Proposed Exemptions; Washington National Retirement Plan et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10345, et al.]

Proposed Exemptions; Washington National Retirement Plan et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

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

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

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

making the comment or request, and (3) the nature of the person's

interest in the exemption and the manner in which the person would be

adversely affected by the exemption. A request for a hearing must also

state the issues to be addressed and include a general description of

the evidence to be presented at the hearing. A request for a hearing

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

description of the evidence to be presented at the hearing.

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

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

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

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

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

[[Page 17210]]

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, NW.,

Washington, DC 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.

Washington National Retirement Plan (the Plan), Located in

Lincolnshire, IL

[Application No. D-10345]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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

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

the Code, shall not apply to the cash sale by the Plan of five venture

capital limited partnership interests (the Venture Capital Funds) and a

private placement bond issue (the Private Placement Bond Issue) 1

to Washington National Insurance Company (the Employer), a party in

interest with respect to the Plan.

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\1\ The interests in the Venture Capital Funds and the Private

Placement Bond Issue are collectively referred to herein as the

Interests.

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This proposed exemption is subject to the following conditions:

(a) All terms and conditions of the sale are at least as

favorable to the Plan as those obtainable in an arm's length

transaction with an unrelated party.

(b) The sale is a one-time transaction for cash.

(c) The fair market value of the Interests is determined by a

qualified, independent appraiser.

(d) The Plan does not pay any commissions, costs or other

expenses in connection with the sale.

(e) With respect to each Venture Capital Fund Interest, the Plan

receives as consideration an amount that is no less than the greater

of (1) its investment basis in such Interest or (2) the fair market

value of the Interest on the date of the sale.

(f) With respect to the Private Placement Bond Issue, the Plan

receives as consideration an amount that is no less than the greater

of (1) the remaining principal balance of such Interest or (2) the

fair market value of the Interest on the date of the sale.

Summary of Facts and Representations

1. The Plan is a defined benefit plan having total assets with an

aggregate fair market value of $22,925,300 as of June 30, 1996. As of

September 11, 1996, the Plan had 964 participants. The trustees of the

Plan (the Trustees) are Robert W. Patin, Thomas C. Scott and Thomas

Pontarelli. The Trustees are charged with overseeing the investments

and investment philosophy of the Plan. The Employer, an insurance

company, maintains its principal place of business in Lincolnshire,

Illinois.

2. Included among the assets of the Plan are Interests in five

Venture Capital Funds and one Private Placement Bond Issue. The

Interests, which represent approximately 6.2 percent of the Plan's

total assets, were all purchased on behalf of the Plan by the then-

existing Trustees during the 1970's and 1980's. In this regard, the

Interests in the Venture Capital Funds were acquired by the Plan at the

inception of the respective limited partnerships whereas the Interest

in the Private Placement Bond Issue was acquired by the Plan directly

from Merrill Lynch, Hubbard Inc., as underwriter. With the exception of

the Employer (see Representation 4 below), it is represented that none

of the general partners, limited partners or holders, in the case of

the Private Placement Bond Issue, is a party in interest with respect

to the Plan.

The Interests are further described as follows:

(a) The Narragansett First Fund (NFF), a Venture Capital Fund, is a

Rhode Island limited partnership that was formed on December 17, 1982

primarily for the purpose of making investments in leveraged buyout

transactions with the objective of capital appreciation. NFF has one

general partner, Narraganset Management Partners (NMP), also a Rhode

Island limited partnership and 35 limited partners consisting of

corporations, partnerships and trusts. The total funding commitment for

NFF was $75.2 million. Of this amount, $66.7 million was actually

funded. Although NFF was scheduled to terminate on December 17, 1995,

NMP temporarily deferred the liquidation of the assets of NFF. The

partnership is now fully invested and is presently in a liquidation

mode.

On December 15, 1982, the Plan entered into a subscription

agreement to invest $500,000 in NFF. As of March 31, 1996, the Plan had

funded $446,885 of the capital commitment representing a 0.67 percent

interest in NFF. Since the inception of its investment in NFF, the Plan

has received cash disbursements totaling $1,369,523 leaving an

investment basis of $0.

(b) TCW Special Placements Fund I (TCW I), a Venture Capital Fund,

is a California limited partnership that was formed on March 12, 1985

for the purpose of allowing investors to pool their assets in order to

provide financing to highly-leveraged companies for expansions,

acquisitions, management buyouts and capital restructurings. TCW

Capital, a California partnership serves as the general partner of TCW

I. As general partner, TCW Capital makes all investment decisions and

has exclusive responsibility for the management of TCW I. TCW I is

fully invested and is expected to terminate in 1997.

On February 28, 1985, the Plan entered into a subscription

agreement to fund $500,000 to TCW I. As of March 31, 1996, the Plan had

funded $500,000 of this commitment. The total funding commitment for

TCW I was $105.6 million of which the full amount was funded.

Therefore, the Plan's interest in TCW I is 0.47 percent. Since its

investment in TCW I, the Plan has received cash disbursements totaling

$414,870 leaving an investment basis of $85,130.

(c) Narragansett Capital Partners--B (NCP-B), a Venture Capital

Fund, was formed as a limited partnership in Providence, Rhode Island

on January 14, 1987 for the purpose of investing in

[[Page 17211]]

equity and equity-related securities in leveraged buyout transactions.

The general partner of NCP-B is Narraganset Capital Associates, L.P.

(NCA), a Rhode Island limited partnership. The total funding commitment

for NCP-B was $63.6 million of which $50.5 million was actually funded.

NCP-B is fully invested and is currently in an investment liquidation

mode.

On December 16, 1986, the Plan entered into a subscription

agreement to fund $500,000 of NCP-B. As of March 31, 1996 the Plan had

funded $397,306 of this commitment. Therefore, the Plan's interest in

NCP-B is 0.01 percent. Since its investment in NCP-B, the Plan has paid

management fees totaling $58,057 and has received cash disbursements

totaling $161,065. Therefore, the Plan's investment basis in NCP-B is

$294,298.

(d) TCW Special Placement Fund II (TCW II), a Venture Capital Fund,

is a California limited partnership that was formed on February 12,

1987 for the purpose of allowing investors to pool their assets in

order to provide financing to highly-leveraged companies. TCW Capital

serves as the general partner of TCW II. The total funding commitment

for TCW II was $335.3 million of which all such amount was actually

funded. TCW II is fully invested and is expected to terminate in 1999.

On February 10, 1986, the Plan entered into a subscription

agreement to fund $500,000 of TCW II. As of March 31, 1996 the Plan had

funded $500,000 of this commitment. Therefore, the Plan's interest in

TCW II is 0.15 percent. Since its investment in TCW II, the Plan has

received disbursements totaling $446,864 leaving an investment basis of

$53,136.

(e) The Shansby Group (Shansby), a Venture Capital Fund, is a

California limited partnership that was formed on November 3, 1987 for

the purpose of making equity investments in established businesses in

consumer industries. The general partner of Shansby is TSG Partners, a

California limited partnership which has sole responsibility for the

investment, management and custody of Shansby's assets. Shansby has a

stated life of ten years and is currently in a liquidation mode. The

total funding commitment for Shansby was $31.3 million of which all

$31.3 million was actually funded. The partnership is fully funded and

is presently in an investment liquidation mode.

On October 27, 1987, the Plan entered into a subscription agreement

to fund $500,000 of Shansby. As of March 31, 1996, the Plan had funded

$500,000 of this commitment. Therefore, the Plan's interest in Shansby

is 0.16 percent. Since its investment in Shansby, the Plan has received

disbursements totaling $476,643 leaving an investment basis of $23,357.

(f) Pennsylvania Mart Properties Secured Notes constitute the

Private Placement Bond Issue in which the Plan has invested. The

issuer, Pennsylvania Mart Properties Corp. (PMP) is a special purpose

corporation. PMP was formed in the mid-1970's to finance up to 100

percent of the cost of acquiring and constructing a distribution center

near Morrisville, Pennsylvania. It was intended that the facility would

be leased to the S.S. Kresge Company (Kresge) or a subsidiary for a 30

year term.2

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2 It is represented that K-Mart Corporation, an affiliate of

Kresge is the actual lessee of the distribution center.

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To obtain funds necessary to acquire the property from Kresge and

to complete construction, PMP sold secured notes to institutional

investors. The Private Placement Bond Issue was issued in the aggregate

principal amount of $22 million and has a maturity date of 30 years or

January 17, 2007. The Private Placement Bond Issue carries interest at

the rate of 10.25 percent per annum and is secured by a first mortgage

on the property and by an assignment of the lease.

The Plan initially purchased its Interest in the Private Placement

Bond Issue for $500,000 on December 2, 1976 from Merrill Lynch. At the

time of the investment, the cost to complete the warehouse facility

securing the Issue was $18,900,000 or 21.25 percent less than the

original cost estimate of $24 million. Because the indenture for the

Private Placement Bond Issue did not permit outstanding debt to exceed

the final cost of the facility, PMP refunded 21.25 percent of the

Issue, pro rata, to each investor on January 17, 1977. A total of

$106,250 in principal was returned to the Plan. On that same date, a

revised secured note, having a face value of $393,750, was given to the

Plan. The applicant assumes that the Plan also received an accrued

interest payment on January 17, 1977 in the amount of $6,406. This

accrued interest would represent 45 days of interest on the initial

$500,000 investment from December 2, 1976 to January 1, 1977.

Since the time of its original investment, the Plan has received

interest income totaling $723,831. As of January 17, 1997, the

outstanding principal balance of the Plan's Interest in the Private

Placement Bond Issue was $267,035. Thus, the Plan's investment basis in

the Private Placement Bond Issue is $0.

3. With the exception of NCP-B (as noted in Representation 2), the

Plan has not been required to pay any management fees in connection

with its ownership of the other Venture Capital Fund Interests. In this

regard, all management fees paid by the Plan have been derived from

capital contributions or have been withheld from distributions. The

Plan has not paid any fees with respect to its Interest in the Private

Placement Bond Issue. Other than management fees, the Plan has not been

required to pay any servicing fees to any outside party to monitor or

administer the Interests.

4. The Employer has also invested in four of the Venture Capital

Funds. It is represented that the Employer acquired its Interests in

these Funds contemporaneously with the Plan. In this regard, the

Employer invested $1,494,255 in NFF in return for a 0.02 percent

interest, $2 million in TCW I in return for a 0.02 percent interest, $2

million in TCW II for a 0.01 percent interest and $3 million in Shansby

for a 0.10 percent interest. It is represented that the Employer has

never invested in the Private Placement Bond Issue. In addition, the

Employer also has invested $1,587,397 in Narragansett Capital

Partners--A, a parallel Fund of NCP-B.3

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3 In this proposed exemption, the Department expresses no

opinion on whether the acquisition and holding by the Plan and the

Employer of their respective Interests in the Venture Capital Funds

violated any provision of Part 4 of Title I of the Act.

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5. Each of the Venture Capital Funds is valued quarterly by an

advisory committee which is comprised of representative limited

partners from the respective Funds. It is represented that such

committee members do not include the Employer or its principals. The

Plan receives a quarterly statement from each committee summarizing the

value of the Venture Capital Fund and the value of the Plan's Interest

in a Venture Capital Fund. In this regard, as of March 31, 1996, the

fair market values of the Plan's Interests in the Venture Capital Funds

were reported as follows: $49,094 in NFF; $267,000 in TCW I; $416,665

in NCP-B; $123,000 in TCW II; and $272,653 in Shansby. By letter dated

January 27, 1997, Mr. Gregory Barber, who undertakes the specific

duties of the general partner for NFF and NCP-B, stated that the

quarterly valuations for these Venture Capital Funds represent the best

estimate of the fair market value of the portfolio companies. Mr.

Barber also noted that there were no sales or transfers of Interests in

the Venture

[[Page 17212]]

Capital Funds resulting from arm's length transactions between

unrelated parties during 1995 or 1996.

By letter dated February 7, 1997, Mr. Raymond Henze, Group Managing

Director of TCW Capital, the general partner of TCW I and TCW II,

outlined the principals and methods of valuation utilized by TCW

Capital in valuing the net assets of these Venture Capital Funds. In

this regard, Mr. Henze stated that--

(a) Non-publicly traded securities are initially valued at cost

unless a change in the financial condition or operating results of

the issuer or guarantor of such securities indicates that there has

been a permanent impairment in the value of the investment. Such

investments will not be valued in excess of cost. No change in

valuation of debt securities is made for fluctuations in market

interest rates.

(b) Marketable securities listed on a national securities

exchange or marketable securities traded in the over-the-counter

market for which there is a last sales price available are valued at

the last sales price on the date of valuation. Other marketable

securities traded in the over-the-counter market are valued at the

closing bid price as reported by the National Quotations Bureau,

Inc. or at a discount from the bid price if marketability is limited

by the size of the holdings relative to trading volume. Securities

not marketable due to investment letter restrictions but

constituting part of the class of publicly-traded securities are

valued at an appropriate discount from the public market price.

(c) The carrying value of investments in non-publicly traded

securities and restricted marketable securities is based upon the

written valuation by a nationally-recognized independent appraiser

or investment banker. Historically, this has been Deloitte & Touche

LLP.

In addition, Mr. Henze stated that during calendar year 1996, there

were no transfers in TCW I.

Finally, in a letter dated January 28, 1997, Mr. Charles Esserman,

General Partner of the Shansby Group stated that the value of the

assets of the Shansby Group as shown in the quarterly financial

statement is, in the opinion of the general partners a fair

representation of the fair market value of such assets as of such

dates. In addition, Mr. Esserman stated that there have been no sales

of Interests in the Shansby Group during the last two years.

6. The Employer proposes to terminate the Plan and wishes to ensure

that all of the Plan's assets can be efficiently liquidated at their

fair market value. Because there is no ready market for any the of

Venture Capital Funds, it is represented that the general partners of

each Fund are under no obligation to assist in the sale or repurchase

of the Interests. Since each of the Venture Capital Funds is in a

liquidation mode, it is represented that even if a purchaser could be

found, it is unlikely that the purchaser would be willing to pay fair

market value for the Plan's Venture Capital Fund Interests.

7. Therefore, the Employer requests an administrative exemption

from the Department in order to purchase the Plan's Interests in the

Venture Capital Funds for the greater of: (a) the funded amount of the

Plan's Interest in the Venture Capital Fund (i.e., the Plan's

investment basis); or (b) the fair market value of the Venture Capital

Fund Interests, on the quarterly statement for the most current

statement available at the time of purchase. In each instance, the

value attributed to the Venture Capital Interests will be reduced by

any distributions received prior to such purchase. No fees or

commissions will be paid by the Plan in connection with its sale of the

Interests in the Venture Capital Funds. Any costs associated with

determining the fair market value for these investments will be borne

by the Employer.

8. In addition to acquiring the Interests in the Venture Capital

Funds, the Employer requests administrative exemptive relief in order

to purchase the Plan's Interest in the Private Placement Bond Issue.

The proposed sales price for the Interest will be the greater of: (a)

the independently-appraised fair market value; or (b) the remaining

principal balance of such Interest. No fees or commissions will be paid

by the Plan in connection with the sale. Any cost associated with

determining the fair market value of the Interest in the Private

Placement Bond Issue will be borne by the Employer.

9. Because the Private Placement Bond Issue is not valued on a

continuing basis, the Employer has retained the Allison-Williams

Company of Minneapolis, Minnesota (Allison-Williams), an independent

investment banking firm, to value this investment. Specifically, Mr.

Michael A. Lingvall, Vice President of Allison-Williams, has determined

the fair market value of the investment. Mr. Lingvall represents that

he is completely unrelated to the Employer and its principals. He also

states that he has three years experience in effecting private

placement sales, valuation and trading and has over eight years

experience in finance.

In an appraisal report dated August 20, 1996 and an addendum dated

November 8, 1996, Mr. Lingvall has placed the market position for the

Plan's Interest in the Private Placement Bond Issue at 92.06 (or

$249,203 based upon a principal balance of $267,035). He indicates that

this represents a spread of approximately 600 points over comparable

Treasury bonds which he believes is an appropriate benchmark for

pricing corporate private placements similar to the Interest. In

determining the fair market value of the Interest, Mr. Lingvall

represents that he considered such factors as the current Treasury bond

yield environment, yield spread premiums on similar-term bond issues,

current credit ratings, security, the size of the Plan's Interest and

economic factors. In addition, Mr. Lingvall will update his appraisal

of the Interest prior to the proposed sale.

10. Thus, based upon the appraisals, the Plan will sell the

Interests in the Venture Capital Funds for their fair market values

because, as the following table shows, these amounts exceed the Plan's

investment basis for each Fund.

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VC Fund Cost Distrib. Adjusted basis FMV

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NFF............................................. $500,000 $1,369,523 $0 $49,094

TCW I........................................... 500,000 414,870 85,130 267,000

NCP-B........................................... *455,363 161,065 294,298 416,665

TCW II.......................................... 500,000 446,864 53,136 123,000

Shansby......................................... 500,000 476,643 23,357 272,653

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Totals.................................... $2,455,363 $2,868,965 $455,921 $1,128,412

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*Includes management fees totaling $58,057.

Accordingly, the total sales price for the Interests in the Venture

Capital Funds will be $1,128,412.

With respect to the Private Placement Bond Issue, the Plan will

sell its interest to the Employer for $267,035. As noted in

Representation 9, this amount denotes the outstanding principal balance

of such Interest and it exceeds

[[Page 17213]]

the Interest's fair market value of $249,203.

Therefore, the aggregate sales price for the Venture Capital Fund

Interests and the Interest in the Private Placement Bond Issue will be

$1,395,447 ($1,128,412 + $267,035).

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

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because: (a) All terms and conditions of the sale

will be at least as favorable to the Plan as those obtainable in an

arm's length transaction with an unrelated party; (b) the sale will be

a one-time transaction for cash; (c) the fair market value of the

Interests has been determined by qualified, independent appraisers; (d)

the Plan will not pay any commissions, costs or other expenses in

connection with the sale; (e) with respect to each Venture Capital Fund

Interest, the Plan will receive as consideration an amount that is no

less than the greater of (1) its investment basis in such Interest or

(2) the fair market value of the Interest on the date of the sale; and

(f) with respect to the Private Placement Bond Issue, the Plan will

receive as consideration an amount that is no less than the greater of

(1) the remaining principal balance of such Interest or (2) the fair

market value of the Interest on the date of the sale.

Notice to Interested Persons

Notice of the proposed exemption will be provided to interested

persons within 10 days as of the date of publication of the notice of

pendency in the Federal Register. Such notice will be provided to

interested persons by first class or interoffice mail. The notice will

include a copy of the notice of proposed exemption, as published in the

Federal Register, as well as a supplemental statement, as required

pursuant to 29 CFR 2570.43(b)(2), which shall inform interested persons

of their right to comment on and/or to request a hearing. Comments and

hearing requests with respect to the proposed exemption are due 40 days

after the date of publication of the proposed exemption in the Federal

Register.

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

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

The Kenzer Corporation Thrift Savings Plan and Trust (the Plan),

Located in New York, New York

[Application No. D-10391]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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

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

the Code, shall not apply to (1) the proposed ``restoration payment''

(the Restoration Payment) to the Plan by The Kenzer Corporation (the

Employer), in respect of certain defaulted notes (the Notes), and (2)

the potential future receipt by the Employer of ``recapture payments''

(the Recapture Payments) from the Plan.

This proposed exemption is subject to the following conditions:

(1) The Restoration Payment covers the face amount of the Notes and

accrued interest as of the date of default, plus lost opportunity costs

attributable to the Notes since the date of default;

(2) Any Recapture Payments are restricted solely to the amounts, if

any, recovered by the Plan with respect to the Notes in litigation or

otherwise; and

(3) The Employer receives a favorable ruling from the Internal

Revenue Service that the Restoration Payment does not constitute a

``contribution'' or other payment that will disqualify the Plan.

Summary of Facts and Representations

1. The Plan is a 401(k) plan sponsored by the Employer. The

Employer, a New York corporation, provides executive search services to

client businesses seeking to fill executive or management level

positions and is headquartered in New York City. As of June 30, 1996,

the Plan had total assets of approximately $851,472.4 As of

December 3, 1996, the Plan had approximately 50 participants and

beneficiaries. The trustees of the Plan (the Trustees) are Robert

Kenzer, Chairman of the Employer, and Eric Segal, President of the

Employer.

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\4\ This figure reflects the fair market value of the Plan's

assets, valuing the Notes (plus accrued interest) at zero.

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2. Among the assets of the Plan are the Notes, which are promissory

notes issued by Bennett Funding, Inc. or an affiliate thereof

(collectively, Bennett). The Plan acquired the Notes beginning in

approximately 1991. The Notes consist of four separately issued notes

in the amounts of $100,000, $100,000, $245,000, and $200,000,

respectively, for an aggregate face amount of $645,000.

The applicant represents that the Trustees believed the Notes to be

secure, safe investments. Documentation issued to the Plan indicated

that each Note was secured by (a) equipment owned by Bennett which

Bennett was leasing to unrelated third parties; (b) an assignment of

the income stream generated by such leases; and (c) a master insurance

policy issued by one of two insurance companies, which guaranteed the

income stream from the leases.

In view of the relatively high interest rates being offered on

investments which the Trustees considered to be low-risk, the Notes,

when due, would generally be ``rolled over,'' with both the principal

and accrued interest being reinvested in new Notes. As represented by

Bennett, interest paid on each Note was deposited in a so-called

``Insured Prime Conversion Account'' (IPCA) until the maturity date, at

which time the interest was added to the principal amount of the Note

and reinvested in a new Note.

3. In February, 1996, Bennett announced that it was deferring

interest payments then coming due on the Notes, which was in fact an

act of default on the Notes. On April 2, 1996, Bennett filed a petition

in the United States Bankruptcy Court for the Northern District of New

York (Cases Nos. 96-61376 et seq), seeking reorganization under Chapter

11 of the Federal Bankruptcy Code.5 Richard M. Breeden, formerly

Chairman of the Securities and Exchange Commission (S.E.C.), was

appointed as bankruptcy trustee. Contemporaneously, the S.E.C. filed a

suit against Bennett in the United States District Court for the

Southern District of New York, charging numerous acts of fraud and

violations of the Securities Act of 1933 and the Securities and

Exchange Act of 1934.

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\5\ The Department expresses no opinion herein as to whether the

acquisition and holding of the Notes by the Plan violated any of the

provisions of Part 4 of Title I in the Act.

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It appears, among other things, that Bennett had begun, at one

point, to ``secure'' the Notes with bogus leases of non-existent

equipment on a wholesale basis. In other cases, Bennett pledged actual

equipment as security for loans from institutional lenders and

thereafter pledged the same equipment lease as further security both to

the lenders and to public purchasers of the Notes. The money being

raised with the newly issued Bennett Notes was apparently being used to

pay off the interest due on older Bennett Notes, or being siphoned off

into unrelated business ventures owned by members of the Bennett

management. In addition, it was revealed that the Notes were not in any

manner insured and that the IPCA

[[Page 17214]]

appears to have been a commingled account whose assets were used by

Bennett in an, as yet, unascertained fashion.

The result of these alleged fraudulent activities, finally, was a

build-up of cash obligations which Bennett could no longer pay through

the sale of new Notes. Bennett's liabilities exceed a billion dollars,

and amounts due to unsecured creditors, among which Note holders are

currently included, exceed $800 million. The Employer has filed claims

with the insurers whose certificates of insurance were issued to

investors in the Notes. However, these insurers have taken the position

that such certificates were bogus and that no insurance existed. The

bankruptcy trustee has sued the insurers, alleging, among other things,

complicity in Bennett's fraudulent scheme.

4. Whatever amount, if any, that the Plan is able to recover with

respect to the Notes in litigation or otherwise, it is likely to suffer

enormous losses. The Employer proposes, therefore, to make the Plan

whole with a Restoration Payment covering the face amount of the Notes

and accrued interest as of February 29, 1996, the end of the last month

for which interest was credited in respect of the Notes ($771,715),

plus an amount for lost opportunity costs attributable to the Notes

(approximately $21,473, as of September 30, 1996) for the period from

February 29, 1996 to the date immediately prior to the date that the

Restoration Payment is deposited in the Plan.6 The Plan will

refund the Restoration Payment to the Employer only to the extent of

any amount that the Plan is able to recover from Bennett. The Employer

is bearing all expenses of prosecuting the Plan's claims in respect of

the Notes, including those relating to Bennett's bankruptcy

proceedings, as well as the costs of this exemption application.

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\6\ The Department notes the applicant's representation that the

Plan's lost opportunity costs with respect to the $771,715 will be

calculated based upon an assumed rate of return equal to the

interest rate paid on the Plan's money market investments for the

period from February 29, 1996 to December 31, 1996, and thereafter,

the interest rate paid on money market funds offered by the Plan to

participants. (Effective as of January 1, 1997, the Plan permitted

participants to direct the investment of their respective individual

accounts).

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Effective as of January 1, 1997, the Plan was converted to a self-

directed, individual account plan, administered by The Chase Manhattan

Bank. Therefore, the Restoration Payment will be allocated to each

participant account in proportion to its allocated share of the net

asset value of the entire Plan portfolio. The Employer has requested a

ruling from the Internal Revenue Service that the Restoration Payment

does not constitute a ``contribution'' or other payment that will

disqualify the Plan.

5. In summary, the applicant represents that the proposed

transactions satisfy the statutory criteria for an exemption under

section 408(a) of the Act for the following reasons:

(1) The Restoration Payment will enable the Plan to immediately

recover the face amount of the Notes and accrued interest as of the

date of default, plus lost opportunity costs attributable to the Notes

since that date; (2) any Recapture Payments will be restricted solely

to the amounts, if any, recovered by the Plan with respect to the Notes

in litigation or otherwise; and (3) the Employer must receive a

favorable ruling from the Internal Revenue Service that the Restoration

Payment does not constitute a ``contribution'' or other payment that

will disqualify the Plan.

Notice to Interested Persons

Notice of the proposed exemption shall be given to all interested

persons by personal delivery or by first-class mail within 15 days of

the date of publication of this notice of pendency in the Federal

Register. Such notice shall include a copy of this notice of pendency

as published in the Federal Register and shall inform interested

persons of their right to comment and/or request a hearing with respect

to the proposed exemption. Comments and requests for a hearing are due

within 45 days of the date of publication of this notice in the Federal

Register.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,

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

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 3rd day of April, 1997.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 97-8973 Filed 4-8-97; 8:45 am]

BILLING CODE 4510-29-P