Proposed Exemptions; Van Ness Plastic Molding Co., Inc.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10483, et al.]

Proposed Exemptions; Van Ness Plastic Molding Co., Inc.

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 restrictions 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

requests 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, NW., Washington, DC

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, 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.

Van Ness Plastic Molding Co., Inc. Employees' Money Purchase Pension

Plan (the Plan) Located in Belleville, NJ

[Application No. D-10483]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) 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 making to the Plan of a restoration

payment (the Restoration Payment) with respect to certain defaulted

third-party notes (Note 1, Note 2 and Note 3; collectively, the Notes)

by the Van Ness Plastic Molding Co., Inc. (the Employer), a party in

interest with respect to the Plan; and (2) the potential future receipt

by the Employer of recapture payments (the

[[Page 35282]]

Recapture Payments) made to the Plan pursuant to bankruptcy proceedings

involving the issuer/assignor of the Notes.

This proposed exemption is subject to the following conditions:

(a) Mr. William Van Ness, the Plan trustee (the Trustee), agrees to

have excluded from his individual account in the Plan (the Account) any

benefit attributable to the Restoration Payment, such that the total

Restoration Payment is allocated to the Accounts of the other Plan

participants and does not include any portion related to the interest

of Mr. Van Ness's Account in the Notes.

(b) The Restoration Payment, which is calculated based upon the

Account balances in the Plan of participants other than Mr. Van Ness,

covers--

(1) The aggregate unrecovered principal of the Notes plus accrued,

but unpaid, interest on the Notes as of the dates of default,

calculated through December 31, 1997;

(2) An additional amount representing interest on the unrecovered

principal of Notes 2 and 3, originally scheduled for maturity in 1999,

from January 1998 until the date the Restoration Payment is made; and

(3) Lost opportunity costs associated with Note 1, which was

originally scheduled for maturity in 1997, from January 1998 until the

date the Restoration Payment is made.

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

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

otherwise.

(d) The Restoration Payment is made to resolve potential claims for

breach of fiduciary duty relating to the management of the Plan.

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

Revenue Service (the 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 nonstandardized prototype money purchase pension

plan having 96 participants and total assets of $1,831,873.27 as of

December 31, 1997. The Plan is sponsored by the Employer, a New Jersey

corporation that is engaged in the manufacture of plastic molding. Mr.

William Van Ness, the Trustee, also serves as the sole shareholder and

president of the Employer. As Trustee, Mr. Van Ness has full investment

discretion and authority with regard to Plan investments except with

respect to those that are under the control of an investment manager.

2. Among the assets of the Plan are three notes that were issued or

assigned by The Bennett Funding Group, Inc. (Bennett), an unrelated

party. The Notes, which were acquired by the Plan between 1993 and 1995

at the direction of Mr. Van Ness, are in the face amounts of $250,000

(Note 1), $17,688.48 (Note 2), and $13,842.22 (Note 3). In order to

purchase the Notes, the Plan paid Bennett an aggregate cash purchase

price of $281,530.70. Following acquisition, the Plan did not incur any

servicing fees or costs in connection with the administration of the

Notes.

The Notes are further described as follows:

(a) Note 1 represented a contractual or an insurable interest in a

pooled investment vehicle that was established and sold by Bennett and

its subsidiary, Resort Funding, Inc., on a non-recourse basis to

accredited investors. The investment pool consisted of consumer sales

agreements, leases and rental agreements, installment sales contracts

or consumer sales agreements generated by third party business

equipment dealers and others. The amount of the issue was $60 million.

Each unit or interest had a minimum purchase price of $10,000. The term

of each investment contract or ``note'' ranged from 11 months to 60

months and carried interest at the rate of approximately 6 percent to 9

percent per annum.

On March 15, 1993, the Plan acquired Note 1 from Bennett for the

cash purchase price of $250,000. Note 1, which carried interest at the

rate of 9 percent per annum, was scheduled to mature on December 15,

1997. Interest under Note 1 was payable to the Plan in monthly

installments of $1,875, with payments commencing on April 15, 1993.

(b) Note 2 was acquired by the Plan from Bennett on August 1, 1995

for a total purchase price of $17,688.48. Note 2 had a term commencing

on September 30, 1995 and ending on August 30, 1999. It carried

interest at the annualized rate of 9.5 percent. Principal and interest

were payable to the Plan in monthly installments of $444.39.

(c) Note 3 was acquired by the Plan from Bennett on November 16,

1995 for a total purchase price of $13,842.22. Note 3 had a term

commencing from January 15, 1996 until December 15, 1999. It carried

interest at the annualized rate of 9.5 percent. Principal and interest

were payable to the Plan in monthly installments of $337.76.

Each Note was secured by (a) equipment owned by Bennett which

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

income stream generated by such leases.1 The Employer and

the Trustee believed that the Notes were relatively low-risk and safe

investments.

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\1\ According to the applicant, the question of whether the

Notes were also secured by a master insurance policy issued by

Generali Underwriters, Inc., an unrelated party, which guaranteed

the income stream from the leases, continues to be the subject of

litigation.

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4. On or about March 29, 1996, Bennett filed for Chapter 11

bankruptcy protection in the United States Bankruptcy Court for the

Northern District of New York (Case Nos. 96-61376 et seq.). Richard C.

Breeden, formerly the Chairman of the Securities and Exchange

Commission (the SEC), was appointed Bankruptcy Trustee for the Bennett

debtors on April 18, 1996. Subsequent to the March 29, 1996 filing,

five additional affiliates of Bennett filed for Chapter 11 protection

and Mr. Breeden was again appointed as Bankruptcy Trustee for these

entities.

5. The Declaration of Bankruptcy by the Bennett debtors stemmed

from a lawsuit by the SEC regarding alleged widespread fraudulent

practices involving the Bennett debtors. In this regard, (a) over $55

million of fictitious leases were sold to investors and the funds

derived from investors were used to service these leases; (b)

assignments made of government leases were typically illegal and

ineffective; and (c) through certain ``sham'' transactions Bennett

appeared to be profitable while it was actually losing money.

6. The Plan filed a Proof of Claim (the Claim) in the amount of

$326,355.73 for the ``money loaned and purchase of lease/assignments''

in the Bennett bankruptcy.2 The Plan's Claim was classified

as an unsecured nonpriority claim, since Mr. Breeden noted that there

was no collateral or lien on the property of the debtor securing the

Claim. The Claim includes both principal and interest payments on the

Notes' outstanding balances from the date of the last payment received

in 1996 through December 15, 1997. In this regard, the Plan received

aggregate payments from Bennett with respect to the Notes of

$70,396.67. Such payments can be broken down as follows:

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\2\ The Department expresses no opinion herein on whether the

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

provisions of Part 4 of Title I of the Act.

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(a) For Note 1, the Plan received a final interest payment from

Bennett in March 1996 in the amount of $1,875 or total interest

payments of $67,500.

(b) For Note 2, the Plan received monthly interest payments from

Bennett until February 1996 in the amount of $444.39 or a total payment

of both principal and interest of $2,221.95.

[[Page 35283]]

(c) For Note 3, the Plan received monthly interest payments until

February 1996 of $337.36 or a total payment of both principal and

interest of $674.72.

At the time of the Bennett bankruptcy proceedings, the amount of

unrecovered principal for Notes 1, 2 and 3 were $250,000, $15,825.81

and $13,363.98, respectively.

7. Because of the complexity surrounding the Bennett debtors'

bankruptcy, it is unclear whether any recovery of the Notes will occur.

Also, due to uncertainty about whether the Notes have actually been

insured, the applicant believes it unlikely that any insurance company

would pay investors' claims (including individual investors and

retirement plans) relating to the individual leases inasmuch as the

insured is listed as Bennett. The applicant further represents that

whatever amount, if any, that the Plan is able to recover with respect

to the Notes through the bankruptcy proceedings, or otherwise, it is

likely to suffer significant losses.

8. As stated in Representation 1, as of December 31, 1997, the

assets of the Plan totaled $1,831,873.27. This figure reflects the fair

market value of the Plan's assets and assumes that the Notes (plus

accrued interest) are valued at $0. According to the applicant, the

exact fair market value of the Notes is not ascertainable at this time

as litigation is ongoing with respect to this matter.

9. At present, the amount of unrecovered principal of the Notes is

$279,189.79. In addition, the accrued interest associated with the

Notes through the dates of default, calculated through December 31,

1997 is $44,458.89. In order to avoid potential fiduciary claims by

Plan participants and others relating to the Plan's investment in the

Notes, the Employer proposes to restore the losses to the Plan by

making a ``Restoration Payment.'' Therefore, an administrative

exemption is requested from the Department.

10. The Restoration Payment will consist, in part, of the aggregate

amount of the principal loss on the Notes (i.e., $279,189.79) plus

accrued, but unpaid, interest (i.e., $44,458.89), calculated from the

time of default through December 31, 1997, and multiplied by 58.38

percent, which percentage reflects the interests in the Plan of

participants other than Mr. Van Ness, who has a 41.62 percent interest

in the Plan. In other words, 58.38 percent of the unrecovered principal

and interest (or $188,946.09) will be paid to the Accounts of the

remaining Plan participants. The Restoration Payment will also include

an additional amount representing accrued interest on the unpaid

principal of Notes 2 and 3, for the period January 1998 until the date

the Restoration Payment is made, again attributable to the Accounts of

participants in the Plan other than the Account of Mr. Van Ness.

Finally, the Restoration Payment will include the lost opportunity

costs with respect to the unrecovered principal of Note 1 from the

period of its scheduled maturity in December 1997 and ending with the

date immediately preceding the date the Restoration Payment is made,

again attributable to the Accounts of participants in the Plan other

than the Account of Mr. Van Ness. Such opportunity costs will be based

on the average rate of return for the Plan, excluding the Notes, for

the years 1995 through 1997.3

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\3\ The average rate of return earned by the Plan for 1995

through 1997 is 12.54 percent. This figure does not include the

Plan's investment in the Notes. In a letter dated September 11,

1997, Mark Shemtob, A.S.A of Abar Pension Services, Inc., an

independent actuarial and pension consulting firm, located in

Livingston, New Jersey, represented that the Plan had net investment

earnings of $198,126 in 1995 and an average account balance of

$1,198,876, which would result in a 16.53 percent rate of return for

1995. In 1996, Mr. Shemtob noted that the Plan had net investment

earnings of $131,397 and an average account balance of $1,032,459,

which would result in a 12.73 percent rate of return for that year.

By letter dated April 29, 1998, the applicant noted that the

Plan's rate of return for the year 1997 was 8.41 percent based upon

a telephone communication with Mr. Shemtob. Accordingly, the average

rate of return for the Plan for the period 1995 through 1997 is

12.54 percent.

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Assuming the Restoration Payment is made to the Plan on June 30,

1998, the applicant represents that the opportunity costs associated

with Note 1 is $18,302.13 and would be calculated as follows:

$250,000 (Unrecovered Principal of Note 1) x 58.38% (Plan's Interest

in Note 1) x 12.54% (Plan's Average Rate of Return for 1995-1997) =

$18,302.13.

Again assuming the Restoration Payment is made to the Plan on June

30, 1998, the applicant represents that the total payment would be

approximately $208,321.87. Of this amount,

(a) $188,946.09 would denote the Restoration Payment as of December

31, 1997, which would be calculated as follows:

$250,000.00. Note 1 Unrecovered Principal

15,825.81... Note 2 Unrecovered Principal

13,363.98... Note 3 Unrecovered Principal

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$279,189.79. Total Unrecovered Principal

$44,458.89.. Accrued interest on Notes from Default through 12/31/97

$323,648.68. Total Unrecovered Principal and Accrued Interest through

12/31/97

$323,648.68 x 58.38% (Plan's Interest in Notes 1, 2 and 3 plus Accrued

Interest) = $188,946.09;

(b) $18,302.13 would be attributed to the opportunity costs

associated with Note 1 from January 1998 through June 30, 1998, as

already calculated above;

(c) $438.86 would be attributed to actual interest accruing on Note

2 from January 1998 through June 30, 1998, calculated as follows:

$15,825.81 (Note 2 Unrecovered Principal) x 58.38% (Plan's Interest

in Note 2) x 4.75% (\1/2\ year interest) = $438.86; and

(d) $634.79 would represent the additional interest accruing on

Note 3 from January 1998 until June 30, 1998, calculated as follows:

$13,363.98 (Note 3 Unrecovered Principal) x 58.38% (Plan's Interest

in Note 3) x 4.75% (\1/2\ year interest) = $634.79.

11. Because Mr. Van Ness has agreed to have excluded from his

Account any benefit which may be attributable to the Restoration

Payment, each affected Plan participant will have allocated to his or

her Account in the Plan the applicable portion of the Restoration

Payment as determined by the third-party Plan administrator. However,

in no event will a restored Account have assets exceeding the amount

that would have been in the Account of the affected Plan participant

but for the loss due to the Bennett bankruptcy.

The Plan will be required to refund the Restoration Payment to the

Employer only to the extent of any amount or amounts that the Plan is

able to recover from Bennett (the Recapture Payment). The Employer will

bear all expenses of prosecuting the Plan's claims with respect to the

Notes, including those relating to the Bennett bankruptcy proceedings,

as well as the costs of the exemption application.

12. Coincident with its filing of the exemption application, the

Employer requested a Private Letter Ruling from the Service on the

issues of whether the Restoration Payment (a) would constitute a

``contribution'' or other payment to the Plan subject to the provisions

of either sections 404 or 4972 of the Code; (b) would adversely affect

the qualified status of the Plan pursuant to either Code sections

401(a)(4) or 415; (c) would result in taxable income to affected Plan

participants and beneficiaries; and (d) would be deductible in full by

the Employer pursuant to section 162 of the Code.4 In

[[Page 35284]]

its ruling letter of March 2, 1998, the Service stated that neither the

Code nor the Income Tax Regulations provide guidance on whether the

Employer's proposed Restoration Payment would constitute a contribution

under the Code. However, in the instant case, the Service noted that

the Restoration Payment would ensure that the affected participants

would recover their Account balances and place such participants in the

position in which they would have been in the absence of the Trustee's

decision to invest a portion of the Plan's assets in the Notes.

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\4\ Section 401(a)(4) of the Code provides that contributions

made by an employer to or under a stock bonus, pension, profit

sharing or annuity plan shall be deductible under section 404

subject to certain limitations contained therein.

Section 415 of the Code provides, in relevant part, that a trust

which is part of a pension, profit sharing or stock bonus plan shall

not constitute a qualified trust under section 401(a)--

(A) in the case of a defined benefit plan, the plan provides for

the payment of benefits with respect to a participant which exceeds

the limitations of subsection (b), or

(B) in the case of a defined contribution plan, contributions

and other additions under the plan with respect to any participant

for any taxable year exceed the limitations of subsection (c).

Section 415(e) of the Code provides limitations on employer

contributions and benefits where an individual is a participant in

both a defined benefit and a defined contribution plan maintained by

the same employer.

Section 1.415-6(b)(2) of the Income Tax Regulations provides

that the term ``annual additions'' includes employer contributions

which are made under the plan. Section 1.415-6(b)(2) further

provides that the Commissioner of the Service may treat transactions

between the plan and the employer or certain allocations to

participants' accounts as giving rise to annual additions.

Section 4972 of the Code imposes on an employer an excise tax on

nondeductible contributions to a qualified plan.

Finally, section 402(a) of the Code generally provides that

amounts held in a trust that is exempt from tax under Code section

501(a) and that is part of a plan that meets the qualification

requirements of Code section 401(a) will not be taxable to

participants until such time as such amounts are actually

distributed to distributees under the plan.

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The Service explained that it was reasonable to characterize the

Restoration Payment as a ``replacement payment.'' In this regard, the

replacement payment would be made by the Employer in response to

potential claims against the Employer and those individuals who were

responsible for investing the Plan's assets in the Notes. In addition,

the replacement payment would be allocated to the Accounts of

participants in the Plan who had incurred a principal loss as a result

of the Note investment. Thus, the Service concluded that the proposed

Restoration Payment (a) would not constitute a contribution or other

payment subject to the provisions of Code sections 404 or 4972; (b)

would not adversely affect the qualified status of the Plan pursuant to

either Code section 401(a)(4) or Code section 415; and (c) would not,

when made, result in taxable income to affected Plan participants and

beneficiaries.

Finally, the ruling letter is conditioned on two requirements.

Firstly, the Restoration Payment must be made to resolve potential

claims for breach of fiduciary duty relating to the management of the

Plan. Secondly, the ruling letter is based on the representation that

no part of the Restoration Payment will be added to the Account of the

Trustee.

13. In summary, it is represented that the proposed transactions

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because: (a) The Restoration Payment will enable the

Plan to recover immediately the unpaid principal of the Notes, accrued

interest and lost opportunity costs; (b) 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; (c) the Employer has

received a favorable ruling from the Service that the Restoration

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

will disqualify the Plan; (d) Mr. Van Ness's Account will not share in

the Restoration Payment such that the total Restoration Payment will be

made to the Accounts of Plan participants other than Mr. Van Ness; and

(e) the Restoration Payment will be made to resolve potential claims

for breach of fiduciary duty relating to the management of the Plan.

For Further Information Contact: Ms. Jan D. Broady of the

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

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

Massachusetts

[Application No. D-10484]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

is granted, the restrictions of section 406(b)(2) of the Act shall not

apply to:

(1) The proposed purchases and sales of timber properties between

various separate accounts (the Accounts), such as the ForesTree

Separate Account, that are maintained by JHMLIC and managed by Hancock

Natural Resource Group, Inc. (HNRG), John Hancock Timber Resource

Corporation (JHTRC), or another Affiliate of JHMLIC; and

(2) The proposed purchases and sales of timber properties between

the Accounts where HNRG or another Affiliate of JHMLIC serves as the

investment manager and various partnerships (the Partnerships) in which

JHTRC or another Affiliate of JHMLIC is the general partner.

Conditions and Definitions

This proposed exemption is subject to the following conditions:

1. ERISA-Covered Plans may participate in the proposed transactions

only if they have total assets in excess of $100 million.

2. At least 30 days prior to the proposed transaction, each

affected Customer invested in the Accounts or Partnerships

participating in the transaction will be provided with information

regarding the timber properties involved and the terms of the

transaction, including the purchase price and how the transaction would

meet the goals and investment policies of the Customer. Notice of any

change in the purchase price will be provided to the Customer at least

30 days prior to the consummation of the transaction.

3. An Independent Fiduciary will be appointed by JHMLIC or an

Affiliate to represent the interests of the ERISA-Covered Plans as

follows:

(a) Where the proposed transaction involves an ERISA-Covered Plan

(including a Pooled Separate Account or Partnership holding ``plan

assets'' subject to the Act) 5 and a Non-ERISA Plan or other

Non-ERISA Customer, an Independent Fiduciary will be appointed to

represent the ERISA-Covered Plan (or Pooled Separate Account or

Partnership), whether that Account or Partnership is the buyer or the

seller of a timber property in the proposed transaction;

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\5\ See 29 CFR 2510.3-101 for the Department's definition of

``plan assets'' relating to plan investments.

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(b) Where the proposed transaction involves two ERISA-Covered Plans

(or Pooled Separate Accounts or Partnerships holding ``plan assets''

subject to the Act) and the decision to liquidate the timber property

is the result of one or more ``triggering events'' described below, an

Independent Fiduciary will be appointed by JHMLIC or an Affiliate to

represent the purchasing plan (or Pooled Separate Account or

Partnership)--i.e. the Buying Account or Buying Partnership. A

``triggering event'' will exist whenever:

(i) JHMLIC or an Affiliate receives a direction from the Customer

to liquidate

[[Page 35285]]

all of the Customer's Account or interest in a Partnership;

(ii) JHMLIC or an Affiliate receives a request by the Customer to

liquidate a specified timber property; or

(iii) A liquidation of all of the assets held in the Selling

Account or Selling Partnership, or a particular property held by such

Account or Partnership, is required under the terms of the investment

contract, insurance contract or investment guidelines governing the

Account or Partnership, and the decision to select any particular

timber property to be sold is outside of the control of JHMLIC and its

Affiliates; and

(c) Where the proposed transaction involves two ERISA-Covered Plans

(or Pooled Separate Accounts or Partnerships holding ``plan assets''

subject to the Act) and there is no ``triggering event'' as described

above in Condition 3(b), an Independent Fiduciary will be appointed by

JHMLIC or an Affiliate for each Account or Partnership involved in the

transaction.

4. With respect to each transaction requiring the participation of

an Independent Fiduciary (as described in Condition 3 above), the

purchase and sale of a timber property shall not be consummated unless

the Independent Fiduciary determines that the transaction, including

the price to be paid or received for the property, would be in the best

interest of the particular Account or Partnership involved based on the

investment policies and objectives of such Account or Partnership.

5. Each Account or Partnership which buys or sells a particular

timber property pays no more than or receives no less than the fair

market value of the timber property at the time of the transaction, as

determined by a qualified independent real estate appraiser experienced

with the valuation of timber properties similar to the type involved in

the transaction.

6. Each purchase or sale of a timber property between the Accounts

or Partnerships is a one-time transaction for cash.

7. Each Account or Partnership involved in the purchase or sale of

a timber property pays no real estate commissions or brokerage fees

relating to the transaction.

8. JHMLIC or an Affiliate acts as a discretionary investment

manager for the assets of the Accounts or Partnerships involved in each

transaction.

9. No purchase or sale transaction is designed to benefit the

interests of one particular Account or Partnership over another.

10. For purposes of this proposed exemption:

(a) ``Account'' means a Separate Account as defined below,

including a ``Non-Pooled Separate Account'' or a ``Pooled Separate

Account'';

(b) ``Partnership'' means a limited partnership with assets, that

may or may not be considered ``plan assets'' subject to the Act, for

which JHTRC or another Affiliate of JHMLIC is the general partner and

HNRG or another Affiliate of JHMLIC serves as investment manager;

(c) ``ERISA-Covered Plan'' is an employee benefit plan as defined

under section 3(3) of the Act;

(d) ``Non-ERISA Plan'' or ``Non-ERISA Customer'' means an entity or

investor not covered by the provisions of Title I of the Act, such as a

governmental plan, a university endowment fund, a charitable foundation

fund or other institutional investor, whose assets are managed in an

Account or Partnership for which JHMLIC or an Affiliate acts as

investment manager;

(e) ``Affiliate'' means any person directly or indirectly through

one or more intermediaries, controlling, controlled by, or under common

control with JHMLIC;

(f) ``Buying Account'' or ``Buying Partnership'' means the Account

or Partnership which seeks to purchase timber properties from another

Account or Partnership;

(g) ``Selling Account'' or ``Selling Partnership'' means the

Account or Partnership which seeks to sell timber properties to another

Account or Partnership;

(h) ``Independent Fiduciary'' means a person or entity with

authority to both review the appropriateness of the proposed

transaction for an Account or Partnership, that is considered to hold

``plan assets'' subject to the fiduciary responsibility provisions of

the Act, based on the investment policy established for that Account or

Partnership, and to negotiate the terms of the transaction, including

the price to be paid for the timber property. An individual or firm

selected to serve as an Independent Fiduciary shall meet the following

criteria:

(1) The individual or firm may have no current employment

relationship with John Hancock or an Affiliate, although a prior

employment relationship would not disqualify the individual or firm;

(2) The individual or firm must not have received more than five

(5) percent of its annual gross receipts during the preceding calendar

year from business with John Hancock and its Affiliates;

(3) The individual or individuals in the firm must have an

undergraduate or graduate academic degree in forestry;

(4) The individual or individuals in the firm must have a minimum

of five (5) years experience and a demonstrated proficiency in

timberland appraisal work;

(5) The individual or individuals in the firm must have a current

certification as a Member of the Appraisal Institute, a Senior Real

Estate Analyst under the Society of Real Estate Appraisers, or a

similar nationally recognized certification;

(6) The individual or firm must have the ability to access

appropriate timberland sales comparison data and make appropriate

adjustments to the subject property; and

(7) The individual or firm must not have a criminal record

involving fraud, fiduciary standards, or securities laws violations;

(i) ``Separate Account'' means a segregated asset Account which

receives premiums or contributions from customers, including employee

benefit plans subject to the Act, in connection with group annuity

contracts and funding agreements, with investments held in the name of

JHMLIC, but where the value of the contract or agreement to the

Customer (contractholder) fluctuates with the value of the investment

associated with such Account;

(j) ``Non-Pooled Separate Account'' or ``Non-Pooled Account'' means

a Separate Account established to back a single contract issued to one

Customer, which may be an employee benefit plan subject to the Act;

(k) ``Pooled Separate Account'' or ``Pooled Account'' means a

Separate Account established to back a group of substantially identical

contracts issued to a number of unrelated Customers, including employee

benefits plans subject to the Act; and

(l) ``Customer'' means a person or entity that acts as the

authorized representative for an Account or Partnership involved in a

proposed purchase or sale of timber properties, that is independent of

JHMLIC and its Affiliates.

Summary of Facts and Representations

1. The Applicants. The applicant for the exemption is John Hancock

Mutual Life Insurance Company of Massachusetts (JHMLIC or ``John

Hancock'') on behalf of itself and on behalf of its indirect wholly-

owned subsidiaries, Hancock Natural Resource Group, Inc. (HNRG) and

John Hancock Timber Resource Corporation (JHTRC), both Delaware

corporations.

[[Page 35286]]

John Hancock ranks as one of the largest insurance companies in the

United States and is a registered investment advisor. John Hancock and

its subsidiaries had total assets of approximately $58.6 billion as of

December 31, 1996, and assets under management of approximately $107

billion as of that date.

John Hancock offers group annuity contracts and funding agreements

to Customers, including employee benefit plans subject to the Act.

Certain of these contracts and agreements provide that, in accordance

with contractholder direction, the premiums or contributions received

from the contractholder will be allocated internally on the books of

John Hancock to segregated asset accounts or ``Separate Accounts.'' The

Separate Account investments are held in John Hancock's name, but the

value of the contract or agreement to the contractholder fluctuates

with the value of the investments associated with the Separate Account.

The direct expenses of managing the investments and John Hancock's fees

are charged against the value of the Separate Account.

Separate Accounts may be established to back a single contract

issued to one customer (a ``Non-Pooled Separate Account''). In

addition, a Separate Account may be established to back a group of

substantially identical contracts issued to a number of unrelated

customers (a ``Pooled Separate Account'').

2. John Hancock currently maintains a number of Separate Accounts

that invest almost exclusively in timberland. These Pooled and Non-

Pooled Separate Accounts are known as the ForesTree Separate Accounts.

The contractholders of both the pooled and non-pooled ForesTree

Separate Accounts include both ERISA-covered plans and non-ERISA

governmental plans. As of July 1997, John Hancock had established a

total of 14 such pooled and non-pooled ForesTree Separate Accounts in

which 32 contractholders participate. Currently, over two million acres

of timberland are allocated to the ForesTree Separate Accounts, and

these properties have a fair market value in excess of $2.3 billion.

Under the applicable contract or agreement, John Hancock has the

right to control, manage and administer each Separate Account,

including the sole discretion to select and dispose of investments in

accordance with the investment policy established for the Account.

3. John Hancock's management responsibilities under the ForesTree

Separate Accounts are performed mostly by its wholly-owned subsidiary,

HNRG, which was established in 1995. Prior to its incorporation in

1995, HNRG functioned as a division within John Hancock. HNRG currently

manages 2.5 million acres of timberland valued at approximately $2.87

billion. HNRG's managed assets include assets held in the ForesTree

Separate Accounts as well as assets managed through other arrangements.

HNRG is responsible for all decisions regarding the acquisition and

disposition of timberland properties held in the ForesTree Separate

Accounts, although such decisions must be reviewed and approved by John

Hancock's internal investment committees. HNRG also has sole

responsibility for the management of John Hancock's timberland

properties, including site preparation and reforestation, road building

and construction, maintenance, acquisition of insurance and payment of

taxes. On-site work is performed by independent forest managers under

contract to HNRG.

4. Assets invested in the ForesTree Separate Accounts are managed

by John Hancock and HNRG in accordance with the investment policies

established for the Accounts. The investment policy for each Non-Pooled

Account is established jointly by John Hancock and the contractholder.

For each of the Pooled Accounts, the investment policy is established

by John Hancock and adopted by each contractholder when it chooses to

participate in a Pooled Account. Under the investment policy of most of

the ForesTree Separate Accounts, timberland properties are purchased or

sold opportunistically to favor the return of the particular portfolio.

However, John Hancock states that as a practical matter the properties

allocated to the ForesTree Separate Accounts are fairly illiquid

investments, and are considered by its customers to be long-term

investments.

HNRG has established certain guidelines that are followed as

investments are acquired and allocated to timberland portfolios it

manages, including those portfolios for Accounts holding ``plan

assets'' subject to the Act such as the ForesTree Separate Accounts.

The goal of these guidelines is to enable HNRG to provide its clients

with access to a variety of timberland acquisitions through a fair,

consistent and unbiased process. The central element of the procedure

is a determination of the suitability of an investment for a portfolio.

In the event that an investment is suitable for more than one

portfolio, priorities are set in accordance with an investment queue

procedure.

HNRG states that the first step in determining portfolio

suitability is to identify all potential funding sources for a pending

acquisition among its existing clients. Each prospective participating

Account is evaluated independently. The client's investment policy,

setting forth specific objectives and constraints, is the primary

determinant of whether or not a particular acquisition is suitable for

allocation to the Account. The portfolio ``fit'' is based on financial

analysis that projects and measures future portfolio performance,

including and excluding the pending acquisition, against established

performance targets. Performance targets may include total return,

appreciation and income. Different levels of investment in the pending

acquisition are reviewed. Consideration is given to diversification by

geographic region, timber markets and timber species. The proposed

investment is analyzed to determine if it can be broken into

appropriate parcels to fit the client portfolio's needs. Portfolio

investment recommendations are intended to be consistent with the

standards defined by the Association for Investment Management and

Research (AIMR), a professional association which has adopted certain

standards for best practices by investment managers.

The amount of funding available for any potential acquisition is

determined after the portfolio suitability analysis has been completed.

As a result, HNRG states that when it comes to funding an acquisition,

one of the following three situations will exist: (i) The acquisition

will be undersubscribed (i.e. there are not enough funds available to

acquire the investment); (ii) the acquisition is fully subscribed (i.e.

there are ample funds available to acquire the investment), or (iii)

the acquisition is oversubscribed (i.e. client portfolio funding

availability exceeds the amount needed to fund the acquisition).

The ``investment queue'' sets the priorities for utilizing funds

from existing client Accounts in the event an investment is suitable

for more than one client's portfolio. The ``investment queue'' is based

on the source of available client funds with the following order of

priority:

(a) Client funds committed to timber property acquisitions, but

unallocated;

(b) Timberland disposition proceeds designated for reinvestment;

(c) Cash flow from operations; and

(d) Contingent funds.

Within each of the four categories of available funds, the length

of time that the funds have been available for investment will

determine the level of priority. For example, funds that have

[[Page 35287]]

been committed to an HNRG timberland investment program, but are

unallocated, will receive priority between clients in the chronological

order of when each commitment was established.

5. Customers that want to use John Hancock's timber management

expertise typically invest in the ForesTree Separate Accounts. These

customers include both ERISA-covered plans and non-ERISA plans.

Customers may also invest directly in Partnerships that own timber

properties. In these cases, JHTRC is usually appointed the general

partner of the Partnership holding the property and HNRG serves as

investment manager of the Partnership. These management

responsibilities are exercised in accordance with the investment

guidelines contained in the partnership agreements, which contain

HNRG's investment selection and allocation policy procedures (as

described in Paragraph 4 above).

For purposes of this proposed exemption, both ForesTree Separate

Account contractholders and John Hancock's investment management

clients who directly invest in Partnerships holding timber properties,

including ERISA-Covered Plans, are referred to as ``Customers'.

The Transactions

6. The Applicants state that occasions may arise when it is

appropriate to liquidate timber property held in an Account or

Partnership, even though the property remains an attractive investment.

For example, a Customer's timber investments may have so increased in

value from its initial investment that the timber-related portion of

the Customer's aggregate portfolio exceeds the Customer's current asset

allocation guidelines for that investment class. In addition, a

Customer may request that John Hancock liquidate a portion of its

timber portfolio in order to recognize some of the portfolio's gains,

even though the particular timber parcel remains an attractive

investment. John Hancock may also conclude that a particular timber

parcel, through individually an attractive investment, is no longer

appropriate for the Customer's Account, in light of the composition of

the Account, its liquidity needs and other available investment

opportunities.

The Applicants state that in these and other situations in which

timber parcels might be sold, the parcels chosen for liquidation could

be appropriate investments for other Customers. Under the proposed

exemption, John Hancock could satisfy the objectives of a Selling

Account or Selling Partnership and a Buying Account or Buying

Partnership in a manner that provides advantages to both sides of the

transaction. Therefore, John Hancock requests an exemption that would

permit it (and its Affiliates) to transfer timber parcels between its

Customer Accounts and Partnerships under certain conditions and

procedures described herein.

7. If John Hancock determines that it should liquidate any

timberland assets held in a Customer's Account or Partnership, or if as

the result of certain ``triggering events'' described below such a

liquidation must occur, and John Hancock concludes that a particular

parcel of timberland to be sold is an appropriate investment for the

portfolio of another Account or Partnership, John Hancock will engage

independent fiduciaries (the I/Fs) to represent the interests of any

ERISA-Covered Plans involved.

Under the procedures described by the Applicants, an I/F will be

appointed by JHMLIC or an Affiliate to represent the interests of the

ERISA-Covered Plans as follows:

(a) Where the proposed transaction involves an ERISA-Covered Plan

(including a Pooled Separate Account or Partnership holding ``plan

assets'' subject to the Act) and a Non-ERISA Plan or other Non-ERISA

Customer, an I/F will be appointed to represent the ERISA-Covered Plan

(or Pooled Separate Account or Partnership), whether that Account or

Partnership is the buyer or the seller of a timber property in the

proposed transaction.

(b) Where the proposed transaction involves two ERISA-Covered Plans

(or Pooled Separate Accounts or Partnerships holding ``plan assets''

subject to the Act) and the decision to liquidate the timber property

is the result of one or more ``triggering events'' described below, an

I/F will be appointed by JHMLIC or an Affiliate to represent the

purchasing plan (or Pooled Separate Account or Partnership)--i.e. the

Buying Account or Buying Partnership. A ``triggering event'' will exist

whenever:

(i) JHMLIC or an Affiliate receives a direction from the Customer

to liquidate all of the Customer's Account or interest in a

Partnership;

(ii) JHMLIC or an Affiliate receives a request by the Customer to

liquidate a specified timber property; or

(iii) A liquidation of all of the assets held in the Selling

Account or Selling Partnership, or a particular timber property held by

such Account or Partnership, is required under the terms of the

investment contract, insurance contract or investment guidelines

governing the Account or Partnership, and the decision to select any

particular property to be sold is outside the control of JHMLIC and its

Affiliates.

(c) Where the proposed transaction involves two ERISA-Covered Plans

(or Pooled Separate Accounts or Partnerships holding ``plan assets''

subject to the Act) and there is no ``triggering event'', an I/F will

be appointed by JHMLIC or an Affiliate for each Account or Partnership

involved in the transaction.

With respect to each transaction requiring the participation of an

I/F, the purchase and sale of a timber property shall not be

consummated unless the I/F determines that the transaction, including

the price to be paid or received for the property, would be in the best

interest of the particular Account or Partnership involved based on the

investment policies and objectives of such Account or Partnership. The

I/F will have the authority both to review the appropriateness of the

proposed purchase or sale in light of the Customer's investment policy

and to negotiate the terms of the transaction, including the price to

be paid for the property and the allocation of the transaction cost

savings to the buyer and seller.6 The I/F will always be

provided with a recent appraisal of the timber property obtained by

HNRG from a qualified independent real estate appraiser experienced

with the valuation of timber properties similar to the type involved in

the transaction. Under the conditions of this proposed exemption, each

Account or Partnership which buys or sells a particular timber property

must pay no more than or receive no less than the fair market value of

the timber property at the time of the transaction, as determined by an

independent qualified real estate appraiser.

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\6\ The Applicants state that generally all of the transaction

expenses for the buyer and the seller would be saved. However, to

the extent that there are any expenses that cannot be avoided, such

expenses would be negotiated between the independent fiduciary and

John Hancock, or a second independent fiduciary, as the case may be.

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8. An individual or firm selected to serve as an I/F would be

required to meet the following criteria:

(a) The individual or firm may have no current employment

relationship with John Hancock or an Affiliate, although a prior

employment relationship would not disqualify the individual or firm;

(b) The individual or firm must not have received more than five

(5) percent of its annual gross receipts during the preceding calendar

year from business with John Hancock and its Affiliates;

[[Page 35288]]

(c) The individual or individuals in the firm must have an

undergraduate or graduate academic degree in forestry;

(d) The individual or individuals in the firm must have a minimum

of five (5) years experience and a demonstrated proficiency in

timberland appraisal work;

(e) The individual or individuals in the firm must have a current

certification as a Member of the Appraisal Institute, a Senior Real

Estate Analyst under the Society of Real Estate Appraisers, or a

similar nationally recognized certification;

(f) The individual or firm must have the ability to access

appropriate timberland sales comparison data and make appropriate

adjustments to the subject property; and

(g) The individual or firm must not have a criminal record

involving fraud, fiduciary standards, or securities laws violations.

In addition to the appointment of an I/F, the Applicants state that

at least 30 days prior to any transaction, each affected Customer

involved with the Accounts or Partnerships participating in the

transaction will be provided with information regarding the timber

properties involved and the terms of the transaction, including the

purchase price and how the transaction would meet the goals and

investment policies of the Customer. John Hancock will provide an

additional notice to Customers should the price of a timber property

change following the initial notice. The transaction will not be

consummated until 30 days after the second notice has been provided.

Any Customer that is an ERISA-Covered Plan will be responsible for

monitoring the performance of John Hancock and its Affiliates as well

as the I/F, when an I/F is required, to ensure that the conditions of

this proposed exemption are met. The Applicants state that all ERISA-

Covered Plans will be large plans with sophisticated fiduciaries

capable of monitoring the performance of the parties in the proposed

transaction. Under the conditions of this proposed exemption, ERISA-

Covered Plans may participate in the proposed transactions only if they

have total assets in excess of $100 million.

Justification for Transactions

9. The Applicants represent that the transfer of timber properties

from one Account or Partnership to another will have a number of

advantages to both the Buying Account or Partnership and the Selling

Account or Partnership.

First, when the transfer is between two of John Hancock's ForesTree

Separate Accounts, it will not require the transfer of legal ownership

of the property. John Hancock has legal title to all assets allocated

to its Separate Accounts and may reallocate these assets among Separate

Accounts without a change in legal title. This means that significant

transaction costs can be avoided, including real property transfer

taxes, title insurance policy costs, closing and recording costs and,

where required, phase one environmental audits.7 In

addition, each Account or Partnership involved in the purchase or sale

of a timber property would not pay any real estate commissions or

brokerage fees for the transaction. The allocation of any remaining

transaction costs would be negotiated between the buyer and the seller

for each transaction. Under the transactions that would be covered by

this proposed exemption, the I/Fs would be responsible for negotiating

the allocation of any remaining transaction costs for the Accounts or

Partnerships for which they are acting.

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\7\ For example, in a transaction between Lyons Falls Pulp &

Paper, Inc., as seller, and a JHMLIC Non-Pooled Separate Account, as

buyer, which involved 67,430 acres of timberland that was sold to

the Account for approximately $12.1 million on February 14, 1996,

the total transaction costs involved more than 7.15 percent of the

acquisition price or over $865,150 ($12,100,000 x .0715). This

figure excludes the New York State Gains Tax of over $1,000,000 that

was incurred by the seller.

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Second, a transfer of timber properties between the Accounts or

Partnerships will often allow a Buying Account or Partnership to invest

its assets more quickly and in properties that might not otherwise be

available to them. John Hancock believes that investors commit to

establishing a timberland investment portfolio because they have

identified a current need for such an asset category. Therefore, John

Hancock states that once a Customer has committed to a ForesTree

Separate Account or to a Partnership, it is important to the Customer

to invest its funds as rapidly as is prudent. However, attractive

timber properties are relatively scarce, and allowing a transfer of

timber parcels in accordance with this proposed exemption would provide

an opportunity for the purchasing Customers to invest funds more

rapidly than would be possible if the purchase involved a seller having

no relationship to John Hancock.

Third, the Applicants represent that because HNRG is the manager of

the Selling Account's or Partnership's timber property, much more

information about the property would be available to a Buying Account

or Partnership than would be if the property were not managed by HNRG.

John Hancock states that this situation reduces the risk to its

purchasing Customers. In addition, because HNRG is already familiar

with the timber property, the Buying Account or Partnership would avoid

certain expenses normally associated with the purchase of a new

property. These ``start-up'' expenses include the costs of lot

management plan development, aerial photographs and geographical

information systems (GIS) mapping.

Finally, each purchase and sale of a timber property between the

Accounts and/or Partnerships will be a one-time transaction for cash.

No purchase or sale transaction will be designed to benefit the

interests one particular Account or Partnership over another.

10. In summary, John Hancock represents that the proposed

transactions will meet the statutory criteria of section 408(a) of the

Act because: (a) Each purchase or sale of a timber property between the

Accounts or Partnerships will be a one-time transaction for cash; (b)

each affected Customer involved with the Accounts or Partnerships

participating in the transaction will be provided with information, at

least 30 days prior to the proposed transaction, regarding the timber

properties involved and the terms of the transaction, including the

purchase price and how the transaction would meet the goals and

investment policies of the Customer; (c) an I/F will be appointed by

JHMLIC or an Affiliate to represent the interests of the ERISA-Covered

Plans in the proposed transaction, unless the decision to liquidate a

timber property from a Selling Account or Selling Partnership is the

result of one or more ``triggering events'; (d) in a transaction where

an I/F is involved, the purchase or sale of the timber property shall

not be consummated unless the I/F determines that the transaction,

including the price to be paid or received for the property, would be

in the best interest of the particular Account or Partnership involved

based on the investment policies and objectives of such Account or

Partnership; (e) each Account or Partnership which buys or sells a

particular timber property will pay no more than or will receive no

less than the fair market value of the timber property at the time of

the transaction, as determined by an independent qualified real estate

appraiser; (f) each Account or Partnership involved in the purchase or

sale of a timber property will pay no real estate commissions or

brokerage fees relating to the transaction; (g) no purchase or sale

transaction will be designed to benefit the interests one particular

Account or

[[Page 35289]]

Partnership over another; and (h) ERISA-Covered Plans will be able to

participate in the proposed transactions only if they have total assets

in excess of $100 million.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the

Department, telephone (202) 219-8194. (This is not a toll-free number.)

ACRA Local 725 Health & Welfare Fund (the Welfare Plan) and ACRA Local

725 Pension Fund (the Pension Plan; together, the Plans) Located in

Macon, Georgia

[Application Nos. L-10536 and D-10537]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and in accordance with the

procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,

32847, August 10, 1990). If the exemption is granted, the restrictions

of section 406(b)(2) of the Act shall not apply to the proposed payment

of interest by the Pension Plan to the Welfare Plan on past mistaken

contributions (the Mistaken Contributions) pursuant to an

indemnification agreement by the Board of Trustees of the Pension Plan

with respect to the Mistaken Contributions, provided the following

conditions are satisfied: (a) The Mistaken Contributions occurred as a

result of an inadvertent clerical error committed by the Plans'

independent third party administrator; (b) the principal amount of the

Mistaken Contributions was repaid as soon as the error was discovered;

and (c) the amount of interest to be paid to the Welfare Plan by the

Pension Plan has been determined by a third party bank to be the fair

market rate of interest.

Summary of Facts and Representations

1. The Welfare Plan is the ACRA Local 725 Health & Welfare Fund of

Dade, Broward and Monroe Counties, Florida, and the Pension Plan is the

ACRA Local 725 Pension Fund of Dade, Broward and Monroe Counties,

Florida. Each Plan is maintained pursuant to Collective Bargaining

Agreements between Air Conditioning Refrigeration Associates, an

employer association representing various employers (the Employers),

and United Association Local Union Number 725 (the Union), an employee

organization whose members are covered by the Plan. The Union

represents individuals who perform, as employees of the Employers,

construction and service work in the air conditioning and pipe trades.

The Welfare Plan provides health and welfare benefits to

participant employees and their families. It is funded solely by

Employer contributions and earnings thereon. The Welfare Plan has been

in existence since 1961. As of April 30, 1997, the Welfare Plan had 674

participants, and approximately $4,275,000 in assets.

The Pension Plan provides retirement and certain disability

benefits to Plan participants and survivor benefits to spouses and/or

other beneficiaries that may be designated by the participant in

accordance with the Plan's procedures. The Pension Plan has been in

existence since 1962. As of April 30, 1997 the Pension Plan had 1,633

participants and assets of approximately $56,100,000.

2. The Board of Trustees of each Plan, all of whom are individuals

who serve in that capacity for both Plans, had for a period of several

years retained the services of Consolidated Benefit Services, Inc. of

Atlanta, Georgia (Consolidated) to serve as administrative manager (the

Administrator) for the Plans. Employer contributions are made to the

Pension Plan and the Welfare Plan as well as other trust funds and

entities to which contributions are required to be paid pursuant to the

Collective Bargaining Agreement between the Employers and the Union.

These contributions are collected and deposited in an escrow account

(the Escrow) under the supervision of the Administrator. The purpose of

the Escrow is to receive and deposit Employer contributions, allow for

clearance of checks and record each Employer contribution to the Plans

in a timely fashion. Sums received by the Escrow are then allocated to

the appropriate accounts. Thus, the appropriate amount of contributions

due to the Welfare Plan are normally allocated and paid to the Welfare

Plan accounts, and the appropriate amount of contributions due to the

Pension Plan are normally allocated and paid to the Pension Plan

accounts.

3. In approximately September, 1996, the Board of Trustees of each

Plan was advised that the parent corporation of Consolidated,

Harrington Benefit Corporation (Harrington), which was also the parent

corporation of American Benefit Plan Administrators, Inc. (ABPA), had

been acquired by Health Services, Inc. (Health Services), a public

company. After the acquisition of Harrington by Health Services, all

administrative record-keeping for the Plans was transferred from the

Atlanta office of Consolidated to the Dallas office of ABPA.

4. In August 1997, the independent accountant for the Plans (the

Auditor), in the course of conducting a routine annual audit,

discovered that in November 1996, ABPA, as the Administrator for the

Plans, withdrew from the Escrow and transferred to the accounts of the

Pension Plan, sums which were in excess of the proper contributions

allocated to the Pension Plan by the Employers. This excess payment

created a shortfall in the proper contributions to the Welfare Plan.

This process continued to occur in subsequent months.8 For

purposes of this proposed exemption, all excess amounts of money

erroneously allocated to the Pension Plan during this period of time

are described herein as ``the Mistaken Contributions''. The applicant

represents that payments from the Escrow to the Pension Plan were

utilized by ABPA to pay current disbursements by the Pension Plan,

including such items as current pension benefits and ongoing

operational expenses. Nonetheless, all financial reports from ABPA to

the Trustees of each Plan erroneously reflected the proper

contributions being allocated to the Pension Plan and the Welfare Plan.

These erroneous financial reports, rather than documentation showing

the actual amounts transferred to the Pension Plan, were delivered to

the respective Boards of Trustees. Accordingly, the Boards of Trustees

of the Plans were not aware of the fact that sums of money were being

allocated erroneously to the Pension Plan from the Escrow. The Trustees

were notified by the Auditor in late August, 1997. At that time,

immediate instructions were made to correct the Mistaken Contributions.

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\8\ In this regard, the Department notes that section 404(a) of

the Act requires, among other things, that a fiduciary discharge his

duties with respect to a plan solely in the interest of the

participants and beneficiaries and with the care, skill, prudence

and diligence under the circumstances then prevailing that a prudent

man acting in a like capacity and familiar with such matters would

use in the conduct of an enterprise of a like character and with

like aims. With respect to the actions and omissions of ABPA, the

Department notes that no relief would be provided under the proposed

exemption for any violation of the general fiduciary provisions of

Part 4 of Title I of the Act.

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5. On October 29, 1997, all excess sums paid erroneously to the

Pension Plan were repaid to the Welfare Plan. The period of delay

between the time of discovery of the error (i.e., August, 1997) and its

correction was the time required by the Auditor to accurately

investigate and calculate the amount necessary to correct the error.

The total amount of the Mistaken Contributions was $796,983.29. This

amount represented approximately 18.6% of the Welfare Plan's assets and

1.4% of the Pension Plan's assets.

[[Page 35290]]

6. The applicants represent that since the Mistaken Contributions

were the result of unintended erroneous allocations by the

Administrator of contributions by the Employers, they may be considered

to come within section 403(c)(2)(A)(ii) of the Act, which would permit

the return of the contributions within 6 months after the plan

administrator discovered that the contributions were made by a mistake

of fact or law.9 As a result, the applicants are not seeking

an exemption for the Mistaken Contributions or the repayment of their

principal amount. Rather, the applicants are requesting an exemption

merely for the proposed payment of interest by the Pension Plan to the

Welfare Plan in connection with the treatment of these transactions as

``Mistaken Contributions'' in order to make the Welfare Plan ``whole''

for the Pension Plan's use of the money that was erroneously allocated

by ABPA from the Escrow to the Pension Plan.

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\9\ The Department expresses no opinion in this proposed

exemption as to whether the contributions are subject to section

403(c)(2)(A)(ii) of the Act.

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

7. In addition to the Pension Plan's repayment of the principal

amount of the Mistaken Contributions to the Welfare Plan, the Board of

Trustees of the Pension Plan now proposes to pay interest to the

Welfare Plan pursuant to an indemnification agreement (the

Indemnification) with the Board of Trustees of the Welfare Plan. The

Indemnification consists of an agreement to pay a reasonable rate of

interest on the total amount of the Mistaken Contributions to reimburse

the Welfare Plan for lost income. The interest rate to be paid by the

Pension Plan will be established as a fair market rate by an

independent bank. The Liberty Bank (the Bank) in Macon, Georgia, was

contacted for the purpose of establishing such a market rate. The Bank

is an independent bank which has no other relationship with the Plans.

The Bank represents that an appropriate rate for such Mistaken

Contributions would be 8.25 to 8.5% per annum. Accordingly, the

Trustees of both Plans have agreed to utilize the rate of 8.5% per

annum to reimburse the Welfare Plan for losses relating to the period

of time it was denied access to the assets (i.e., $796,983.29).

8. The applicants represent that the Trustees of the Plans have

repeatedly requested ABPA to provide a written explanation of the

manner in which the Mistaken Contributions occurred, but ABPA has

failed to provide any response. Due to dissatisfaction with ABPA's

performance, the Trustees terminated ABPA's services effective August

31, 1997, and appointed a new administrative manager, Core Management

Resources, Inc., of Macon, Georgia.

9. The applicants represent that no participant in either Plan

experienced any reduction, deferment or delay in receipt of any benefit

due from either Plan as a result of the errors. All benefits and

expenses of each Plan were paid in a timely fashion by each respective

Plan in the ordinary course of its business.

10. In summary, the applicants represent that the subject

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

Act because: (a) The Mistaken Contributions were inadvertent transfers

that occurred solely through the errors of the Plans' independent third

party administrator, ABPA; (b) the Pension Plan repaid the principal

amount of the Mistaken Contributions to the Welfare Plan as soon as

possible after the error was discovered and properly calculated by the

Auditor; (c) the amount of interest to be paid to the Welfare Plan on

the Mistaken Contributions has been determined by an independent bank

(i.e., the Bank) as a fair market rate of interest to reimburse the

Welfare Plan for losses relating to the period of time it was denied

access to the assets erroneously allocated to the Pension Plan; and (d)

no participant in either the Welfare Plan or the Pension Plan

experienced any reduction, deferment or delay in receipt of any benefit

due from the Plan as a result of the transactions.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the

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

William M. Hitchcock SERP (DB) (the Plan) Located in Houston, Texas

[Application No. D-10605]

Proposed Exemption

The Department is considering granting an exemption under the

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

procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,

32847, August 10, 1990). If the exemption is granted, the sanctions

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

of section 4975(c)(1)(A) through (E) of the Code, shall not apply to

the proposed sale by the Plan of 67,466 shares of stock (the Stock) in

Thoratec Laboratories, Inc. (Thoratec) to William M. Hitchcock (Mr.

Hitchcock), a disqualified person with respect to the Plan, provided

the following conditions are satisfied: (a) The sale is a one-time

transaction for cash; (b) the Plan pays no sales commissions or other

expenses in connection with the transaction; (c) the Plan receives the

fair market value of the Stock, as determined by reference to its most

current listed price on the National Association of Securities Dealers

Automated Quotation National Market System (NASDAQ) at the time of the

transaction; and (d) Mr. Hitchcock is the only Plan participant to be

affected by the transaction, and he desires that the transaction be

consummated.10

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\10\ Since Mr. Hitchcock is the sole owner of the Plan sponsor

and the only participant in the Plan, there is no jurisdiction under

Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is

jurisdiction under Title II of the Act pursuant to section 4975 of

the Code.

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Summary of Facts and Representations

1. The Plan is a defined benefit self-employed retirement plan with

one participant, Mr. Hitchcock, who is the sole owner of the Plan

sponsor. The Plan sponsor is a sole proprietorship which is engaged in

the business of consulting. Mr. Hitchcock is also the Plan's trustee.

As of March 18, 1998, the Plan had $468,873 in total assets.

2. On February 14, 1994, the Plan purchased 2,400 shares of the

Stock at a price of $2.03 per share (i.e., for a total of $4,872). On

April 5, 1995, the Plan purchased 200,000 shares of the Stock at a

price of $1.30 per share (i.e., for a total of $260,000). On June 10,

1996, the Stock underwent a reverse stock split of 1/3 and, as a

result, the Plan currently holds 67,466 shares of the Stock. Mr.

Hitchcock is a director of Thoratec, and together he and the Plan own

1.8% of Thoratec.11 The Stock currently constitutes

approximately 93% of the Plan's assets.12 The Stock is

publicly traded on the NASDAQ.

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\11\ In this proposed exemption, the Department is expressing no

opinion as to whether the Plan's acquisitions of the Stock

constituted a prohibited transaction under section 4975 of the Code,

nor is the Department herein proposing relief for any prohibited

transaction which may have occurred as a result of such acquisitions

of the Stock by the Plan. However, the purchases and holding of the

Stock by the Plan raise questions under section 4975(c)(1)(D) and

(E) of the Code. Section 4975(c)(1)(D) and (E) of the Code prohibits

the use by or for the benefit of a disqualified person of the assets

of a plan and prohibits a fiduciary from dealing with the assets of

a plan in his own interest or for his own account. Mr. Hitchcock, as

a director of Thoratec, may have had an interest in the acquisitions

and holding of the Stock which may have affected his best judgment

as a fiduciary of the Plan. In such circumstances, the transactions

may have violated section 4975(c)(1)(D) and (E) of the Code. See

Advisory Opinion 90-20A (June 15, 1990). Accordingly, to the extent

there were violations of section 4975(c)(1)(D) and (E) of the Code

with respect to the purchases and holding of the Stock by the Plan,

the Department is extending no relief for these transactions herein.

\12\ The Department notes that the Internal Revenue Service has

taken the view that if a plan is exposed to the risk of large losses

because of the lack of diversification and the speculative nature of

investments made by the Plan, such an investment strategy may raise

questions in regard to the exclusive benefit rule under section

401(a) of the Code. For example, see Rev. Rul. 73-532, 1973-2 C.B.

128, which states, among other things, that the safeguards and

diversity that a prudent investor would adhere to must be present in

order for the ``exclusive-benefit-of-employees'' requirement to be

met. However, the Department is expressing no opinion in this

proposed exemption regarding whether violations of section 401(a) of

the Code occurred as a result of the Plan's acquisition of

investments that may be speculative in nature, such as the purchase

of the Stock.

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[[Page 35291]]

3. Mr. Hitchcock now proposes to purchase the Stock from the Plan

for cash. No commissions or other expenses will be paid by the Plan in

connection with the sale. The Plan will receive the fair market value

of the Stock, as determined by its most current listed price on the

NASDAQ at the time of the sale. On March 12, 1998, the Stock was

trading at a price of $7.00 per share. Therefore, based upon this per

share trading price, Mr. Hitchcock would have paid the Plan $472,262

for the Stock (67,466 shares times $7.00 per share).

4. Mr. Hitchcock represents that the proposed sale would be

advantageous to the Plan because it would increase the Plan's liquidity

and diversify the Plan's assets. In addition, 66,666 shares of the

Stock owned by the Plan are unregistered and subject to certain sale

restrictions under Rule 144 of the Securities and Exchange Commission

(SEC). The restricted Stock can be disposed of only in a private

placement or in the public market over a period of years under the

timing and volume restrictions of SEC Rule 144. As a result, all of the

Plan's shares of the Stock may not be sold on the open market at the

present time. These shares of the Stock were purchased by the Plan in a

private placement. However, in any sale of the Plan's shares to a third

party in a private placement, the purchaser would probably demand a

significant discount off the NASDAQ listed price in order to acquire

the shares. Therefore, by selling all of the Stock to Mr. Hitchcock for

the most current listed price for each share of the Stock on the

NASDAQ, the Plan will receive a premium for its shares at the time of

the transaction.

5. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 4975(c)(2) of the Code

because: (a) The sale is a one-time transaction for cash; (b) no

commissions or other expenses will be paid by the Plan in connection

with the sale; (c) the Plan will receive the fair market value of the

Stock, as determined by its most current listed price on the NASDAQ at

the time of the sale; and (d) Mr. Hitchcock is the only Plan

participant to be affected by the transaction, and he desires that the

transaction be consummated.

Tax Consequences of the Transaction

The Department of the Treasury has determined that if a transaction

between a qualified employee benefit plan and its sponsoring employer

(or affiliate thereof) results in the plan either paying less than or

receiving more than fair market value, such excess may be considered to

be a contribution by the sponsoring employer to the plan, and therefore

must be examined under the applicable provisions of the Internal

Revenue Code, including sections 401(a)(4), 404 and 415.

Notice to Interested Persons: Since Mr. Hitchcock is the only Plan

participant to be affected by the proposed transaction, the Department

has determined that there is no need to distribute the notice of

proposed exemption to interested persons. Comments and requests for a

hearing are due within 30 days from the date of publication of this

notice of proposed exemption in the Federal Register.

For Further Information Contact: Gary H. Lefkowitz of the

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

General Information

The attention of interested persons is directed to the following:

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

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

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

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

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

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

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

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

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

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

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

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(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 that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 23rd day of June 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 98-17135 Filed 6-26-98; 8:45 am]

BILLING CODE 4510-29-P