Grant of Individual Exemptions; U.S. West, Inc.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 98-51; Exemption Application No. L-

9583, et al.]

Grant of Individual Exemptions; U.S. West, Inc.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of Individual Exemptions.

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SUMMARY: This document contains exemptions issued by the Department of

Labor (the Department) 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).

Notices were published in the Federal Register of the pendency

before the Department of proposals to grant such exemptions. The

notices set forth a summary of facts and representations contained in

each application for exemption and referred interested persons to the

respective applications for a complete statement of the facts and

representations. The applications have been available for public

inspection at the Department in Washington, D.C. The notices also

invited interested persons to submit comments on the requested

exemptions to the Department. In addition the notices stated that any

interested person might submit a written request that a public hearing

be held (where appropriate). The applicants have represented that they

have complied with the requirements of the notification to interested

persons. No public comments and no requests for a hearing, unless

otherwise stated, were received by the Department.

The notices of proposed exemption were issued and the exemptions

are being granted solely by the Department because, 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

[[Page 60399]]

exemptions of the type proposed to the Secretary of Labor.

Statutory Findings

In accordance with section 408(a) of the Act and/or section

4975(c)(2) of the Code and the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon

the entire record, the Department makes the following findings:

(a) The exemptions are administratively feasible;

(b) They are in the interests of the plans and their participants

and beneficiaries; and

(c) They are protective of the rights of the participants and

beneficiaries of the plans.

U S WEST, Inc.; Located in Englewood, Colorado

[Prohibited Transaction Exemption 98-51; Application No. L-9583]

Exemption

Section I--Transactions Involving Contributions In-kind

Effective March 31, 1994, the restrictions of sections

406(a)(1)(E), 407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not

apply to voluntary contributions in-kind by U S WEST, Inc., any

successor to U S WEST, Inc., and/or any affiliates of U S WEST, Inc.

(collectively, U S WEST) of certain shares of publicly traded common

stock of U S WEST (the Stock) and/or any replacement publicly traded

shares of such Stock to certain trusts (the Trusts or Trust) for the

purpose of pre-funding welfare benefits under one or more employee

welfare benefit plans (the Plan or Plans) maintained by U S WEST,

provided that:

(a) The Plan provisions explicitly authorize U S WEST to pre-fund

benefits through in-kind contributions of Stock, and all contributions

of Stock have been and will be made in conformity with such Plan

provisions;

(b) Neither the Plans nor the Trusts have paid nor will pay,

whether in cash or in other property or in a diminution of any funding

obligation of U S WEST, any consideration for Stock contributed in-kind

by U S WEST;

(c) U S WEST has no obligation to pre-fund welfare benefits

provided to participants under any of the Plans, either pursuant to the

plan documents, the terms of any collective bargaining agreement, or

the provisions of the Act;

(d) None of the Plans have ceded, nor will cede, any right to

receive cash contributions from U S WEST;

(e) None of the Plans or Trusts have paid, nor will pay, any

commissions in connection with the contribution in-kind of Stock by U S

WEST; and

(f) Each of the conditions, as set forth below in Section II, have

been satisfied and at all times will be satisfied.

Section II--Conditions

The exemption is conditioned upon the adherence by U S WEST

to the material facts and representations described in the Notice of

Proposed Exemption (the Notice) as modified by this exemption and upon

satisfaction of the following requirements:

(a) All Stock contributed in-kind by U S WEST to any of

the Trusts or acquired by such Trusts, as a result of the

recapitalization of U S WEST, constituted qualifying employer

securities (QES), as defined in section 407(d)(5) of the Act; and all

Stock contributed in-kind in the future and any replacement publicly

traded shares of such Stock will constitute QES;

(b) Stock contributed in-kind by U S WEST or acquired as a result

of the recapitalization of U S WEST has been held in Trusts, which are

qualified under section 501(c)(9) of the Code, and which are

established for the purpose of funding life, sickness, accident, and

other welfare benefits for the participants and beneficiaries of the

Plans, and all Stock contributed in-kind in the future and any

replacement publicly traded shares of such Stock will be held in such

Trusts;

(c) All Stock contributed in-kind by U S WEST to any

Trust or acquired by any Trust as a result of the recapitalization of U

S WEST has been held in a separate account (the Account or Accounts)

under such Trust, and all Stock contributed in-kind in the future and

any replacement publicly traded shares of such Stock will be held in an

Account under such Trust. Such Accounts under a Trust have been and

will be managed by an independent fiduciary ( the I/F), who is an

independent, qualified investment manager, or any successor

independent, qualified investment manager, and who has represented and

will represent the interests of the Plans which are funded by such

Trust for all purposes with respect to the Stock for the duration of

the Trust's holding of any of such Stock;

(d) The I/F of the Accounts in the Trusts which fund any welfare

plan benefits, has accepted Stock from U S WEST, through in-kind

contributions and recapitalization of U S WEST, and will accept Stock,

through future in-kind contributions and through any replacement

publicly traded shares of such Stock, only after such I/F determines at

the time of the transactions that such transactions are feasible, in

the interest of, and protective of participants and beneficiaries of

the Plans funded by such Trusts;

(e) The I/F has had sole responsibility and, at all times, will

have sole responsibility for the ongoing management of the Accounts

under the Trusts which hold the Stock and has taken and will take

whatever action is necessary to protect the rights of the Plans funded

by such Trusts, including but not limited to all decisions regarding

the acceptance of contributions in-kind by U S WEST, the sale or

retention of such Stock, the exercise of voting rights of such Stock,

and any other acquisition or dispositions of such Stock;

(f) Any contributions in-kind of Stock made by U S WEST to any Plan

through any Trust and any acquisitions of Stock in connection with the

recapitalization of U S WEST did not cause immediately after each such

transaction, and in the future any contributions in-kind of Stock and

any replacement publicly traded shares of such Stock will not cause

immediately after each such transaction the aggregate fair market value

of such Stock, plus the fair market value of all qualifying employer

real property (QERP), as defined by section 407(d)(4) of the Act, and

the fair market value of all other QES held by such Plan to exceed 25

percent (25%) of the fair market value of the assets of such Plan as

determined on the date of each such transaction;

(g) The percentage limitations, as set forth above in paragraph (f)

of this Section II, have been and will be applied without regard to

amounts of securities issued by U S WEST that may be held by an

unrelated common or collective trust fund maintained by an independent

manager in which any of the Plans through the Trusts may have invested

or may invest, provided that the fair market value of the securities

issued by U S WEST and held in such unrelated common or collective

trust fund does not exceed 5 percent (5%) of the fair market value of

each such common or collective trust fund; and provided further that

the conditions of Prohibited Transaction Class Exemption 91-38 (PTCE

91-38) 1 are satisfied, including the requirement that the

interests of the Plans in such unrelated common or collective trust

fund does not exceed 10 percent (10%) of the total

[[Page 60400]]

of all assets in such common or collective trust fund;

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\1\ The Notice of Proposed Exemption for exemption application

number D-8414 was published at 56 FR 4856 on February 6, 1991. PTCE

91-38 was granted at 56 FR 31966 on July 12, 1991.

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(h) Nothing in the conditions, as set forth above in paragraph (f)

of this Section II, shall preclude, the holding by any Plan of Stock,

any other QES and QERP, in amounts in excess of 25 percent (25%) of the

assets of such Plan, if the aggregate fair market value of such Stock,

other QES and QERP exceeds 25 percent (25%) of the value of the assets

of such Plan solely by reason of:

(1) A greater rate of appreciation to the value of such Stock,

other QES and QERP relative to the rate of appreciation to the value of

the assets in such Plan, other than the Stock, other QES and QERP; or

(2) A greater decline in the value of the other assets of the Plan

relative to that of such Stock, other QES and QERP;

(i) None of the assets of any of the Trusts have reverted, nor at

any time will any of the assets of such Trusts revert to the use or

benefit of U S WEST.

EFFECTIVE DATE: The exemption is effective as of March 31, 1994.

Written Comments

In the Notice, the Department invited all interested persons to

submit written comments and requests for a hearing on the proposed

exemption within ninety (90) days of the date of the publication of the

Notice in the Federal Register on March 31, 1998. All comments and

requests for hearing were due by June 29, 1998.

During the comment period, the Department received two (2) requests

for a hearing. The Department has taken into consideration the concerns

expressed by the individuals who requested a hearing. After a review of

these concerns, the Department does not believe that any issues have

been raised which would require the convening of a hearing.

The Department received letters from thirty-five (35) interested

persons commenting on the subject transaction. At the close of the

comment period, the Department forwarded copies of these letters to the

applicant and requested that the applicant address in writing the

various concerns raised by the commentators. Most of the comments fell

into broad categories that the applicant responded to generally. Where

a single commentator raised a specific issue, such issue was responded

to individually. A description of the comments and the applicant's

responses thereto are summarized below.

The applicant noted that several commentators objected to the

granting of the requested exemption based on the belief that the assets

of the Plans, the assets of U S WEST Pension Plan, or the assets of

retirees would be used to purchase QES. In this regard, the applicant

reiterated that the exemption would permit the voluntary contribution

of QES by the applicant or its affiliates. Thus, it is represented that

the cost of the QES contributed to the Trusts has been and will be

borne solely by U S WEST. No assets of the Plans, of the U S WEST

Pension Plan, or of the retirees has been or will be used to pay for

the QES, nor have the Trusts ceded nor will the Trusts cede any right

to receive cash contributions in exchange for the contribution by U S

WEST of the QES.

Three (3) commentators expressed identical beliefs that the

applicant should be required to contribute to the Trusts the cash which

the applicant's affiliate, U S WEST Communications (USWC) receives from

its telephone service customers (the Rate Payers), and which is

attributable to the expense borne by the Rate Payers as a result of the

cost of the Plans being passed along to the Rate Payers in the state

rate making procedures. The three commentators that raised the rate

making issue were from Arizona, which the applicant maintains does not

permit accrued expenses for post-retirement welfare benefits to be

taken into account for purposes of setting the rates charged by USWC in

that state.

Notwithstanding the circumstances in Arizona, and in the interest

of ensuring a complete response to the issues raised, the applicant

considered the comments in light of each of the fourteen (14) states

served by USWC. In this regard, it is represented that until recently

accrued expenses for future post-retirement welfare benefits could not

be included in the calculation of cost of service for rate making

purposes. Instead, such expenses could be included in cost of service

calculations only to the extent they were paid out in the form of

benefits. Following the adoption by the Financial Accounting Standards

Board of Financial Accounting Standard 106 ( FAS 106) in 1990, most

state regulatory jurisdictions in which USWC does business have begun

permitting utilities to use some type of accrual method similar to that

provided in FAS 106 for recognizing post-retirement welfare benefit

expenses in the cost of service. These accrued expenses are not

automatically included in rates but may be included at the request of

USWC.

As part of the procedure for determining the extent to which

accrued post-retirement welfare benefit expenses should be included in

rates, many jurisdictions consider how these expenses are funded

through trusts or other means, and certain states require U S WEST to

maintain a specified minimum level of funding for benefits in one or

more external accounts (i.e. trust accounts). More specifically, some

of the states served by USWC may require a certain level of funding of

benefits be designated as funded by that state's utility customers. In

this regard, the applicant represents that no part of U S WEST's two

prior contributions of QES was attributable to funding these

designations. In the future, even if the applicant chooses to make an

additional contribution attributable to a particular state's Rate

Payers, rather than choose other alternatives, New U S WEST is able to

ensure that no part of such contribution will consist of QES, and

accordingly will do so.

The three commentators who raised the rate structuring issues,

discussed in the paragraphs above, also suggested that the Stock should

be discounted to protect the Plans against the potential loss of value

over time. In the opinion of the applicant the intent of the

commentators in making this suggestion is unclear, inasmuch as Plans

are not paying for the Stock contributed by U S WEST, and the financial

reporting standards of the Act require plan assets to be reported at

fair market value.

Several commentators objected to permitting the Plans to invest

more than the statutory limit (10%) in QES. Some of these commentators

expressed their concern that the holding by the Plans of QES in excess

of the statutory limit would reduce the security of Plan benefits (e.g.

by exposing the Plans to volatility in Stock prices). In response, the

applicant points out that welfare benefits under the Plans are not

intended to be fully pre-funded, and that the voluntary contributions

of Stock do not replace any required cash contributions of U S WEST.

The applicant notes that no business purpose would be served if U S

WEST were to contribute Stock that is expected to decline in value,

because the cost of any benefits that are not pre-funded remain a

liability of U S WEST. Accordingly, in the opinion of the applicant the

exemption is in the interest of the participants and beneficiaries of

the Plans in that U S WEST will be encouraged to make voluntary

contributions to the Plans that would not otherwise be made.

Finally, several commentators expressed concern that the proposed

exemption would affect their benefits under the Plans or their benefits

under the U S WEST Pension Plan. In response, the applicant represents

that the exemption will have no impact on these benefits. Further, one

[[Page 60401]]

commentator noted that the applicant has made certain promises relating

to the continuation of benefits to persons who retired prior to 1991.

With respect to such promises, the applicant represents that it intends

neither to enlarge nor to reduce the scope of its obligations by any

representations made in connection with the requested exemption.

In addition to the comments described above, in letters dated June

29, August 10, 1998, September 17, and September 23, 1998, the

Department also received comments and additional information from the

applicant. In these submissions, the applicant requested certain

modifications to the exemption as proposed, provided documentation for

such modifications, and informed the Department of certain

clarifications and changes in the Summary of Facts and Representations

(SFR) in the Notice. The applicant's comments fall into four (4)

categories: (1) clarification of the purpose of the contribution; (2)

the application of limits on the acquisition and holding of QES; (3)

information on the separation of U S WEST; and (4) the impact of such

separation on the requested exemption.

With respect to category 1, above, regarding the purpose of the

contribution, the applicant has requested confirmation of its

interpretation of the language in Section I of the Notice. In this

regard, Section I states that the contribution by U S WEST of Stock to

the Trusts was ``for the purpose of pre-funding post-retirement welfare

benefits'' under the Plans. In its comment, the applicant expressed its

understanding that the exemption would not require Stock or any other

specific asset contributed to a Trust to be used solely for the

provision of post-retirement welfare benefits. In this regard, the

applicant notes that where a Plan provides benefits to retirees, as

well as to active employees, and such Plan holds an interest in a

Trust, the terms of such Trust would permit the use of plan assets held

in the Trust to pay benefits on behalf of either group, to the extent

that such assets are not segregated for tax and accounting purposes for

one or the other group. The Department concurs in the understanding, as

expressed by the applicant, and has deleted the words, ``post-

retirement,'' from the language in Section I of the exemption.

With respect to category 2, above, regarding issues associated with

the application of limits on the acquisition and holding of QES, the

applicant has requested a modification of the language of Section III

(f) of the Notice. In this regard, Section III (f) states that:

any contributions in-kind of Stock made by U S WEST to any Trust,

any acquisitions of Stock in connection with the recapitalization of

U S WEST, did not cause immediately after each such transaction, and

in the future any contributions in-kind of Stock, any replacement

publicly traded shares of such Stock or any Stock purchases in

connection with rebalancing of a Trust's holding of Stock will not

cause immediately after each such transaction the aggregate fair

market value of such Stock, plus the fair market value of all

qualifying employer real property (QERP), as defined by section

407(d)(4) of the Act, and the fair market value of all other QES

held by such Trust to exceed 25 percent (25%) of the fair market

value of the assets of such Trust as determined on the date of each

such transaction.

In the opinion of the applicant the 25 percent limitation (the 25%

Limitation) should be calculated at the Plan level, rather than at the

Trust level. In this regard, the applicant believes that applying the

25% Limitation at the Plan level would ensure consistency with the

method of accounting required under the reporting rules of the Act, and

that the primary impact of applying the 25% Limitation at the Trust

level would be that fewer voluntary contributions would be made to the

trusts, specifically, to the U S WEST Occupational Welfare Benefit

Trust (formerly the U S WEST Benefit Assurance Trust) (the Assurance

Trust). Further, the applicant points out that if the final exemption

were revised to provide for calculation of the 25% Limitation at the

Plan level, rather than at the Trust level, the assets of the Assurance

Trust that could be invested in QES would not significantly exceed 25

percent (25%) of the asset of such trust.

In support of its position, the applicant represents that the value

of each Plan's interest in each Trust can be measured. In addition, the

applicant represents that each Plan holds a proportionate interest in

each Trust asset (that is, a Plan's interest in each Trust asset, is

the same as such Plan's interest in the Trust as a whole). Because each

Plan can account for its interest in the Trust and holds an undivided

interest in each of the underlying assets of the Trust in the same

proportion as its interest in the Trust as a whole, it is represented

that each Plan's interest in a particular asset, including the Stock,

can be readily determined. Because a single Plan's benefits may be

funded under more than one Trust, the applicant believes that applying

the 25% Limitation at the Plan level would provide a more useful and

accurate measurement of each Plan's interest in the Stock.

Further, it is represented that where a single Trust funds the

benefits of more than one Plan, the assets attributable to each Plan

are identifiable. The applicant represents that this is achieved either

by commingling plan assets for investment purposes and attributing a

pro rata share of each asset in the commingled Account to each Plan

participating in the Trust, or by establishing one or more separate

investment management Accounts solely on behalf of a plan participating

in the Trust, or by combining both approaches. In this regard, it is

represented that a Trust that funds benefits under more than one Plan

functions as a ``master trust.'' Moreover, when assets of a Plan are

utilized to pay benefits, the liquidation of the assets attributable to

the benefit paying Plan funded under a Trust will not affect the assets

of any other Plan funded under such Trust. Once U S WEST has determined

that benefits are to be paid for a Plan from the assets in an Account

that holds QES, then the Independent Fiduciary of such Account

continues to be responsible for the allocation as between QES or cash

equivalents in funding the benefit payment.

The Department has decided that it is in the interests of the

participants and beneficiaries whose Plan benefits are funded in whole

or in part by the assets in the Accounts under the Trusts, if the 25%

Limitation is imposed on the Plan level. This decision is based on the

representations of the applicant, as discussed in the paragraph above,

and on the fact that all Stock contributed in-kind by U S WEST in the

past or in the future to any Accounts under such Trusts have been and

will be managed by an I/F who has had and, at all times, will have sole

responsibility for the ongoing management of the Accounts under the

Trusts which hold the Stock and has taken and will take whatever action

is necessary to protect the rights of the Plans funded by such Trusts,

including but not limited to all decisions regarding the acquisition,

retention, or disposition of such Stock. Accordingly, the Department

concurs with the applicant's request to modify the language, as set

forth in Section III(f) of the Notice. However, the Department notes

that Section III(f), has been renumbered in the final exemption, as

Section II(f) which reads as follows:

any contributions in-kind of Stock made by U S WEST to any Plan

through any Trust and any acquisitions of Stock in connection with

the recapitalization of U S WEST did not cause immediately after

each such transaction, and in the future any contributions in-kind

of Stock and any replacement publicly traded shares of such

[[Page 60402]]

Stock will not cause immediately after each such transaction the

aggregate fair market value of such Stock, plus the fair market

value of all qualifying employer real property (QERP), as defined by

section 407(d)(4) of the Act, and the fair market value of all other

QES held by such Plan to exceed 25 percent (25%) of the fair market

value of the assets of such Plan as determined on the date of each

such transaction.

In addition, the Department notes that reference was made in the

language of Section III(h), as set forth in the Notice, to the

application, under certain conditions, of the 25% Limitation to the

Trust level. In order to maintain consistency throughout the exemption

the Department has renumbered Section III(h), as Section II(h) and has

substituted the word, ``Plan,'' wherever the word, ``Trust,'' appears

in the language of Section II(h). Accordingly, the language of Section

II(h) reads as follows:

nothing in the conditions, as set forth above in paragraph (f) of

this Section II, shall preclude, the holding by any Plan of Stock,

any other QES and QERP, in amounts in excess of 25 percent (25%) of

the assets of such Plan, if the aggregate fair market value of such

Stock, other QES and QERP exceeds 25 percent (25%) of the value of

the assets of such Plan solely by reason of:

(1) a greater rate of appreciation to the value of such Stock,

other QES and QERP relative to the rate of appreciation to the value

of the assets in such Plan, other than the Stock, other QES and

QERP; or

(2) a greater decline in the value of the other assets of the

Plan relative to that of such Stock, other QES and QERP.

With respect to category 3, above, regarding information relating

to the separation of U S WEST, the applicant informed the

Department that the Board of Directors of U S WEST, on April 20, 1998,

submitted for shareholder approval a proposal under which U S WEST

would be separated into two (2) independent companies. In this regard,

pursuant to the terms of the separation, those parts of the business

representing U S WEST Communications Group (the Communications Group)

and U S WEST's directory services (DEX) would be known as U S WEST,

Inc. (New U S WEST), and those parts of the business representing U S

WEST Media Group (the Media Group) would be known as MediaOne Group,

Inc. (MediaOne). It is represented that the terms of the separation

were approved for fairness by two (2) independent investment banking

firms, and that the opinions of these firms were provided to all

shareholders of U S WEST. On June 4, 1998, shareholders of U S WEST

approved the proposal to separate U S WEST, effective June 12, 1998. It

is represented that after the separation of U S WEST, there is no

ownership or management relationship between New U S WEST and MediaOne

(other than the fact that shareholders may choose to hold shares issued

by both companies).

Prior to the separation of U S WEST, the different lines of

business engaged in by U S WEST through its subsidiaries were reflected

in two (2) classes of stock, ``C'' shares and ``M'' shares (the ``C''

Shares and the ``M'' Shares). The ``C'' Shares represented the

Communications Group's business involving integrated communications,

entertainment, information and transactions services. The ``M'' Shares

reflected the Media Group's business involving cable, wireless,

directory, interactive and international services.

To effect the separation of U S WEST, it is represented that the

businesses of the Communications Group and DEX were contributed to New

U S WEST, and stock of New U S WEST was distributed to the holders of

``C'' Shares. It is represented that the ``M'' Shares continue to

reflect the business of the Media Group which after the separation of U

S WEST is engaged in by MediaOne. No additional shares were distributed

to the holders of ``M'' shares, other than $850 million shares of New U

S WEST stock that such holders received as compensation for the

transfer of DEX from the Media Group to New U S WEST.

The Department acknowledges the separation of U S WEST into New U S

WEST and MediaOne, as described by the applicant, and notes that this

information has been included in the record of the exemption. For a

more detailed description of the circumstances preceding the separation

of U S WEST and/or a description of the steps taken to effect such

separation, interested persons are encouraged to obtain a copy of the

exemption application file (L-9583) which is available in the Public

Documents Room of the Pension and Welfare Benefits Administration, U.S.

Department of Labor, Room N-5638, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

With respect to category 4, above, it is represented that the

separation of U S WEST into two distinct companies did not

have an impact on the holding of the Stock contributed in-kind by U S

WEST to the Assurance Trust, on March 1994, and again on March 1995. In

this regard, the applicant represents that such Stock was not affected

by the separation of U S WEST on June 12, 1998, because such Stock had

already been sold out of the Assurance Trust by December 31, 1997.

Further, it is represented that the cash proceeds from sales of ``C''

Shares or the ``M'' Shares were not used to purchase shares of Stock in

connection with ``rebalancing'' the portfolio of ``C'' Shares and ``M''

Shares by the Assurance Trust. Accordingly, the applicant represents

that the transactions, as described in Section II of the Notice and in

the SFR, have not occurred and will not occur, such that relief will no

longer be necessary, either on a retroactive or prospective basis.

Accordingly, the applicant does not object to the removal in its

entirety of Section II of the Notice from the final exemption.

The Department concurs with the applicant, has deleted Section II

from the exemption, and has renumbered the former Section III, as

Section II in the final exemption. In addition, the Department has

deleted any reference to transactions involving ``rebalancing'' of a

Trust's holding of Stock from the terms and conditions of the final

exemption.

The separation of U S WEST into two distinct companies did cause

changes in the employee welfare benefit plans sponsored by each

company. In this regard, because MediaOne and New U S WEST are not

affiliated, it is no longer possible to cover employees of each company

under the same welfare benefit plan. Accordingly, it is represented

that the respective boards of directors of each company have determined

that New U S WEST will adopt the Plans previously maintained by U S

WEST (the New U S WEST Plans), and that MediaOne will establish

``mirror'' welfare benefit plans (the MediaOne Plans) on behalf of the

former employees of U S WEST who transferred to MediaOne. It is

anticipated the welfare benefit plans maintained by New U S WEST and

MediaOne, respectively, will provide the same benefits provided by the

Plans maintained by U S WEST. In this regard, it is represented that

the operation and administration of the welfare benefit plans and

trusts maintained by New U S WEST and MediaOne will be the same

in all material respects to the operation and administration of Plans

and the Trusts established by U S WEST. It is further represented that

the welfare benefits provided to employees of New U S WEST and MediaOne

will have the same level of funding protection that such employees had

prior to the separation of U S WEST. Each company will reserve the same

right to amend or terminate, respectively, the New U S WEST Plans and

the MediaOne Plans, as was reserved by U S WEST with respect to the

Plans it sponsored. As described in the Notice, in order to pre-fund a

portion of the welfare benefits provided under the Plans, U S WEST

established

[[Page 60403]]

under section 501(c)(9) of the Code, three Trusts: (1) the Assurance

Trust, (2) the U S WEST Management Benefit Assurance Trust (the

Management Trust), and (3) the U S WEST Life Insurance and Welfare

Trust (the Life Insurance Trust). In its comment, the applicant

informed the Department of the effect of the separation of U S WEST on

these three Trust and on a fourth trust, the U S WEST VEBA Trust (the

VEBA Trust), maintained by U S WEST, pursuant to section 501(c)(9) of

the Code, to provide short-term funding of health care benefits for any

of the Plans.

In this regard, it is represented that, effective with the

separation of U S WEST, New U S WEST adopted the Assurance Trust, the

Management Trust, and the Life Insurance Trust to provide funding for

the New U S WEST Plans, while MediaOne has adopted the VEBA Trust.

Further, New U S WEST has transferred a proportionate share of the

assets and liabilities of the Management Trust and the Life Insurance

Trust to the VEBA Trust for the purpose of funding the MediaOne Plans.

In addition, the applicant has represented that no assets of the

Assurance Trust were transferred to the VEBA Trust, because the assets

of the Assurance Trust are held solely on behalf employees covered

under collective bargaining agreements, and none of these employees are

employed by MediaOne.

Notwithstanding the changes caused by the separation of U S WEST,

as described in the paragraphs above, New U S WEST and MediaOne have

requested that the final exemption continue to be available

prospectively to both companies; provided certain conditions are

satisfied. It is represented that the conditions of the exemption will

ensure that the rights of participants and beneficiaries of the New U S

WEST Plan and the MediaOne Plan will be protected. In this regard, New

U S WEST and MediaOne each confirm that the Department may rely on

representations made in the exemption application and incorporated in

the Notice, subject to those modifications necessarily resulting from

the separation of U S WEST, as described herein. Specifically, New U S

WEST and MediaOne have omitted representations (b) and (c) in paragraph

12 of the SFR in the Notice, because such conditions relate solely to

the ``rebalancing'' transactions for which exemptive relief is no

longer requested or required.

New U S WEST and MediaOne believe that it would be in the interest

of participants of the welfare benefit plans sponsored respectively by

each company to continue to receive contributions of QES. In support of

this request, it is represented that the reasons that additional

voluntary contribution of QES are in the best interest of participants

are completely unchanged. In this regard, it is represented that the

operation and administration of the welfare benefit plans and trusts

that will be maintained respectively by New U S WEST and MediaOne

``mirror'' the terms of the Plans in existence prior to the separation

of U S WEST. Further, it is represented that the level of protection

afforded to participants and beneficiaries in the New U S WEST Plans

and the MediaOne Plans will be unaffected, in that voluntary

contributions of QES will permit a higher level of contributions and

will provide greater security that assets will be available to fund

future benefits.

Finally, the applicant argues that the separation of U S WEST into

two (2) lines of business should not necessitate the filing of another

application for exemption, as such a filing would only duplicate the

information that has already been provided to the Department.

Similarly, it is represented that a separate exemption application

would not serve to provide notice to additional interested persons,

because all persons who would be interested in such application have

already been notified by the publication of Notice in the Federal

Register.

The Department concurs that the exemption will cover future

contributions in-kind of QES by New U S WEST, and accordingly,

has altered Section I of the exemption by adding the italicized words

to the language of Section I, as follows,

Effective March 31, 1994, the restrictions of sections 406(a)(1)(E),

407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not apply to

voluntary contributions in-kind by U S WEST, Inc., any successor to

U S WEST, Inc., and/or any affiliates of U S WEST, Inc.

(collectively, U S WEST) of certain shares of publicly traded common

stock of U S WEST (the Stock) and/or any replacement publicly traded

shares of such Stock to certain trusts (the Trusts or Trust) for the

purpose of pre-funding post-retirement welfare benefits under one or

more employee welfare benefit plans (the Plan or Plans) maintained

by U S WEST.

However, with regard to the request that the exemption continue to

be available prospectively to MediaOne, the Department does not believe

that the Notice, as published in the Federal Register, contemplated

future contributions in-kind of QES by MediaOne to the MediaOne Plans.

In this regard, the Department notes that the MediaOne Plans are new

``mirror'' plans which were not in existence at the time of the

publication of the Notice in the Federal Register. Further, the

Department is not convinced that the notice to interested persons that

was provided with regard to the exemption requested by U S WEST

afforded sufficient opportunity for comment from persons who would be

interested persons with regard to future transactions by MediaOne. As a

result, the Department does not believe that the exemption can be

interpreted to be available prospectively to MediaOne. MediaOne may

submit another application for exemption relief should MediaOne wish to

make voluntary in-kind contributions of QES in the future to MediaOne

Plans.

Accordingly, after full consideration and review of the entire

record, including the written comments, the Department has determined

to grant the exemption, as modified and amended herein. The comments

submitted by the commentators to the Department and the applicant's

response thereto has been included as part of the public record of the

exemption application. The complete application file, including all

supplemental submissions received by the Department, is available for

public inspection in the Public Documents Room of the Pension Welfare

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

Constitution Avenue N.W., Washington, D.C. 20210.

For a complete statement of the facts and representations

supporting the Department's decision to grant this exemption refer to

the Notice published on March 31, 1998, 61 FR 15443.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

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

RREEF America L.L.C. (RREEF); Located in San Francisco, California

[Prohibited Transaction Exemption 98-52; Exemption Application No. D-

9952]

Exemption

The Department is granting an exemption under the authority of

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

accordance with the procedures set forth in 29 C.F.R. Part 2570,

Subpart B (55 FR 32836, 32847, August 10, 1990.)

Section I--Covered Transactions

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

[[Page 60404]]

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

(1) The provision of certain leasing services (the Leasing

Services) by RREEF's leasing affiliates (the Leasing Affiliates, as

defined in Section IV) to certain accounts established by RREEF (the

Accounts, as defined in Section IV); and

(2) The payment of leasing commissions in connection with the

provision of Leasing Services by the Leasing Affiliates to the

Accounts; provided that the conditions set forth in Section II are met.

Section II--Conditions

(1) The arrangement under which the Leasing Services are performed

with respect to any Account is subject to the prior authorization of

either (i) an independent plan fiduciary for each employee benefit plan

or other plan for which RREEF serves as trustee or investment manager

(a Client Plan) that invests in a Single Client Account, or (ii)

independent plan fiduciaries with respect to Client Plans or other

institutional investors holding at least 60 percent of the units of

beneficial interest in a Multiple Client Account, following disclosure

of information in the manner described in paragraph (2) below. In the

case of a Client Plan whose assets are proposed to be invested in an

Account subsequent to the provision of Leasing Services to the Account,

the Client Plan's investment in the Account is subject to the prior

written authorization of an authorizing plan fiduciary following

disclosure of the information described in paragraph (2).

(2) Not less than 45 days prior to the first date it proposes to

provide Leasing Services for any Account, RREEF, as investment manager,

shall furnish the authorizing plan fiduciary with any reasonably

available information which RREEF believes to be necessary to determine

whether such approval should be given, as well as such information

which is reasonably requested by the authorizing plan fiduciary. Such

information will include: (a) a description of the Leasing Services to

be performed by the Leasing Affiliate; (b) an explanation of the

potential conflicts of interest involved in selecting the Leasing

Affiliate; (c) an explanation of the selection process (including the

role of the Independent Fiduciaries (as defined in Section IV)); (d)

identification of properties for which Leasing Services will be

required; (e) an estimate of the leasing fees to be paid to the Leasing

Affiliate if it is selected to provide such services; and (f) a

description of the terms upon which a Client Plan may withdraw from an

Account.

(3) In the event an authorizing plan fiduciary of any Client Plan

whose assets are invested in an Account submits a notice in writing to

RREEF, as investment manager, at least 15 days prior to the provision

of Leasing Services, objecting to the provision of the Leasing

Services, and RREEF proposes to proceed with the provision of Leasing

Services, the Client Plan on whose behalf the objection was tendered

will be given the opportunity to terminate its investment in the

Account, without penalty. With the exception of a Client Plan which has

invested in a closed-end Account under which the rights of withdrawal

from the Account may be limited, as provided in the Client Plan's

written agreement to invest in the Account, if a written objection to

the Leasing Services is submitted to RREEF any time after 15 days prior

to implementation of the Leasing Services (or after implementation),

the Client Plan must be able to withdraw without penalty, within such

time as may be necessary to effect such withdrawal in an orderly manner

that is equitable to all withdrawing and the non-withdrawing Client

Plans. However, the Leasing Affiliate need not discontinue providing

the Leasing Services, once implemented, by reason of a Client Plan

electing to withdraw after 15 days prior to the scheduled

implementation date of the Leasing Services. Any Client Plan which

invests in a Single Client Account may terminate the Leasing Services

arrangement and withdraw from the Account at any time (upon reasonable

written notice).

(4)(a) RREEF shall furnish the Independent Fiduciary (as defined in

section IV) acting on behalf of the Client Plans participating in the

Account with an annual report (the RREEF Annual Report) containing the

information described in this paragraph, not less frequently than once

a year and not later than 45 days following the end of the period to

which the report relates. The RREEF Annual Report shall disclose the

total of all fees incurred by the Account during the preceding year

under contracts with RREEF and its affiliates and shall include a

description of all leasing activities with respect to each property

under the responsibility of the Independent Fiduciary for which a

Leasing Affiliate provides services, including marketing/advertising

activities, leases under negotiation, lease offers rejected (and why),

and such other information as shall be reasonably requested by the

Independent Fiduciary. The RREEF Annual Report shall also delineate the

leasing commissions that are anticipated to be paid to RREEF and its

affiliates in the coming year for services provided by these entities

in connection with the properties held by the Account. The RREEF Annual

Report will contain a description of a method for the termination of

the leasing arrangement (see Section II(5)) by the Independent

Fiduciary and/or by investing Client Plans in each Account.

(b) The Independent Fiduciary shall furnish RREEF and the

authorizing plan fiduciaries with an annual report (the I/F Annual

Report), within 90 days following the end of the period to which the

report relates, summarizing its activities for the year, indicating its

opinion as to the continued validity of the leasing guidelines with

respect to any property for the next year, and recommending any

amendments to, or termination of, the leasing agreement with the

Leasing Affiliate. The I/F Annual Report will contain a description of

a method for the termination of the leasing arrangement with the

Leasing Affiliate and for the confirmation and/or removal of the

Independent Fiduciary by the Client Plans investing in the Accounts.

(c) RREEF implements procedures to ensure each authorizing plan

fiduciary of a Client Plan investing either in a Multiple Client

Account, or a Single Client Account, has an opportunity to vote on the

reconfirmation of the Independent Fiduciary on an annual basis. These

procedures require that the Independent Fiduciary: (i) provide each

authorizing independent client plan fiduciary with a ballot

2 by certified mail (or another method of delivery pursuant

to which confirmation of receipt is provided), with the ballot

instructions that direct the authorizing independent client plan

fiduciary to return the ballot to RREEF; (ii) ensure that the ballot

clearly indicates that the authorizing plan fiduciary may vote for or

against continuation of the Independent Fiduciary; (iii) ensure that

the ballot must be accompanied by a statement that failure to return

the ballot within 45 days following the independent plan fiduciaries'

receipt of the ballots will be counted as a ``for'' vote (unless

holders of a majority of the units of beneficial interests in the

Accounts have voted against reconfirmation); and (iv) 30 days after the

Independent Fiduciary mails the ballot to the authorizing plan

fiduciary, RREEF must make at least one follow-up contact with the

authorizing plan fiduciary that has not previously

[[Page 60405]]

returned the ballot prior to treating the unreturned ballot as a

``for'' vote. If RREEF does not receive a response from the authorizing

plan fiduciary within 15 days after initiating contact with the

authorizing plan fiduciary, RREEF may treat the unreturned ballot as a

vote for reconfirmation. The reconfirmation will become effective on

the earlier of the date affirmative ballots are obtained from the

holders of a majority of the units of beneficial interests in the

Accounts, or 45 days following the authorizing plan fiduciaries'

receipt of the ballots (unless holders of a majority of the units of

beneficial interests in the Accounts have voted against

reconfirmation.)

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\2\ RREEF will direct the Independent Fiduciary as to the

specific form of a ballot. The applicant represents that for a

Single Client Account, this will not be a ``ballot'', but a

``direction'' form.

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(d) The Independent Fiduciary receives confirmation, and certifies

to RREEF that the notice and the ballots sent to the authorizing plan

fiduciary pursuant to subparagraphs (b) and (c) regarding the continued

retention of the Independent Fiduciary and RREEF have been received by

the authorizing plan fiduciary. The method used to confirm notice to

the authorizing plan fiduciaries must be sufficient to ensure that the

authorizing Client Plan fiduciaries actually receive notice. In all

cases, return receipt for certified mail, printed confirmation of

facsimile transmissions and manifest or computer data entries of

independent courier services will be considered acceptable methods of

confirming receipt.

(5)(a) The leasing agreement for any property may also be

terminated or modified at any time at the written direction of the

Independent Fiduciary, and may be terminated by a vote in favor of such

termination by the holders of a majority of the units of beneficial

interests in the Account (or such greater percentage, not to exceed 60

percent, as shall be set out in the agreements establishing the

Account). Further, any Client Plan which invests in a Single Client

Account may terminate the Leasing Services arrangement and withdraw

from the Account at any time (upon reasonable notice).

(b) In the event of a vote to terminate the Leasing Services

arrangement pursuant to paragraph (4)(c) or (5)(a), RREEF shall cease

submitting to the Independent Fiduciary any new proposals to engage in

covered transactions and RREEF will not renew or extend any covered

transactions. Moreover, within 180 days after the vote of the Account

holders, RREEF shall cease engaging in any existing covered

transactions.

(6)(a) Each Leasing Services agreement shall be in writing and

shall be reviewed at least annually and approved by an Independent

Fiduciary. However, prior to proposing a transaction to the Independent

Fiduciary, RREEF will first determine that such transaction is in the

best interest of the Account.

(b) The Independent Fiduciary shall negotiate each Leasing Services

agreement. The Independent Fiduciary shall also consider the cost to

the Account of such fiduciary's involvement in connection with its

consideration of whether to approve a particular Leasing Services

agreement.

(c) Each leasing agreement and the performance of the Leasing

Affiliate under such agreement shall be reviewed at least annually by

the Independent Fiduciary, who shall instruct RREEF of any action which

should be taken by RREEF on behalf of the Account with respect to the

continuation, termination or other exercise of rights available to the

Account under the terms of the leasing agreement. RREEF will carry out

such instruction from the Independent Fiduciary to the extent it is

legal and permitted by the terms of the leasing agreement.

(d) In the case of any emergency circumstances, RREEF or the

Leasing Affiliates may provide Leasing Services to an Account for a

period not exceeding 90 days without entering into a Leasing Services

agreement, but no compensation may be paid by an Account for such

services without prior approval of the Independent Fiduciary.

(7) If RREEF holds Account properties, and any RREEF affiliate or

principal holds for its own account any properties in the same real

estate market during a period when there is leasing competition between

those properties, RREEF will hire, during such period, a third party

leasing agent for Account properties.

(8)(a) RREEF shall furnish the Independent Fiduciary with any

reasonably available information which RREEF reasonably believes to be

necessary or which the Independent Fiduciary shall reasonably request

to determine whether such approval of the transactions described above

should be given, or to accomplish the Independent Fiduciary's periodic

reviews of RREEF's performance under such agreements.

(b) With respect to RREEF, such information will include: a

description of the Leasing Services for the Account and the Client

Plans investing therein; the qualifications of RREEF to do the job; a

statement, supported by appropriate factual representations, of the

reasons for RREEF's belief that RREEF is qualified to provide the

services; a copy of the proposed Leasing Services agreement and the

terms on which RREEF would provide the services; the reasons why RREEF

believes the retention of RREEF would be in the best interest of the

Account; information demonstrating why the fees and other terms of the

arrangement are reasonable and comparable to the fees customarily

charged by similar firms for similar services in comparable locales;

the identities of non-affiliated service providers and the terms under

which these service providers might perform the services; and whether

any RREEF affiliate is a property manager to any properties that are in

competition for tenants with the property for which RREEF is under

consideration.

(9) Any Independent Fiduciary may be removed at any time by a vote

of holders of a majority of the units of beneficial interests in an

Account. In the event of the removal of an Independent Fiduciary,

existing leasing agreements overseen by that Independent Fiduciary will

not be affected; however, RREEF will designate a replacement

Independent Fiduciary within sixty (60) days.

(10) Seventy-five percent (75%) or more of the units of beneficial

interests in a Multiple Client Account must be held by Client Plans or

other investors having total assets of at least $100 million. In

addition, 50 percent (50%) or more of the Client Plans investing in a

Multiple Client Account must have assets of at least $100 million. A

group of Client Plans maintained by a single employer or controlled

group of employers, any of which individually has assets of less than

$100 million, will be counted as a single Client Plan if the decision

to invest in the Account (or the decision to make investments in the

Account available as an option for an individually directed account) is

made by a fiduciary other than RREEF, who exercises such discretion

with respect to Client Plan assets in excess of $100 million.

(11) No Client Plan covering employees of RREEF will be invested in

an Account.

(12) Not more than 20 percent of the assets of any Client Plan on

whose behalf RREEF proposes to provide Leasing Services can be invested

in RREEF Accounts.

(13) At the time any leasing agreement is entered into, the terms

of the agreement must be at least as favorable to the Account as the

terms of an arm's-length transaction between unrelated parties. In

addition, the compensation paid to the Leasing Affiliate for Leasing

Services by any Account must not exceed the amount paid in an arm's-

length transaction between unrelated parties for comparable properties

in similar locales. In any event, such

[[Page 60406]]

compensation will not exceed reasonable compensation within the meaning

of section 408(b)(2) of the Act and regulation 29 CFR 2550.408b-2. (The

Independent Fiduciary must certify that an economic advantage to the

Accounts exists before consummation of any leasing agreement).

(14)(a) Within one-year of the grant of this exemption, and after

the beginning of each subsequent five-year period, each Independent

Fiduciary will prepare with the assistance of RREEF a survey of leasing

fees for the properties that have similar geographic location and

property types to those held by the Accounts for which the Independent

Fiduciary is responsible. The survey will include data regarding the

fees that have been charged to the Accounts by several firms that are

unaffiliated with RREEF for Leasing Services during the one-year period

prior to the beginning of the new five-year period. Also, the survey

will include data as to the fees paid by RREEF for such services

performed for the properties not held by the Accounts during the same

period and other market data regarding the cost of Leasing Services by

geographic location and property types.

(b) Based upon its survey and its professional resources and

expertise, the Independent Fiduciary will determine a typical range of

annual fees for Leasing Services for the Accounts. The average of the

range, as determined from such survey, will serve as the basis of

comparison for determining for the next five-year period whether

continuation of the Leasing Services policy has provided cost savings

or other benefits to the Accounts.

(c) RREEF will demonstrate to the Independent Fiduciary at the end

of the applicable five-year period that leasing fees charged to each

Account by RREEF or its affiliates, plus the cost of the services of

the Independent Fiduciary under the exemption that are allocated to the

Accounts, are less than the fees that would have been charged using the

benchmark rate established at the beginning of the five-year period. In

making its determinations, the Independent Fiduciary shall take into

account, to the extent it deems necessary, property management fees

paid by the Accounts to RREEF and its affiliates.3

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\3\ With respect to Multiple Client Accounts, property

management services by RREEF are currently provided in accordance

with PTE 82-51 (47 FR 14238/14241, April 2, 1982). PTE 82-51 permits

collective investment funds (the Funds) managed by RREEF or any of

its affiliates, in which Client Plans participate, to engage in

certain transactions with parties in interest with respect to the

Client Plans that are investors in the Funds, provided that certain

conditions are met. Therefore, the requested exemption is necessary

only for the provision of Leasing Services by RREEF's affiliates to

the Multiple Client Accounts in connection with the properties held

by the Accounts.

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(d) The Independent Fiduciary will review the data supplied by

RREEF and, to the extent considered necessary by the Independent

Fiduciary, data collected from the Independent Fiduciary's own surveys,

and will document its findings and analysis of such cost savings in a

report to be delivered to each of the Client Plans participating in the

Accounts within 90 days after the end of the five-year period and each

subsequent five-year period and prior to the implementation of the

annual confirmation procedure described in paragraph (6) of Section II

with respect to such period. In the event the Independent Fiduciary

finds that cost savings have not been achieved for the Accounts, it

will not approve any additional services arrangements until RREEF and

its affiliates have demonstrated to the satisfaction of the Independent

Fiduciary that policies intended to assure cost savings to the Accounts

have been implemented by RREEF and its affiliates. The survey, the

Independent Fiduciary's report reviewing the survey, and the final

report of the Independent Fiduciary analyzing whether cost savings had

been achieved during the five-year period to which the survey relates,

will be maintained by RREEF in accordance with the recordkeeping

requirements of Section III.

(15) The fees paid to RREEF and/or its affiliates for Leasing

Services provided in connection with a property held for an Account

shall not exceed: (a) 7 percent of the lease amount for new leases; (b)

2 percent of the lease amount for renewal leases; and (c) for leases in

which outside brokers are involved, 2.75 percent of the lease amount.

(16) Before entering into any leasing arrangement pursuant to the

terms of this exemption, copies of the proposed exemption and the final

exemption will be delivered to each Client Plan for which RREEF or its

affiliate propose to perform Leasing Services as described herein.

Section III--Recordkeeping

(1) RREEF and any Leasing Affiliate will maintain, for a period of

six years, the relevant records necessary to enable the persons

described in paragraph (2) of this Section III to determine whether the

conditions of this exemption have been met. Included in these records

will be the written records of the Independent Fiduciary which had been

periodically furnished by the Independent Fiduciary to RREEF, and the

records described in paragraph (14) of Section II. However, a

prohibited transaction will not be considered to have occurred if, due

to circumstances beyond RREEF's, the Leasing Affiliate's, or the

Independent Fiduciary's control, the records are lost or destroyed

prior to the end of the six-year period.4

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\4\ RREEF represents that its contract with each Independent

Fiduciary will require that the Independent Fiduciary's written

records be maintained in accordance with this section.

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(2)(a) Except as provided in subsection (b) of this paragraph and

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

the records referred to in paragraph (1) of this section shall be

unconditionally available at their customary location for examination

during normal business hours by:

(1) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

(2) Any fiduciary of a Client Plan who has authority to acquire or

dispose of the interests of the Client Plan in the Accounts or any duly

authorized employee or representative of such fiduciary;

(3) Any contributing employer to any Client Plan that has an

interest in the Accounts or any duly authorized employee or

representative of such employer;

(4) Any participant or beneficiary of any Client Plan participating

in the Accounts, or any duly authorized employee or representative of

such participant or beneficiary; and (5) The Independent Fiduciaries.

(b) None of the persons described above in subparagraphs (2)-(5) of

this paragraph shall be authorized to examine the trade secrets of

RREEF or any Leasing Affiliate or commercial or financial information

which is privileged or confidential.

Section IV--Definitions

(1) The Accounts--The Accounts are any future pooled accounts

(i.e., Multiple Client Accounts) or any existing or future single-

customer accounts (i.e., Single Client Accounts), including joint

ventures, general or limited partnerships or other real estate

investment vehicles established by RREEF for the investment of employee

benefit Client Plan assets in real-estate related investments to the

extent that (i) such Accounts hold ``plan assets'' within the meaning

of the regulations at 29 CFR section 2510.3-101 and (ii) management of

their assets is subject to the discretionary authority of RREEF.

[[Page 60407]]

(2) RREEF--For purposes of this exemption, the term RREEF means

RREEF America L.L.C., and certain of their officers who may serve as

trustees of group trusts managed by RREEF America L.L.C., or who may

serve in similar fiduciary capacities with respect to other commingled

investment vehicles managed by them, and/or any other affiliates of

RREEF as defined in paragraph (4) of this section IV which act as

investment fiduciaries with respect to any Account.

(3) Leasing Affiliate--RREEF Management Company or other affiliates

of RREEF (as defined in paragraph (4) of this Section IV) retained to

provide Leasing Services with respect to an Account.

(4) An ``affiliate'' of a person means any person directly or

indirectly, through one or more intermediaries, controlling, controlled

by, or under common control with the person.

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

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

individual.

(6) Independent Fiduciary--A person who:

(a) Is not an affiliate of RREEF as defined in Section IV(4);

(b) Is not an officer, director, employee of, or partner in, RREEF

(or affiliates thereof as defined in Section IV(4));

(c) Is not a corporation or partnership in which RREEF has an

ownership interest or is a partner;

(d) Does not have an ownership interest in RREEF or any of its

affiliates;

(e) Is not a fiduciary with respect to any Client Plan's investment

in the Account;

(f) Has represented in writing that it is qualified to perform the

services contemplated by the exemption, which qualifications shall

include, among other things: (i) Demonstrated experience, generally

over a period of not less than five years, in the business of

commercial real estate, brokerage, management, or appraisal generally

and in reviewing or negotiating leasing agreements and commissions

specifically; (ii) familiarity with the relevant real estate,

specifically as it relates to comparable property types with respect to

the specific properties for which the Leasing Affiliate proposes to

perform Leasing Services (for example, in the case of office

properties, the Independent Fiduciary's experience shall relate

specifically to office properties in the same market); (iii) experience

in complying with the fiduciary standards of the Act in connection with

the representation of the Client Plans; and

(g) Has acknowledged in writing acceptance of fiduciary obligations

and has agreed not to participate in any decision with respect to any

transaction in which the Independent Fiduciary has an interest that

might affect its best judgement as a fiduciary. For purposes of the

foregoing, each Independent Fiduciary shall represent in writing that

it has no relationship with RREEF or its affiliates, or with any

Account, that would affect its best judgement as a fiduciary.

For purposes of this definition of Independent Fiduciary, no

organization or individual may serve as an Independent Fiduciary for

any fiscal year if the gross income received by such organization or

individual (or partnership or corporation of which such organization or

individual is an officer, director, or 10 percent or more partner or

shareholder) from RREEF or any affiliates of RREEF (including amounts

received for services as Independent Fiduciary under any prohibited

transaction exemption granted by the Department) for that fiscal year

exceeds 5 percent of its or his annual gross income from all sources

for such fiscal year.

In addition, no organization or individual who is an Independent

Fiduciary, and no partnership or corporation of which such organization

or individual is an officer, director or 10 percent or more partner or

shareholder, may acquire any property from, sell any property to, or

borrow any funds from RREEF or any affiliates of RREEF, or any Account

maintained by RREEF or any affiliates of RREEF, during the period that

such organization or individual serves as an Independent Fiduciary and

continuing for a period of 6 months after such organization or

individual ceases to be an Independent Fiduciary or negotiates any such

transaction during the period that such organization or individual

serves as Independent Fiduciary.

This exemption is subject to the express condition that the

material facts and representations contained in the application are

true and complete, and that the application accurately describes all

material terms of the transactions to be consummated pursuant to the

exemption.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption refer to

the notice of proposed exemption published on August 31, 1998 at 63 FR

46245 (the Notice).

Written Comments

The Department received two written comments (the Comments) with

respect to the Notice and no requests for a public hearing. The

Comments were filed by RREEF and generally request clarifications and

modifications to the Notice. Set forth below in section I is a

discussion of those aspects of the Comments which relate to the

language of the final exemption (the Exemption). In addition, section

II below discusses those aspects of the Comments which relate to the

Summary of Facts and Representations (the Summary) contained in Notice.

I. Discussion of the Comments Regarding the Exemption

1. Section II(10) of the Notice relates to the appropriate

percentage of beneficial interests in an Account which must be held by

Client Plans with a certain minimum asset size. Specifically, Section

II(10) of the Notice states, in relevant part, that 75% or more of the

units of beneficial ownership in ``an Account'' must be held by Client

Plans or other investors having total assets of at least $100 million.

In addition, Section II(10) of the Notice states that 50% or more of

the Client Plans investing in ``an Account'' must have assets of at

least $100 million.

The Comments state that the foregoing 75% and 50% tests are

relevant only in the case of, and are meant to apply to, Multiple

Client Accounts (see paragraph 22 of the Summary contained in the

Notice). For purposes of this Exemption, RREEF has represented that

Single Client Accounts will be established only for Client Plans with

at least $100 million in assets. Accordingly, RREEF requests that the

foregoing references to ``an Account'' in the first and second

sentences of Section II(10) of the Exemption be changed to ``Multiple

Client Account.''

The Department acknowledges RREEF's request, as stated in the

Comments, and has modified the language of Section II(10) of the

Exemption accordingly.

2. The Comments also state that the third sentence in Section

II(10) of the Notice provides that ``for purposes of the 50% test'', a

group of Client Plans maintained by a single employer or controlled

group of employers, any of which individually has assets of less than

$100 million, will be counted as a single Client Plan if the decision

to invest in the Account is made at the direction of an unaffiliated

fiduciary who exercises discretion with respect to

[[Page 60408]]

total Client Plan assets in excess of $100 million.

The Comments state that the phrase ``. . . . For purposes of the

50% test'', as it appears in the third sentence of Section II(10) of

the Notice, should be deleted. The Comments note that this reference to

only the ``50% test'' is not completely accurate in the context of

RREEF's Multiple Client Accounts, as contemplated under this Exemption.

In this regard, the Comments state that if a fiduciary unaffiliated

with RREEF directs the investment of multiple affiliated plans (usually

through a single ``master trust'') into a Multiple Client Account, it

is appropriate to treat the affiliated plans as a Single Client Plan

for both the ``75% test'' and the ``50% test'' referred to in Section

II(10). In addition, the Comments state that it is RREEF's

understanding that multiple plans of a single employer, invested as a

unit at the direction of a fiduciary independent of RREEF, would be

treated as a single Client Plan for purposes of establishing a Single

Client Account under the Exemption.

The Department acknowledges RREEF's request and has modified the

Exemption by deleting the phrase ``. . . . For purposes of the 50%

test'' in the third sentence of Section II(10) of the Exemption.

II. Discussion of the Comments Regarding the Summary

1. The Comments state that the Exemption will not be relevant to

RREEF USA Fund-I because this Multiple Client Account is in

liquidation. Moreover, as stated in the Notice, the Comments reaffirm

that RREEF has no intention of using the Exemption for any other

current Multiple Client Accounts. Therefore, the Comments note that the

references to USA Fund-I in the Notice, which are located in Paragraphs

3 and 20 of the Summary, should be disregarded.

The Department acknowledges the applicant's clarification regarding

the applicability of the Exemption to existing Multiple Client

Accounts, including USA Fund-I. Thus, in response to this Comment, the

Department has modified the definition of the term ``Accounts,'' as it

appears in Section IV(1) of the Notice, to clarify that this term does

not apply to any existing Multiple Client Accounts. Section IV(1) of

the Exemption states, in pertinent part, that the Accounts are any

future pooled accounts (i.e., Multiple Client Accounts) or any existing

or future single-customer accounts (i.e., Single Client Accounts).

2. With respect to Paragraph 9 of the Summary, the Comments state

that the discussion regarding the potential for leasing competition

among properties held by an Account and another property held by a

RREEF affiliate for its own account in the same real estate market, is

not meant to refer in any way to the potential for competition between

two properties held by two different Accounts. In the latter case,

RREEF and the Independent Fiduciary, subject to the veto rights of the

Client Plan(s), will determine whether it would be appropriate for a

Leasing Affiliate to provide Leasing Services to one or both of the

properties held by such Accounts.

3. With regard to Paragraph 10 of the Summary, the Comments state

that the reference to the use of the same Independent Fiduciary for all

Accounts that have properties in the same real estate market is not

entirely accurate. In this regard, the Comments note that RREEF

proposes to use the same Independent Fiduciary for all Accounts that

have properties of the same type in the same real estate market. Thus,

for example, different Independent Fiduciaries may be retained in the

same real estate market for retail and commercial properties.

The Department concurs with all of the Comments relating to the

Summary.

Accordingly, after giving full consideration to the entire record,

including the Comments, the Department has decided to grant the

exemption subject to the modifications and clarifications described

above. The Comments have been included as part of the public record of

the exemption application.

Interested persons should note that the complete exemption file is

available for public inspection in the Public Disclosure Room of the

Pension and Benefits Administration, Room N-5638, U.S. Department of

Labor, 200 Constitution Avenue, NW., Washington DC 20210.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,

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

Pacific Income Advisers, Inc. (PIA); Located in Santa Monica, CA

[Prohibited Transaction Exemption 98-53; Exemption Application No. D-

10324]

Exemption

Section I--Exemption Involving Plans Where PIA Is Both a Fiduciary or

Other Party in Interest With Respect to the Plan and Investment Adviser

of Certain Trusts in Which the Plans Invest

The restrictions of sections 406(a) and 406(b) of the Act and the

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

by reason of section 4975(c)(1) (A) through (F) of the Code shall not

apply to: (1) the acquisition, sale or redemption of trust units (the

Units) in the Pacific Income Advisers Fixed-Income Group Investment

Trust (Fixed Income Trust), the Pacific Income Advisers Short-Term

Group Investment Trust (Short-Term Trust), the Pacific Income Advisers

Equity Group Investment Trust (Equity Trust), and the Pacific Income

Advisers Global Group Investment Trust (Global Trust; each a Trust and

collectively, the Trusts), by employee benefit plans, and Individual

Retirement Accounts (IRA's; collectively, the Plan(s)); and (2) the

payment of fees by a Trust to Pacific Income Advisers (PIA) where PIA

is a fiduciary or other party in interest with respect to a Plan

investing in a Trust and the investment adviser to each of the Trusts,

provided the conditions of Section II are met.

Section II--Conditions

(1) (a) The investment of a Plan's assets in the each of the Trusts

and the fees to be paid by a Trust to PIA are authorized in writing by

a Plan fiduciary who is independent of PIA (Independent

Fiduciary).5 Such authorization shall be consistent with the

responsibilities, obligations and duties imposed on fiduciaries by Part

4 of Title I of the Act. In addition, such authorization shall be

either: (1) Set forth in the investment management agreement between

the Plan and PIA; (2) indicated in writing prior to each purchase or

sale; or (3) indicated in writing prior to the commencement of a

specified purchase or sale program in the Units of the Trusts.

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\5\ A fiduciary will not be deemed independent of PIA if: (1)

such fiduciary is directly or indirectly controlled by PIA or an

affiliate thereof; (2) such fiduciary or any officer, director,

partner, highly compensated employee, or the relative of such

fiduciary is an officer, director, partner, or highly compensated

employee, of PIA or an affiliate of PIA; and (3) such fiduciary

directly or indirectly receives any compensation or other

consideration for that fiduciary's own personal account in

connection with any transaction described in this exemption.

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(b) PIA does not provide investment advice to a Plan's Independent

Fiduciary within the meaning of 29 CFR 2510.3-21(c)(1)(ii) with respect

to a Plan's acquisition of Units of a Trust.

(2) Prior to making an initial investment in the Units, each Plan's

Independent Fiduciary shall receive the following written disclosures

from PIA:

(a) The proposed exemption and grant notice describing the

exemptive relief provided herein;

(b) The applicable Trust's Offering Memorandum, outlining the

investment

[[Page 60409]]

objective(s) of the Trust and the policies employed to achieve these

objectives and a description of all fees associated with investment in

the Trust; and

(c) The applicable Trust's Agreement and Declaration of Trust,

disclosing the structure and manner of operation of the Trust.

(d) A statement describing the relationship between PIA and the

Trusts.

(3) The Independent Fiduciary shall acknowledge in writing that the

Plan is an ``accredited investor'' as defined in Rule 501 of Regulation

D of the Securities Act of 1933 (1933 Act). In addition, the

Independent Fiduciary shall acknowledge in writing that it has not

relied upon the advice of PIA with respect to the acquisition, sale or

redemption of the Units.

(4) No Plan shall pay a sales commission or redemption fee, in

connection with the acquisition, sale or redemption of the Units of the

Trusts.

(5) (a) No participating Plan may invest more than 25% of its total

assets in the Global Trust.

(b) No Plan, other than a multiple employer welfare arrangement

(MEWA), a multiple employer trust (MET), or voluntary employee benefit

association (VEBA), may acquire or hold Units representing more than

20% of the assets of a Trust.6 A MEWA, MET, or VEBA may

acquire and hold Units representing up to 35% of the assets of either

the Short-Term Trust or Fixed Income Trust only. As to investment in

any other Trust, a MEWA, MET, or VEBA may not acquire or hold Units

representing more than 20% of the assets of such Trust.

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\6\ A MEWA is defined in section 3 (40)(A) of the Act and

provides benefits described in section 3(1) of the Act for employees

of two or more employers. Although the term ``MET'' is not used or

defined in Title I of the Act, a MET may be covered by Title I of

the Act, to the extent that it provides benefits described in

section 3(1) of the Act and it is established or maintained by an

employer, an employee organization, or both. A VEBA is defined in

section 501(c)(9) of the Code and is subject to Title I to the

extent that it provides benefits described in section 3(1) of the

Act and it is established or maintained by an employer, an employee

organization, or both.

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(c) For purposes of determining the percentage of the assets of a

Trust being held by a single Plan, PIA shall first make the calculation

90 days after the first Unit of a Trust is sold to such Plan.

(6)(a) At the time the transactions are entered into, the terms of

the transactions shall be at least as favorable to the Plans as those

obtainable in arm's length transactions between unrelated parties.

(b) PIA, including any officer or director of PIA, does not

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

(c) The price paid or received by a Plan Client for Units of a

Trust is the net asset value per Unit at the time of the transaction

and it is the same price which would have been paid or received for the

Units of a Trust by any other investor at that time. For purposes of

this paragraph, the term ``net asset value'' means the amount for

purposes of pricing all purchases and sales calculated by dividing the

value of all securities, determined by an objective method as set forth

in each Trust's relevant Trust documents and Trust Offering Memorandum,

and other assets belonging to the Trust, less the liabilities charged

to such Trust, by the total number of Units of the Trust.

(7) The combined total of all fees paid by a participating Plan

shall constitute no more than reasonable compensation within the

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

(8) The Plan does not pay any Plan-level investment management

fees, investment advisory fees or similar fees to PIA with respect to

any of the assets of such Plan which are invested in Units of a Trust.

This condition does not preclude the payment of investment advisory or

similar fees by the Trusts to PIA under the terms of investment

management agreements between PIA and each of the Trusts.

(9) All authorizations and approvals made by the Independent

Fiduciary regarding investment in a Trust and the fees paid to PIA are

subject to an annual reauthorization wherein any such prior

authorization shall be terminable at will by the Plan, without penalty

to the Plan, upon written notice of termination. A form expressly

providing an election to terminate the authorization (the Termination

Form) with instructions on the use of the form must be supplied to the

Independent Fiduciary no less than annually; provided that the

Termination Form need not be supplied sooner pursuant to paragraph (10)

below. The Termination Form must include the following information:

(a) The authorization is terminable at will by the Plan, without

penalty to the Plan, upon receipt by PIA of written notice from the

Independent Fiduciary; and

(b) Failure of the Independent Fiduciary to return the Termination

Form will result in continued authorization of PIA to continue to

engage in the transactions described in Sections I.

(10) PIA will provide, at least 30 days in advance of the

implementation of an additional service to a Trust by PIA or a fee

increase for investment management, investment advisory or similar

services, a written notice to the Independent Fiduciary of the Plan

Client explaining the nature and amount of the additional service for

which a fee is charged or the increase in fees.

(11) Each Plan shall receive the following:

(a) A monthly report disclosing the performance and the value of

the Plan's investment in each of the Trusts. Such monthly report shall

disclose the extent to which assets of a Plan have been shifted between

the Trusts by PIA and any fee differential resulting from such shifting

between the Trusts;

(b) An audited financial statement of each of the Trusts in which a

Plan is invested, prepared annually by a independent, certified public

accountant, including a list of investments of each Trust and their

valuations, provided to the Plan not later than 45 days after the end

of the period to which the report relates; and

(c) An annual statement of a Plan's percentage interest in each

Trust and the value of the Plan's Units, provided to the Plan not later

than 45 days after the end of the period to which the report relates.

Such report shall also include the total fees paid to PIA by each

Trust. Further, such report shall also include the brokerage fees paid

by each Trust to unrelated broker-dealers, as well as the total of all

fees and expenses paid by PIA to third parties.

(12) Brokerage transactions for the Trusts are performed by

entities unrelated to PIA for no more than reasonable compensation

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

(13) PIA shall maintain, for a period of six years, the records

necessary to enable the persons described in paragraph (14) of this

section to determine whether the conditions of this exemption have been

satisfied, except that (a) prohibited transaction will not be

considered to have occurred if, due to circumstances beyond the control

of PIA, the records are lost or destroyed prior to the end of the six

year period, and (b) no party in interest other than PIA shall be

subject to the civil penalty that may be assessed under section 502(i)

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

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

examination as required by paragraph (14) below.

(14) (a) Except as provided in section (b) of this paragraph and

notwithstanding any provisions of subsection (a)(2) and (b) of section

504 of the Act, the records referred to in paragraph (13) of this

section shall be unconditionally available at their

[[Page 60410]]

customary location during normal business hours for examination by:

(1) Any duly authorized employee or representative of the

Department or the Internal Revenue Service (the Service);

(2) Any Independent Fiduciary of a Plan investing in a Trust, or

any duly authorized representative of such fiduciary;

(3) Any contributing employer to any Plan investing in a Trust, or

any duly authorized employee representative of such employer;

(4) Any participant or beneficiary of any participating Plan

investing in a Trust, or any duly authorized representative of such

participant or beneficiary; and

(5) Any other person or entity investing in a Trust.

(b) None of the persons described above in subparagraphs (2)-(5) of

this paragraph (14) shall be authorized to examine the trade secrets of

PIA or commercial or financial information which is privileged.

EFFECTIVE DATE: This exemption is effective August 29, 1997.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption refer to

the notice of proposed exemption published on July 20, 1998 at 63 FR

38855.

Written Comments

The applicant submitted a letter and certain other information

commenting on the notice of proposed exemption (the Notice) and the

Summary of Facts and Representations contained therein (the Summary).

The major points raised by such comments are summarized below.

First, the applicant states that references made in the Notice to

the ``Pacific Income Advisers International Group Investment Trust''

should be changed to refer to the ``Pacific Income Advisers Global

Group Investment Trust''. Thus, the applicant requests that the first

reference to this Trust in the operative language of the exemption

should be changed to reflect the proper name, and that references made

thereafter in the exemption to the ``International Trust'' should be

changed to refer to the ``Global Trust''.

The Department acknowledges the applicant's request and has so

modified the language of the exemption.

Second, with respect to Paragraphs 4, 5 and 7 of the Summary, the

applicant's comments seek to clarify the relationships between PIA and

its clients, including the Plans. In this regard, the applicant states

that it is unlikely that a Plan would discontinue a separate account

investment advisory relationship with PIA and subsequently invest all

of its assets under PIA's management in Units of one or more of the

Trusts. The applicant states that it would be more likely that a Plan

would instruct PIA to sell some of the assets separately managed by PIA

and invest the proceeds in such Units.

Third, with respect to the discussion in Paragraph 10 of the

Summary regarding the fees charged to Plans for investments in each of

the Trusts, the applicant's comments state that the investment advisory

fees payable to PIA by each Trust are subject to change. Such change

must be approved in accordance with the terms and conditions set forth

in the Notice and this exemption. Thus, for example, Section II(10) of

this exemption requires that PIA provide, at least 30 days in advance

of the implementation of any fee increase for investment management,

investment advisory or similar services, a written notice to the

Independent Fiduciary of the Plan explaining the increase in fees.

Section II(9)(a) and (b) also requires that the Independent Fiduciary

be provided with a Termination Form which allows the Plan to authorize

such a fee increase under the procedures described therein.

The Department acknowledges these and other clarifications to the

information contained in the Summary, as stated in the applicant's

comment letter and accompanying materials.

Accordingly, the Department has determined to grant the exemption

as modified.

FOR FURTHER INFORMATION CONTACT: Ms. Janet Schmidt of the Department,

telephone (202) 219-8883. (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 or disqualified

person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,

any other provisions of the Act and/or the Code, including statutory or

administrative exemptions and transactional 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

(3) The availability of these exemptions is subject to the express

condition that the material facts and representations contained in each

application accurately describes all material terms of the transaction

which is the subject of the exemption.

Signed at Washington, D.C., this 4th day of November, 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 98-29963 Filed 11-6-98; 8:45 am]

BILLING CODE 4510-29-P