new ERISA-Covered Account that proposes to

share investments following the issuance of a final exemption will be

provided with the above-described written description and a copy of the

exemption as granted, before beginning to participate in any shared

investments.

8. The Trustees can request a change in the investment Policies and

Objectives governing investment of its assets under the Investment

Management Agreement which would preclude further shared real estate

investments, and which could call for

[[Page 41443]]

divestiture of existing participations in such investments on its

behalf. Any other plan would be able to withdraw from an ERISA-Covered

Account by providing notice to UNUM in accordance with the relevant

contractual provisions.

9. The UNUM Plan, and any other ERISA-Covered Account, will only

participate in the shared real estate equity investments with the

approval of a fiduciary which is entirely independent of UNUM and its

affiliates.

The independent fiduciary will be chosen by the Trustees, who will

have reviewed information about the nominee's qualifications, and had

an opportunity to meet with and question the nominee or its

representatives prior to confirming the appointment. The nominee may be

a firm, or a committee of individuals, possessing the necessary

qualifications as outlined below.

10. UNUM will not have the authority to remove an independent

fiduciary or a member of an independent fiduciary committee, except for

cause. The term ``for cause'' means that there must be sufficient and

reasonable grounds for removal and the reasons for removal must be

related to the ability and fitness of an individual to perform his or

her required duties under the proposed exemption. The definition of the

term ``for cause'' must be clearly stated in specific terms in the

contract by which the independent fiduciary is retained. If the

organization acting as independent fiduciary is removed for cause by

the Trustees, the procedure described above for the initial selection

of an independent fiduciary shall apply to the replacement.

In the case of an individual member of a committee serving as an

independent fiduciary, the committee member may also be removed for

cause at any time upon the majority vote of the remaining members of

the committee. If a vacancy occurs by virtue of the death, resignation

or removal of a member of an independent fiduciary committee,

replacement members of the committee will be appointed by a majority

vote of remaining members of the committee. Possible replacements may

be suggested by members of the committee, UNUM, the Trustees, or the

appropriate fiduciary of any other participating plan. If an

independent fiduciary is to be replaced, written records regarding the

reason for such replacement as well as a description of the replacement

independent fiduciary must be maintained by UNUM or its affiliate, and

such records must be made available to the Department upon request. If

the independent fiduciary is removed for cause, UNUM will explain the

circumstances in writing to the Department.

11. Prior to the decision to approve the selection of an

independent fiduciary initially selected by UNUM, the Trustees or other

appropriate fiduciary on behalf of any other plan participating in

shared real estate investments will be furnished with appropriate

biographical information pertaining to the organization or committee

members. This biography will set forth the background and

qualifications of the organization or committee member to serve in the

capacity of independent fiduciary. The information provided to the

Trustees or other plan fiduciaries will include the total amount of

compensation received by the organization (or committee member) from

UNUM and its affiliates during the preceding year. This financial

disclosure will be updated annually, and will include the amount of

fees and expenses paid for independent fiduciary services.

12. To ensure that the organizations or committee members so

selected are knowledgeable and qualified to serve as independent

fiduciaries and are, in fact independent of UNUM, the following

qualifications and restrictions will be met. The independent fiduciary

must be unrelated to UNUM and its affiliates. The independent fiduciary

may not be, or consist of, any officer, director or employee of UNUM,

or be affiliated in any way with UNUM or any of its affiliates. (See

definition of ``affiliate'' in Section V(a), below.) The independent

fiduciary must be either (1) a business organization which has (or

whose principals have) at least five years of experience with respect

to commercial real estate investments, or (2) a committee composed of

three to five individuals who each have at least five years of

experience with respect to commercial real estate investments. The

contract with the independent fiduciary must provide for a minimum

initial term of not less than five (5) years.

No organization or committee member will be eligible to serve as an

independent fiduciary for an ERISA-Covered Account for any taxable year

if the gross income (excluding retirement income) received by such

organization or individual (or any partnership or corporation of which

such organization or individual is an officer, director, or ten percent

or more partner or shareholder) from UNUM and its affiliates for that

taxable year exceeds five percent of its or his annual gross income

from all sources for the prior fiscal year. If such organization or

individual had no income for the prior fiscal year, the five percent

limitation shall be applied with reference to the fiscal year in which

such organization or individual serves as an independent fiduciary. In

addition, no organization or individual who is an independent

fiduciary, and no partnership or corporation of which such organization

or individual is an officer, director or ten percent or more partner or

shareholder, may (i) acquire any property from, sell any property to,

or borrow any funds from, UNUM or its affiliates, during the period

that such organization or individual serves as an independent fiduciary

and a period of six months after such organization or individual ceases

to be an independent fiduciary, or (ii) negotiate any such transaction

during the period that such organization or individual serves as

independent fiduciary.

A business organization or committee member may not serve as an

independent fiduciary of more than one ERISA-Covered Account.

13. The independent fiduciary will be compensated by the UNUM Plan

or any other ERISA-Covered Account for which it acts as independent

fiduciary. UNUM may indemnify any independent fiduciary or members of

an independent fiduciary committee with respect to any action or

threatened action to which such person is made a party by reason of his

or her service as an independent fiduciary. Indemnification will be

provided as permitted under the laws of the State of Maine and subject

to the requirement that such person acted in good faith and in a manner

he or she reasonably believed to be solely in the interests of the

participants and beneficiaries of the plans participating in the

Account.

14. The independent fiduciary of each ERISA-Covered Account will

have the responsibility and authority to approve or reject

recommendations made by UNUM for any transaction described in this

notice of proposed exemption. The committee members and/or organization

acting as independent fiduciary will be informed of the procedures set

forth in the requested exemption for the resolution of anticipated

impasses prior to his or its acceptance of the appointment. UNUM will

involve the independent fiduciary in the consideration of contemplated

transactions prior to the making of any decisions, and will provide the

independent fiduciary with whatever information may be necessary in

making its determinations. No transaction which is the subject of this

proposed exemption will be undertaken prior to the rendering of an

informed decision by the independent fiduciary. In addition, the

independent fiduciary will

[[Page 41444]]

approve the initial allocation of a shared investment to an ERISA-

Covered Account. In the case of transactions that involve the possible

transfer of an interest in a real estate investment between the General

Account and an ERISA-Covered Account, the independent fiduciary will

not be limited to approving or rejecting the recommendations of UNUM,

but will have full authority to negotiate the terms of the transfer (in

accordance with the independent appraisal procedure described below) on

behalf of the ERISA-Covered Account. The independent fiduciary of each

ERISA-Covered Account will also review on an as-needed basis, but not

less than twice annually, the entire portfolio of shared real estate

investments in the ERISA-Covered Account to determine whether it is in

the best interests of the ERISA-Covered Account to retain or sell such

investments.

15. The independent fiduciary will prepare written records of its

decisions and the reasons underlying those decisions, which may take

the form of committee meeting minutes or letters to UNUM. UNUM will

maintain these and all other written records required to be maintained

by the Department and will make them available for inspection by

authorized employees of the Department and the Internal Revenue

Service, as well as the fiduciaries, contributing employers, and

participants and beneficiaries of the plans participating in the

proposed transactions.

16. In connection with the management of real estate shared

investments, it is possible that UNUM, on behalf of the General

Account, or the independent fiduciaries for ERISA-Covered Accounts

participating in a shared investment, may develop different approaches

as to whether or how long an investment should be held by an Account.

Certain situations may also arise during the course of UNUM's holding

of a shared real estate investment in which decisions will need to be

made where it is not possible to obtain the agreement of UNUM and all

of the independent fiduciaries involved. These situations may arise as

a result of an action taken by a third party, or they may arise in

connection with an action proposed by UNUM or the independent fiduciary

for an ERISA-Covered Account. In such cases, UNUM will make

recommendations to the independent fiduciaries regarding a proposed

transaction. If a course of action cannot be found that is acceptable

to each independent fiduciary, a stalemate procedure will be followed

to ensure that a decision can be made. The applicant represents that

the stalemate procedure is similar to procedures typically used to

resolve disputes between co-venturers under real estate joint venture

agreements and is therefore familiar to most real estate investors.

17. With respect to stalemates between two or more Accounts which

share an investment, the stalemate procedure is designed to provide a

result that is similar to what would occur in comparable situations

where unrelated parties to a transaction were dealing at arm's length.

This means that the action which will be taken in such cases is the one

that does not require an Account: (1) to invest new money; (2) to

change the terms of an existing agreement; or (3) to change the

existing relationship between the Accounts. Joint venture agreements

typically provide the opportunity for a co-venturer to buy out the

interest of another co-venturer if they reach an impasse. If, for

example, a third party wishes to buy out a joint venturer's interest in

a property and the co-venturers disagree on whether to accept or reject

the buy-out offer, the real estate joint venture agreement will

typically allow one co-venturer to buy out the other at a specified

price.

18. Where investments are shared by two or more ERISA-Covered

Accounts, UNUM will make recommendations to the independent fiduciaries

of each participating ERISA-Covered Account regarding investment

management decisions that must be made for a real estate shared

investment. For example, if the independent fiduciaries cannot agree on

a UNUM recommendation, UNUM may offer alternate recommendations

(possibly including partition and sale of undivided interests) in an

attempt to facilitate agreement. If the independent fiduciaries still

cannot agree, each ERISA-Covered Account will be offered the

opportunity to buy out the other ERISA-Covered Account's interest on

the basis of a specified price. The specified price may be based on the

price offered by a third party, or, if no third party offer is received

(or if the third party offer is unacceptable to either ERISA-Covered

Account), the specified price will be the price established under the

independent appraisal procedure described below. As in a buy-sell

provision in a typical joint venture, the ERISA-Covered Account to

which the offer is made will have the option to sell to the offering

ERISA-Covered Account at the specified price, or to buy out the

offering ERISA-Covered Account's interest at that price.

19. If the independent fiduciary for the ERISA-Covered Account

which disagrees with UNUM's recommendation does not wish to make a buy-

sell offer to the other ERISA-Covered Account, the other ERISA-Covered

Account(s) may do so. If no ERISA-Covered Account chooses to exercise

the buy-sell option, UNUM will take the action designed to preserve the

status quo, i.e., the action designed to avoid expenditure of

additional funds by the Accounts and avoid any change in existing

arrangements or contractual relationships.

20. Where a real estate investment is shared by the General Account

and one or more ERISA-Covered Accounts and a stalemate occurs between

the General Account and an ERISA-Covered Account, UNUM may offer

alternate recommendations to facilitate an agreement. If the Accounts

still cannot reach agreement, each Account will be offered the

opportunity to buy out the other Account's interest on the basis of a

specified price, which will be established in accordance with the

independent appraisal procedure described below, or will be the price

offered by a third party. If none of the Accounts elects to make a buy-

sell offer to the other Account, UNUM would be required to take the

action selected by the independent fiduciary of the ERISA-Covered

Account. Where the General Account wishes, e.g., to hold its interest

and the independent fiduciary for the ERISA-Covered Account determines

to sell its interest, the General Account will buy out the interest of

the ERISA-Covered Account at the price offered by the third party, or,

at the ERISA-Covered Account's option, at an independently determined

price. Conversely, where the independent fiduciary for the ERISA-

Covered Account determines to retain its interest while the General

Account wants to sell its interest, the ERISA-Covered Account has the

option of buying out the General Account, or, if the independent

fiduciary chooses not to, the status quo will be maintained.

Specific Transactions

I. Direct Real Estate Investments

(a) Transfers Between Accounts

21. Following the initial sharing of investments, it may be in the

best interests of the Accounts participating in the investment for one

Account to sell its interest to the other(s). Such a situation may

arise, for example, when one Account experiences a need for liquidity

in order to satisfy the cash needs of the plans participating in the

Account, while for the other Account(s) the investment remains

appropriate. One possible means of reconciling this situation is for

the ``selling'' Account to

[[Page 41445]]

sell its interest in the shared investment to the remaining

participating Account(s) or to another Account(s) at current fair

market value. Such sales may not, however, be appropriate in all

circumstances. An inter-Account transfer will only be permitted when it

is determined to be in the best interests of each Account that would be

involved in the transaction. The transfer would also be subject to the

approval of the Insurance Departments of a number of states where UNUM

is domiciled, including Maine, South Carolina and New York. Because

UNUM would be acting on behalf of both the ``buying'' and ``selling''

Accounts (but not the General Account) in such an inter-Account

transfer, the transfer might be deemed to constitute a prohibited

transaction under section 406(b)(2) of the Act. Accordingly, exemptive

relief is requested herein for the sale or transfer of an interest in a

shared real estate investment by one ERISA-Covered Account to another

Account of which UNUM is a fiduciary. Such transfers would have to be

at fair market value and approved by the independent fiduciary for each

ERISA-Covered Account involved in the transfer.

Ordinarily, no transfer of an interest in a shared investment will

be permitted between the General Account and an ERISA-Covered Account.

The transfer of an interest in a shared investment between the General

Account and an ERISA-Covered Account may be deemed to constitute a

violation of sections 406(a)(1) (A) and (D) as well as sections 406(b)

(1) and (2) of ERISA. As noted above, however, where a stalemate arises

between the General Account and an ERISA-Covered Account, the transfer

of such an interest would be permitted to resolve the conflict.

Specific stalemate procedures have been developed for these situations.

If, for example, a third party makes an offer to purchase the entire

investment held by UNUM on behalf of the General Account and an ERISA-

Covered Account, it is possible that the General Account would like to

accept the offer and the independent fiduciary on behalf of the ERISA-

Covered Account would like to reject the offer. In that event, UNUM may

offer alternative recommendations to the independent fiduciary. If

there is still no agreement, the independent fiduciary (as the party

wishing to reject the offer) would be given the opportunity to buy-out

the General Account's interest at a specified price. This price may be

a proportionate share of the third party offer; or, if such price is

unacceptable to the ERISA-Covered Account, a proportionate share of the

price determined through the independent appraisal procedure described

below. This procedure would give the ERISA-Covered Account an

opportunity to retain its interest in the shared investment. If the

ERISA-Covered Account does not choose to buy-out the General Account's

interest, the General Account would be required to accede to the

direction of the ERISA-Covered Account and would, therefore, reject the

third party offer.

If, in the event of a third party purchase offer, the General

Account wants to reject the offer but the independent fiduciary on

behalf of the ERISA-Covered Account wants to accept the offer, the

procedures described above would apply, except that the General Account

(as the party wishing to reject the offer) would have the opportunity

to buy-out the ERISA-Covered Account's interest at a proportionate

share of the third party purchase offer, or, at the option of the

independent fiduciary for the ERISA-Covered Account, at an

independently determined price. This will permit the ERISA-Covered

Account to sell its interest in a real estate investment, if it chooses

to do so, at no less than the same price it would have received from a

third party.

Even in the absence of a third party offer, UNUM may recommend the

sale of a shared investment. If the independent fiduciary approves the

recommendation, UNUM will arrange for the sale. If the independent

fiduciary does not approve UNUM's recommendation, UNUM may offer

alternative recommendations, possibly including partition and sale of

divided interests. If, however, no agreement is reached, the

independent fiduciary (as the party wishing to reject the

recommendation) would be given the opportunity to buy-out the General

Account's interest in accordance with the independent appraisal

procedure described below. If there is no buy-out, UNUM would take the

course of action consistent with the ERISA-Covered Account's

determination and would, therefore, not sell the investment.

The independent fiduciary may also determine independently that a

shared investment in an ERISA-Covered Account should be sold. If UNUM

agrees with this recommendation, UNUM will arrange the sale. If UNUM,

on behalf of the General Account, disagrees with the recommendation,

UNUM will first attempt to sell the ERISA-Covered Account's interest to

another Account other than the General Account. In this case, the sale

price and other terms would have to be approved by the independent

fiduciary for each ERISA-Covered Account. If the ERISA-Covered

Account's interest cannot be sold to another Account, UNUM may offer

alternative recommendations, possibly including partition and sale of

the ERISA-Covered Account's interest to a third party. If no agreement

is reached with respect to these options, the General Account (as the

party opposed to the sale) would have the opportunity of buying out the

ERISA-Covered Account's interest at a price established under

independent appraisal procedures described below. If there is no buy-

out and no agreement, UNUM will be required to take the course of

action consistent with the ERISA-Covered Account's determination and

will sell the entire investment.

Where an independent price for the transfer of an interest in a

shared investment between the General Account and an ERISA-Covered

Account is not established by an offer from an unrelated third party

(or where the third party price is unacceptable to the ERISA-Covered

Account), the stalemate procedure provides for the appointment of an

independent appraiser. Under this procedure, UNUM and the independent

fiduciary will each appoint an independent appraiser. These two

appraisers will then choose a third appraiser. The panel of appraisers

will each evaluate the entire investment, and the average of the three

appraisals will be used to determine the proportional value of each

shared investment interest. However, the General Account and the ERISA-

Covered Account may agree that if one valuation is more than a

specified percentage outside the range of the other two valuations,

that valuation may be disregarded and the transfer price will be the

average of the remaining two valuations. The applicant represents that

this procedure, which is of the variety typically used in real estate

joint venture agreements, provides adequate protection for the ERISA-

Covered Account because the independent fiduciary is an equal

participant in the appraisal process. See Section I(a).

(b) Joint Sales of Property

22. In situations involving shared real estate investments, an

opportunity may arise to sell the entire investment to a third party,

and it may be determined for all of the participating Accounts that the

sale is desirable. When the General Account is participating in the

investment, and the sale is therefore determined to be in the best

interests of the General Account (in addition to being in the interests

of the other Account(s)), the sale might be deemed

[[Page 41446]]

to constitute a prohibited transaction under section 406 of the Act and

section 4975 of the Code.23

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\23\ The Department notes that all future references to the

provisions of the Act shall be deemed to include the parallel

provisions of the Code.

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Similarly, UNUM may be acting on behalf of two ERISA-Covered

Accounts, in which case a prohibited transaction under section

406(b)(2) may be deemed to occur. Accordingly, exemptive relief is

requested for these joint sales. The sales would have to be approved by

the independent fiduciary for each ERISA-Covered Account involved in

the sale. In accordance with UNUM's stalemate procedures, if the

independent fiduciary for one ERISA-Covered Account wishes to sell its

interest in a shared investment and the independent fiduciary for

another ERISA-Covered Account does not want to sell, UNUM will attempt

to negotiate a compromise, including the transfer of interests from one

Account to the other. If no agreement can be reached, the status quo

will be maintained and no sale will be made. See Section I(b).

(c) Additional Capital Contributions

23. On occasion, commercial real estate investments require

infusions of additional capital in order to fulfill the investment

expectations of the property. For example, developmental real estate

investments sometimes require additional capital in order to complete

the construction of the property. In addition, the cash flow needed to

improve or operate completed buildings may also result in the need for

additional capital. Such additional capital is frequently provided by

the owners of the property. In the case of a property that is owned

entirely by UNUM on behalf of the Accounts, it is contemplated that

needed additional capital will ordinarily be contributed in connection

with the investment in the form of an equity capital contribution made

by each participating Account in an amount equal to such Account's

existing percentage equity interest in the shared investment

24; that is, in the first instance, each Account would be

afforded the opportunity to contribute additional capital on a fully

proportionate basis. In the case of ERISA-Covered Accounts, all

decisions regarding the making of additional capital contributions must

be approved by the independent fiduciary for the Account. The making of

an additional capital contribution could be deemed to involve a

prohibited transaction under section 406 of the Act. If one or more

participating Accounts in a shared investment is unable to provide its

share of the needed additional capital, various alternatives may be

appropriate, including having the other Account(s) make a

disproportionate contribution. For example, where the General Account

and an ERISA-Covered Account participate in a shared investment and the

need for additional capital arises, it might be determined for

liquidity reasons or other factors involving the ERISA-Covered Account

that the additional contribution should not be made by that Account. As

a result, the additional equity capital may be provided entirely by the

General Account with the further consequence that the General Account

would thereafter have a larger interest in the investment and,

therefore, a larger share in the appreciation and income to be derived

from the property.25

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\24\ In any case where the General Account participates in a

shared investment with one or more ERISA-Covered Accounts and a call

for additional capital is made, the General Account will always make

a capital contribution that is at least equivalent proportionately

to the highest capital contribution made by an ERISA-Covered

Account.

\25\ In the case of shared real estate investments owned

entirely by UNUM accounts, if an Account contributes capital

equaling less than its pro rata interest in the investment (or makes

no contribution at all), that Account's equity interest will be re-

adjusted and reduced based on the change in the fair market value of

the property caused by the infusion of new capital.

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Such an adjustment in ownership interests might be deemed to

constitute a prohibited (indirect sales) transaction under section 406

of the Act. In addition, these situations could also occur where two

ERISA-Covered Accounts are involved.

Accordingly, the applicant is requesting exemptive relief that

would permit the contribution of additional equity capital for a shared

investment by Accounts participating in the investment (including the

General Account). Any decision made or action taken by an ERISA-Covered

Account (i.e., the contribution of either no additional capital, the

Account's pro rata share of additional capital, less than or more than

the Account's pro rata share, etc.) must be approved by such

independent fiduciary. See Section I(c).

(d) Lending of Funds to Meet Additional Capital Requirements

24. If the General Account and an ERISA-Covered Account participate

in a shared investment that experiences the need for additional

capital, and it is determined that the ERISA-Covered Account does not

have sufficient funds available to meet the call for additional

capital, the General Account might be willing and able to loan the

required funds to the ERISA-Covered Account.

Prior to any loan being made, it must be approved by the

independent fiduciary for the ERISA-Covered Account. Such loan will be

unsecured and non-recourse, will bear interest at a rate that will not

exceed the prevailing interest rate on 90-day Treasury Bills, will not

be callable at any time by the General Account, and will be prepayable

at any time without penalty at the discretion of the independent

fiduciary of the ERISA-Covered Account. Prior to any loan being made,

it would have to be approved by the independent fiduciary for the

ERISA-Covered Account. See Section I(d).

II. Joint Venture Investments

25. Many real estate investments are structured as joint venture

arrangements (rather than 100 percent ownership interest in property)

in which UNUM and another party, such as a real estate developer or

manager, participate as joint venturer partners (or co-venturers).

Joint venture investments typically involve several particular features

by virtue of the terms and conditions of the joint venture agreements

that may, when UNUM's joint venture interest is shared, result in

possible violations of section 406 of the Act.

(a) Additional Capital Contributions to Joint Ventures

26. As in the case of investments made entirely by UNUM, joint

venture real estate investments sometimes require additional operating

capital. Typically, a joint venture agreement will provide for a

capital call by the general partner of the joint venture to be made to

each joint venturer under which each venturer will be requested to

provide the needed capital. Capital contributions are generally

requested on a pro rata basis either in the form of an equity

contribution or a loan to the joint venture. If one joint venturer

refuses to contribute its pro rata equity share of the capital call,

the other joint venturer(s) may contribute additional capital to cover

the short-fall and thereby ``squeeze down'' the interest in the venture

of the non-contributing joint venturer.26

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\26\ In the case of a call for additional capital involving a

typical joint venture arrangement entered into between parties

dealing at arm's length, the joint venture agreement may commonly

provide that the equity interest of any non-contributing venturer be

re-adjusted, or ``squeezed down'', on a capital interest basis. This

involves re-adjusting the equity interests of the venturers solely

on the basis of the percentage of total capital contributed without

taking into account any appreciation on the underlying property.

This ``capital interest'' adjustment can substantially diminish the

equity interest of the non-contributing venturer in the actual

current market value of the underlying property. Thus, this type of

re-adjustment is intended to provide an incentive to all venturers

to make their proportionate capital contributions so that

improvements can be made and the operation of a property continued

without burdening the other venturers.

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[[Page 41447]]

Alternatively, if sufficient additional capital is not provided by

the joint venturers, other financing may be sought, or the joint

venture may be liquidated. In the case of a capital call where UNUM's

joint venture interest is shared by two or more Accounts, a

determination must be made on behalf of each Account participating in

the shared investment with respect to whether it is appropriate for the

Account to provide its proportionate share of additional capital

requested by the joint venture. The general rule that UNUM will follow

is that each Account will be given the opportunity to provide its pro

rata share of the capital call, but for some Accounts it may be

determined to be appropriate to provide less than a full share or no

additional capital at all. In such cases, the interest of the Account

would be reduced proportionately on a fair market basis. In the case of

ERISA-Covered Accounts, all decisions regarding the making of

additional capital contributions must be approved by the independent

fiduciary for the Account. In addition to situations where some

Accounts participating in the ownership of UNUM's joint venture

interest may not be in a position to provide their share of a capital

call, other situations may arise where the co-venturer is unable to

make its additional capital contributions. Both of these situations may

result in prohibited transactions under section 406 of the Act.

27. UNUM Shortfall. The General Account and an ERISA-Covered

Account may experience a capital call from the general partner of the

joint venture for either an additional equity or debt contribution. If

it is determined that the ERISA-Covered Account does not have

sufficient funds available to meet its contribution requirement,

27 the General Account may make a loan to the ERISA-Covered

Account to enable the ERISA-Covered Account to make its required pro

rata capital contribution. Accordingly, subject to the conditions of

the proposed exemption, Section II(a)(2) would provide relief for loans

of this type. Prior to any loan being made, it would have to be

approved by the independent fiduciary for the ERISA-Covered Account.

Such loan will be unsecured and non-recourse, will bear interest at a

rate that will not exceed the prevailing interest rate on 90-day

Treasury Bills, will not be callable at any time by the General

Account, and will be prepayable at any time without penalty at the

discretion of the independent fiduciary of the ERISA-Covered Account.

In addition, the General Account may make an additional equity

contribution to the joint venture to cover the ERISA-Covered Account's

shortfall. In that event, the equity interest of the ERISA-Covered

Account will be ``squeezed down'' (relative to the equity interest of

the General Account) on a fair market value basis. This option would

avoid the capital basis squeeze-down of the ERISA-Covered Account's

interest by the co-venturer. Such contribution would be made by the

General Account only after the independent fiduciary for the ERISA-

Covered Account is given an opportunity to make an additional

contribution. See Section II(a)(3).

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\27\ In any case where the General Account and one or more

ERISA-Covered Accounts share UNUM's interest in a joint venture, the

General Account will always make a capital contribution that is at

least equivalent proportionately to the highest capital contribution

made by an ERISA-Covered Account, up to its pro rata share of the

additional capital call. Thus, the General Account will never be the

cause as between the Accounts of a capital contribution shortfall by

UNUM that would result in a capital basis squeeze down by a co-

venturer.

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A similar situation may arise where two ERISA-Covered Accounts

participate in a joint venture investment. If one Account is unable or

unwilling to provide its proportionate share of a capital call, the

other Account may be interested in making up the shortfall. This might

be accomplished by means of an equity contribution with a resulting re-

adjustment on a current fair market value basis in the equity ownership

interests of the participating Accounts. Thus, any of these

disproportionate contribution situations between Accounts might result

in a violation of section 406 of the Act. Subject to the generally

applicable conditions of this proposed exemption, Section II(a)(3)

provides relief for these disproportionate contributions.

28. Co-Venturer Shortfall. In some cases, UNUM's co-venturer in a

joint venture investment may be unable to meet its additional capital

obligation, and UNUM may deem it advisable for some or all of the

participating Accounts to contribute capital in excess of the pro rata

share of UNUM's Accounts in the joint venture in order to finance the

operation of the property (and thereby squeeze down the equity interest

of the co-venturer).28 The applicant is requesting exemptive

relief that would permit additional capital contributions to be made by

participating Accounts (including the General Account) on a

disproportionate basis if the need arises. Any instance involving the

infusion of additional capital to a joint venture will be considered by

the independent fiduciary for each ERISA-Covered Account participating

in the investment and any action to be taken by the Account must be

approved by the independent fiduciary. These actions might include

contributing a pro rata share of additional equity capital (including a

capital contribution that squeezes down the interest of a co-venturer

on the basis provided in the joint venture agreement), contributing

more or less than a pro rata share, or contributing no additional

capital. See Section II(a)(4).

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\28\ In any case involving a shared joint venture interest held

by the General Account and an ERISA-Covered Account, if it is

determined that the ERISA-Covered Account will contribute its pro

rata share of extra capital, the General Account would also

contribute at least its pro rata share of such capital.

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(b) Third Party Purchases of Joint Venture Properties

29. Under the terms of typical joint venture agreements, if an

offer is received from a third party to purchase the assets of the

joint venture, and one joint venture partner (irrespective of the

percentage ownership interest of the joint venture partner) wishes to

accept the offer, the other joint venture partner must either (1) also

accept the offer, or (2) buy out the first partner's interest at the

portion of the offer price that is proportionate to the first partner's

share of the venture. For example, if UNUM on behalf of the Accounts

and a real estate developer are joint venture partners in a property

and an offer is received from another person to acquire the entire

property that the developer wants to accept, UNUM on behalf of the

Accounts would be obligated either to sell its interest also to the

third-party or to buy out the interest of the developer at the portion

of the price offered by the third party proportionate to the

developer's share of the venture. When UNUM's interest in a real estate

joint venture is shared by two or more Accounts, it is likely that the

same decision will be appropriate for each Account in any third-party

purchase situation. See sections I(b) and II(b)(1). It is also

possible, however, that it might be in the interests of some Accounts

to reject the offer and buy-out the developer, while other Accounts

might not have the funds to do so or, for some other reason, would

elect to sell to the third party. The joint venture agreements

typically require, however, that UNUM on behalf of the Accounts provide

the co-venturer with a unified buy or sell reply. Thus, in making a buy

or sell decision in any of these cases involving an ERISA-Covered

Account,

[[Page 41448]]

UNUM might be deemed to be acting in violation of section 406 of the

Act. Further, in order to resolve situations where the same reply is

not appropriate for all participating Accounts, various alternatives

may be adopted. For example, the Account(s) that wishes to continue

owning the property may be willing and able to buy out not only the co-

venturer, but also the other participating Account(s) that wishes to

accept the third party offer to sell. Or, one Account may be willing

and able to buy-out the co-venturer while the other Account chooses to

continue holding its original interest in the property. Alternatively,

all of the Accounts may choose to participate in the buy-out, but on a

basis that is not in proportion to their existing ownership interests.

Such alternatives, when an ERISA-Covered Account is involved, while all

possibly desirable from case to case, may also raise questions under

section 406 of the Act, whether or not the General Account is a

participant in the investment. Accordingly, the applicant is requesting

exemptive relief that would permit UNUM to respond to third-party

purchase offers as appropriate under the circumstances. Such a response

might involve acceptance of the offer on behalf of all participating

Accounts, a buy-out of a co-venturer by some or all of the

participating Accounts on a pro rata or non-pro rata basis, or a buy-

out of the interest of one participating Account (and of the co-

venturer) by other participating Accounts. Any action by any ERISA-

Covered Account in these situations will be required to be approved by

the independent fiduciary for the Account in accordance with the

stalemate procedure, as described below (see rep. 30, below).

30. In a case involving the sharing of a joint venture interest

between two ERISA-Covered Accounts, if one ERISA-Covered Account wishes

to buy out the co-venturer and the other ERISA-Covered Account is

unable or unwilling to do so, the ERISA-Covered Account wishing to buy

out the co-venturer would have the opportunity to do so if the other

ERISA-Covered Account's interests can also be accommodated. This could

be accomplished if, for example (1) the second ERISA-Covered Account

wishes to sell its interest to the first ERISA-Covered Account (at a

proportionate share of the price offered by the third party offeror)

and the first ERISA-Covered Account agrees; or (2) the second ERISA-

Covered Account wishes to continue holding its original interest. If,

however, the second ERISA-Covered Account wishes to sell its interest

and the first ERISA-Covered Account is unwilling or unable to buy it,

both Accounts would be required to sell to the third party offeror in

order to avoid the expenditure of additional funds by an unwilling

Account.

If the General Account participates in a joint venture interest

subject to a third party purchase offer, the stalemate procedure would

provide the same alternatives, except that if the General Account

wishes to accept the third party purchase offer and the ERISA-Covered

Account wishes to buy out the co-venturer (and is unwilling or unable

to buy out the General Account's interest), the General Account would

be required to buy out the co-venturer with the ERISA-Covered Account.

See Section II(b).

(c) Rights of First Refusal in Joint Venture Agreements

31. Under the terms of typical joint venture agreements, if a joint

venture partner wishes to sell its interest in the venture to a third

party, the other joint venture partner must be given the opportunity to

exercise a right of first refusal to purchase the first partner's

interest at the price offered by the third party. For example, if UNUM

and a real estate developer are joint venture partners and the

developer decided to sell its interest to a third party, UNUM would

have the right to purchase the developer's interest at the price

offered by the third party. In the case of shared real estate joint

ventures, the decision by UNUM on behalf of the Accounts with respect

to whether or not to exercise a right of first refusal might raise

questions under section 406 of the Act since each Account participating

in the investment might be affected differently by such decision.

Because, under the terms of the joint venture agreement, only one

option (exercise or not exercise) may be chosen by UNUM on behalf of

the Accounts, exemptive relief is being requested that would permit

UNUM to exercise or not exercise a right of first refusal as may be

appropriate under the circumstances. Any action taken on behalf of an

ERISA-Covered Account regarding the exercise of such a right would have

to be approved by the independent fiduciary. Further, under the

requested exemption, if the General Account and an ERISA-Covered

Account share a joint venture investment, even though UNUM may

initially decide on behalf of the General Account not to make a

purchase under a right of first refusal option, the General Account

will be required to participate in the purchase of the other joint

venturer's interest if the independent fiduciary determines that it is

appropriate for the ERISA-Covered Account to participate in the

exercise of the right of first refusal on at least a pro rata basis.

If, however, two Accounts other than the General Account participate in

a joint venture and agreement cannot be reached on behalf of the

Accounts on whether to exercise a right of first refusal, the right

will not be exercised and the co-venturer will be permitted to sell its

interest to the third party, unless one Account decides to buy-out the

co-venturer alone. In this regard, it is conceivable that some

participating Accounts may elect to take advantage of a right of first

refusal opportunity and buy-out a co-venturer without other

participating Accounts taking part in the transaction. For example, in

the case of a shared joint venture investment involving the General

Account (or any other Account) and an ERISA-Covered Account, if the co-

venturer wishes to accept an offer to sell its interest and the

independent fiduciary of the ERISA-Covered Account decides not to have

the account participate in purchasing the co-venturer's interest, the

General Account (or other participating Account) would be free to make

the purchase on its own. The exercise of a right of first refusal on

such a disproportionate basis might also raise questions under section

406 of the Act for which exemptive relief may be needed. See Section

II(c).

(d) Buy-Sell Provisions in Joint Venture Agreements

32. Joint venture agreements entered into by UNUM typically provide

that one joint venture partner may demand that the other partner either

sell its interest to the first partner at a price determined by the

terms of the joint venture agreement or buy out the interest of the

first partner at such price. If the other joint venture partner refuses

to exercise either option within a specified period, it must sell its

interest to the first partner at the stated price. These ``buy-sell''

provisions are generally used to resolve serious difficulties or

impasses in the operation of a joint venture, but generally a joint

venture agreement permits the buy-sell provision to be exercised at any

time. As in the situations discussed above, the decision by UNUM on

behalf of the Accounts to make a buy-sell offer, or its reaction to

such an offer made by a co-venturer, may affect various participating

Accounts differently. Accordingly, any decision made by UNUM in these

cases involving ERISA-Covered Accounts might raise questions under

section 406 of the Act. The applicant is requesting exemptive relief

that would permit UNUM to make an appropriate decision under the

[[Page 41449]]

circumstances on behalf of all participating Accounts to make a buy-

sell offer to a co-venturer or to react to a buy-sell offer from a co-

venturer. Any such decision must be approved by the independent

fiduciary for each ERISA-Covered Account participating in the

investment.

33. In the event that UNUM recommends the initiation of the buy-

sell option against the co-venturer, UNUM will exercise the option if

the independent fiduciary on behalf of each participating ERISA-Covered

Account approves the recommendation. If, in the case of a General

Account/ERISA-Covered Account shared joint venture investment, the

independent fiduciary does not agree with UNUM's recommendation, the

independent fiduciary would be given the opportunity to buy out the

General Account's interest at a price to be determined in accordance

with the independent appraisal procedure described above. If the

independent fiduciary declines to buy out the General Account's

interest, the General Account would then have the opportunity to buy

out the ERISA-Covered Account's interest, (provided the independent

fiduciary for the ERISA-Covered Account approves of such sale), also in

accordance with the independent appraisal procedure. If neither the

General Account nor the ERISA-Covered Accounts buys out the other's

interest in the joint venture investment, UNUM would take the course of

action most consistent with the determination of the ERISA-Covered

Account, and would, therefore, not exercise the buy-sell option.

In the event that the co-venturer initiates the buy-sell option

with respect to a shared joint venture investment, UNUM must either

sell its entire interest to the co-venturer or reject the offer and

buy-out the co-venturer's interest at that price. If the participating

Accounts agree upon the course of action to be taken, UNUM will then

take the agreed action. If no agreement is reached, various

alternatives may be considered. For example, in the case of a General

Account/ERISA-Covered Account shared joint venture investment, if UNUM

recommends rejection of the offer (and consequent purchase of the co-

venturer's interest), but the independent fiduciary wants to accept the

offer, the General Account would have the option to purchase the co-

venturer's interest solely on behalf of the General Account. If the

General Account chooses this option, the ERISA-Covered Account (which

wished to accept the co-venturer's offer) would have the opportunity to

sell its interest to the General Account, at a proportionate share of

the price offered by the co-venturer, but would not be required to do

so. However, if the General Account declines to purchase the ERISA-

Covered Account's interest where the ERISA-Covered Account wishes to

accept the buy-sell offer, the entire joint venture interest would be

sold to the co-venturer. If the ERISA-Covered Account wishes to reject

the buy-sell offer (and purchase the co-venturer's interest) and the

General Account wishes to accept the offer, the General Account would

be required to purchase its proportionate share of the co-venturer's

interest, unless the independent fiduciary for the ERISA-Covered

Account elects to purchase more than its proportionate share (including

the entire co-venturer interest).

Where two or more ERISA-Covered Accounts share a joint venture

investment, the stalemate procedure is similar, except that no ERISA-

Covered Account would be required to purchase the interest of a co-

venturer (and thus expend additional funds) against its wishes. See

Section II(d).

(e) Transactions With Joint Venture Party in Interest

34. The applicant represents that when the General Account holds a

50 percent or more interest in a joint venture, the joint venture

itself may be deemed to be a party in interest under section 3(14)(G)

of the Act. Thus, any subsequent transaction involving the joint

venture and an ERISA-Covered Account that is also participating in the

venture (e.g., an additional contribution of capital) may be deemed to

be a transaction between the plans participating in an ERISA-Covered

Account and a party in interest (the joint venture itself) in violation

of section 406. Accordingly, the applicant is requesting exemptive

relief from the restrictions of section 406(a) of the Act, only, which

would permit any additional equity capital contributions to a joint

venture by an ERISA-Covered Account which is participating in an

interest in the joint venture, where the joint venture is a party in

interest solely by reason of the ownership on behalf of the General

Account of a 50 percent or more interest in such joint venture. Such

action would be conditioned upon the approval of the independent

fiduciary for the ERISA-Covered Account. See Section III.

Initial Allocations

The applicant, UNUM, has not requested exemptive relief for the

initial allocation of shared equity real estate investments by UNUM

among two or more Accounts, at least one of which is an ERISA-Covered

Account. UNUM represents that neither the General Account nor any

ERISA-Covered Account will incur any debt in connection with the

initial allocation of the shared investment. In this regard, it is the

view of the Department that the mere investment of assets of a plan on

identical terms with a fiduciary's investment for his or her own

account in the equity interests of a shared real estate investment

would not, in itself, cause the fiduciary to have an interest in the

transaction that may affect his or her best judgment as a fiduciary.

Therefore, such an investment would not, in itself, violate section

406(b)(1) which prohibits a fiduciary from dealing with the assets of a

plan in his or her own interest or for his or her account. In addition,

such shared investment, pursuant to reasonable procedures established

by the fiduciary, would not cause the fiduciary to act (or represent) a

party whose interests are adverse to those of the plan. Therefore, such

an investment would not, in itself, violate section 406(b)(2) which

states that a fiduciary may not act in any capacity in a transaction

involving the plan on behalf of a party whose interests are adverse to

those of the plan.

With respect to section 406(a)(1)(D) of the Act which prohibits the

transfer to, or use by or for the benefit of a party in interest

(including a fiduciary) of the assets of a plan, it is the opinion of

the Department that a party in interest does not violate that section

merely because he or she derives some incidental benefit from a

transaction involving plan assets. We are assuming, for purposes of

this analysis, that the fiduciary does not rely upon and is not

otherwise dependent upon the participation of plans in order to

undertake its share of the investment.

Thus, with respect to the investment of plan assets in shared

equity investments which are made simultaneously with investments by a

fiduciary for its own account on identical terms, it is the view of the

Department that any benefit that the fiduciary might derive from such

investment under these circumstances is incidental and would not

violate section 406(a)(1)(D) of the Act.

Notice to Interested Persons

Within 30 days of publication of this proposed exemption in the

Federal Register, UNUM will provide the notice required under 29 CFR

section 2570.43(b) by posting a copy of all materials to be required in

that notice at business locations maintained by

[[Page 41450]]

UNUM and its affiliates at which participants in the UNUM Plan work. In

addition, if any new ERISA-Covered Account proposes to participate in

shared investments covered by the exemption proposed herein, the

representatives of that Account will be provided with a copy of this

proposed exemption and the final exemption before beginning to

participate in any shared investments.

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 Code does not relieve a fiduciary or other

party in interest or disqualified person from certain other provisions

of the Act and 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) The proposed exemption, if granted, will not extend to

transactions prohibited under section 406(b)(3) of the Act and section

4975(c)(1)(F) of the Code;

(3) 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; and

(4) The proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and 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.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the pending exemption to the address above,

within the time period set forth above. All comments will be made a

part of the record. Comments and requests for a hearing should state

the reasons for the writer's interest in the pending exemption.

Comments received will be available for public inspection with the

application for exemption at the address set forth above.

Proposed Exemption

Section I--Exemption for Certain Transactions Involving the Management

of Investments Shared by Two or More Accounts Maintained by UNUM

If the exemption is granted, as indicated below, the restrictions

of certain sections of the Act and the sanctions resulting from the

application of certain parts of section 4975 of the Code shall not

apply to the following transactions if the conditions set forth in

Section IV are met:

(a) Transfers Between Accounts--(1) The restrictions of section

406(b)(2) of the Act shall not apply to the sale or transfer of an

interest in a shared investment (including a shared joint venture

interest) between two or more Accounts (except the General Account),

provided that each ERISA-Covered Account pays no more, or receives no

less, than fair market value for its interest in a shared investment.

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

the Act and the sanctions resulting from the application of section

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

Code shall not apply to the sale or transfer of an interest in a shared

investment (including a shared joint venture interest) between ERISA-

Covered Accounts and the General Account, provided that such transfer

is made pursuant to stalemate procedures, described in this notice of

proposed exemption, adopted by the independent fiduciary for the ERISA-

Covered Account, and provided further that the ERISA-Covered Account

pays no more or receives no less than fair market value for its

interest in a shared investment.

(b) Joint Sales of Property--The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and the sanctions resulting from the

application of section 4975 of the Code by reason of section 4975(c)(1)

(A) through (E) of the Code shall not apply to the sale to a third

party of the entire interest in a shared investment (including a shared

joint venture interest) by two or more Accounts, provided that each

ERISA-Covered Account receives no less than fair market value for its

interest in the shared investment.

(c) Additional Capital Contributions--The restrictions of sections

406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions resulting

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

4975(c)(1) (A) through (E) of the Code shall not apply either to the

making of a pro rata equity capital contribution by one or more of the

Accounts to a shared investment; or to the making of a Disproportionate

[as defined in Section V(e)] equity capital contribution by one or more

of such Accounts which results in an adjustment in the equity ownership

interests of the Accounts in the shared investment on the basis of the

fair market value of such interests subsequent to such contribution,

provided that each ERISA-Covered Account is given an opportunity to

make a pro rata contribution.

(d) Lending of Funds--The restrictions of sections 406(a),

406(b)(1) and 406(b)(2) of the Act and the sanctions resulting from the

application of section 4975 of the Code by reason of section 4975(c)(1)

(A) through (E) of the Code shall not apply to the lending of funds

from the General Account to an ERISA-Covered Account to enable the

ERISA-Covered Account to make an additional pro rata contribution,

provided that such loan--

(A) Is unsecured and non-recourse with respect to participating

plans,

(B) Bears interest at a rate not to exceed the prevailing rate on

90-day Treasury Bills,

(C) Is not callable at any time by the General Account, and

(D) Is prepayable at any time without penalty.

Section II--Exemption for Certain Transactions Involving the Management

of Joint Venture Interests Shared by Two or More Accounts Maintained by

UNUM

If the exemption is granted, the restrictions of certain sections

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

parts of section 4975 of the Code shall not apply to the following

transactions resulting from the sharing of an investment in a real

estate joint venture between two or more Accounts, if the conditions

set forth in Section IV are met:

(a) Additional Capital Contributions--(1) The restrictions of

sections 406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions

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

section 4975(c)(1) (A) through (E) of the Code shall not apply to the

making of additional pro rata equity capital contributions by one or

more Accounts participating in the joint venture.

[[Page 41451]]

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

the Act and the sanctions resulting from the application of section

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

Code shall not apply to the lending of funds from the General Account

to an ERISA-Covered Account to enable the ERISA-Covered Account to make

an additional pro rata capital contribution, provided that such loan--

(A) Is unsecured and non-recourse with respect to the participating

plans,

(B) Bears interest at a rate not to exceed the prevailing rate on

90-day Treasury Bills,

(C) Is not callable at any time by the General Account, and

(D) Is prepayable at any time without penalty.

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

the Act and the sanctions resulting from the application of section

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

the Code shall not apply to the making of Disproportionate [as defined

in section V(e)] additional equity capital contributions (or the

failure to make such additional contributions) in the joint venture by

one or more Accounts which result in an adjustment in the equity

ownership interests of the Accounts in the joint venture on the basis

of the fair market value of such joint venture interests subsequent to

such contributions, provided that each ERISA-Covered Account is given

an opportunity to provide its proportionate share of the additional

equity capital contributions; and

(4) In the event a co-venturer fails to provide all or any part of

its pro rata share of an additional equity capital contribution, the

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

the sanctions resulting from the application of section 4975 of the

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

not apply to the making of Disproportionate additional equity capital

contributions to the joint venture by the General Account and an ERISA-

Covered Account up to the amount of such contribution not provided by

the co-venturer which result in an adjustment in the equity ownership

interests of the Accounts in the joint venture on the basis provided in

the joint venture agreement, provided that such ERISA-Covered Account

is given an opportunity to participate in all additional equity capital

contributions on a proportionate basis.

(b) Third Party Purchase Offers--(1) In the case of an offer by a

third party to purchase any property owned by the joint venture, the

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

the sanctions resulting from the application of section 4975 of the

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

not apply to the acquisition by the Accounts, including one or more

ERISA-Covered Account[s], on either a proportionate or Disproportionate

basis of a co-venturer's interest in the joint venture in connection

with a decision on behalf of such Accounts to reject such purchase

offer, provided that each ERISA-Covered Account is first given an

opportunity to participate in the acquisition on a proportionate basis;

and

(2) The restrictions of section 406(b)(2) of the Act shall not

apply to any acceptance by UNUM on behalf of two or more Accounts,

including one or more ERISA-Covered Account[s], of an offer by a third

party to purchase a property owned by the joint venture even though the

independent fiduciary for one (but not all) of such ERISA-Covered

Account[s] has not approved the acceptance of the offer, provided that

such declining ERISA-Covered Account[s] are first afforded the

opportunity to buy out both the co-venturer and ``selling'' Account's

interests in the joint venture.

(c) Rights of First Refusal--(1) In the case of the right to

exercise a right of first refusal described in a joint venture

agreement to purchase a co-venturer's interest in the joint venture at

the price offered for such interest by a third party, the restrictions

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

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

reason of section 4975(c)(1) (A) through (E) of the Code shall not

apply to the acquisition by such Accounts, including one or more ERISA-

Covered Account[s], on either a proportionate or Disproportionate basis

of a co-venturer's interest in the joint venture in connection with the

exercise of such a right of first refusal, provided that each ERISA-

Covered Account is first given an opportunity to participate on a

proportionate basis; and

(2) The restrictions of section 406(b)(2) of the Act shall not

apply to any decision by UNUM on behalf of the Accounts not to exercise

such a right of first refusal even though the independent fiduciary for

one (but not all) of such ERISA-Covered Accounts has approved the

exercise of the right of first refusal, provided that none of the

ERISA-Covered Accounts that approved the exercise of the right of first

refusal decides to buy-out the co-venturer on its own.

(d) Buy-Sell Options--(1) In the case of the exercise of a buy-sell

option set forth in the joint venture agreement, the restrictions of

sections 406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions

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

section 4975(c)(1) (A) through (E) of the Code shall not apply to the

acquisition by one or more of the Accounts on either a proportionate or

Disproportionate basis of a co-venturer's interest in the joint venture

in connection with the exercise of such a buy-sell option, provided

that each ERISA-Covered Account is first given the opportunity to

participate on a proportionate basis; and

(2) The restrictions of section 406(b)(2) of the Act shall not

apply to any decision by UNUM on behalf of two or more Accounts,

including one or more ERISA-Covered Account[s], to sell the interest of

such Accounts in the joint venture to a co-venturer even though the

independent fiduciary for one (but not all) of such ERISA-Covered

Account[s] has not approved such sale, provided that such disapproving

ERISA-Covered Account is first afforded the opportunity to purchase the

entire interest of the co-ven

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