Proposed Exemptions; SmartRetirement: The OLDE 401(k) Plan

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10410, et al.]

Proposed Exemptions; SmartRetirement: The OLDE 401(k) Plan

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).

[[Page 9863]]

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, N.W., Washington, D.C.

20210. Attention: Application No. ____________, stated in each Notice

of Proposed Exemption. The applications for exemption and the comments

received will be available for public inspection in the Public

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

Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

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

exemption as published in the Federal Register and shall inform

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

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

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

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

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

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

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

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

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

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

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

statement of the facts and representations.

SmartRetirement: The OLDE 401(k) Plan (the Plan) Located in Detroit, MI

[Application No. D-10410]

Proposed Exemption

Based on the facts and representations set forth in the

application, 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

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

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\1\ For purposes of this proposed exemption, reference to

specific provisions of Title I of the Act, unless otherwise

specified, refer also to the corresponding provisions of the Code.

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Section I. Covered Transactions

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

the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the

Code, shall not apply, (1) effective October 4, 1996, to the past and

continuing receipt, by OLDE Discount Corporation (OLDE Discount), a

wholly owned subsidiary of OLDE Financial Corporation (OLDE Financial),

the Plan sponsor, of a portion of certain distribution fees that are

paid by third party mutual funds (the Funds) to OLDE Discount pursuant

to Rule 12b-1 (Rule 12b-1; the 12b-1 Fees) under the Investment Company

Act of 1940 (the 1940 Act) and which are attributable to Plan assets

that are invested in the Funds; and (2) the proposed cash rebate of

such 12b-1 Fees, by OLDE Discount, to either the Plan or to the

individually-directed accounts (the Accounts) of the participants in

the Plan.2

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\2\ Unless otherwise noted, OLDE Financial and its affiliates

are collectively referred to herein as OLDE.

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The transactions are conditioned on the requirements set forth

below in Section II.

Section II. General Conditions

(a) The decision to invest the assets of an Account in the Funds is

made by a Plan participant and not by OLDE nor is OLDE providing

``investment advice'' to the participant within the meaning of section

3(21) of the Act.

(b) No sales commissions, other than 12b-1 Fees, are paid by an

Account in connection with the purchase or sale of shares in the Funds

and no redemption fees are paid by an Account with respect to the sale

of shares of the Funds.

(c) The Plan, or if applicable, Account, receives a rebate from

OLDE Discount in the form of cash equal to such Plan's or Account's pro

rata portion of all 12b-1 Fees charged by OLDE Discount to the Funds

under a rebate program (the Rebate Program).

(d) For purposes of the Rebate Program:

(1) During the course of each calendar year, as it receives 12b-1

Fees from the Funds, OLDE Discount calculates that portion of the 12b-1

Fees that are attributable to the Plan, including interest based on the

Federal Funds Rate plus 2 percent.

(2) Within 30 days of receipt by OLDE Discount of the 12b-1 Fees,

OLDE Discount separates and transfers the Plan's allocable portion of

the 12b-1 Fees, together with interest earned on such fees (as

determined in Step 1 above), to a money market account that has been

established in the Plan's name with an unrelated bank, Comerica Bank of

Detroit, Michigan (Comerica).

(3) The Plan may draw upon its Comerica money market account during

the course of the year for the purpose of paying the Plan's

administrative expenses owed to third parties.

(4) Immediately following the end of each calendar year, any

remaining rebated 12b-1 Fees that are not drawn upon, after the payment

of the Plan's administrative expenses, are allocated by the Plan to the

participant Accounts.

(5) OLDE establishes and maintains a system of internal and

external accounting controls for the Rebate Program.

(6) OLDE retains an independent auditor outside of the control of

OLDE to audit, on an annual basis, OLDE Discount's rebating of 12b-1

Fees to either the Plan or the Accounts.

(e) Prior to purchasing shares in the Funds, each Plan participant

receives full written disclosure of information concerning the Funds,

including, but not limited to the following:

(1) Copies of applicable prospectuses for the Funds discussing the

investment objectives of the Funds, the policies employed to achieve

these objectives, the relationship, if any, existing between OLDE

Discount with the parties who act as sponsors, distributors,

administrators, investment advisers and sub-advisers, custodians and

transfer agents to the Funds and a statement describing the fee

structure and the 12b-1 Fees. (OLDE will

[[Page 9864]]

supplement such disclosures with information describing the Rebate

Program.)

(2) Upon written or oral request to OLDE, a statement of additional

information supplementing the applicable prospectus, which describes

the types of securities and other instruments in which the Funds may

invest, the investment policies and strategies that the Funds may

utilize, including a description of the risks.

(3) Upon written request to OLDE, a copy of OLDE Discount's

distribution agreements pertaining to the various Funds.

(4) Copies of the proposed exemption and grant notice describing

the exemptive relief provided herein.

(f) After receiving the disclosures noted above, the participant

acknowledges receipt of the documents in writing and provides

authorization to OLDE with respect to investing in the Funds.

(g) Each additional purchase or redemption of shares in the Funds

is directed by the participant, provided OLDE makes available to the

participant, copies of the applicable Fund prospectus and disclosures

regarding the fee structure and the 12b-1 Fees.

(h) Each Plan participant receives the following written or oral

disclosures from OLDE with respect to ongoing investment in the Funds:

(1) Written confirmations of each purchase or redemption

transaction involving shares of a Fund.

(2) Telephone quotations of such participant's Account balance.

(3) A monthly statement of account specifying the net asset value

of the assets in a participant's Account, a summary of current year

contributions, contributions since inception, beginning and ending

account balances, summaries of contributions, purchases and sales

during the month, a summary of the participant's final Account

portfolio and, to the extent applicable during one month per year only,

any rebated fees that are allocated to the participant's Account.

(4) Semiannual and annual reports that include financial statements

for the Funds as well as the fees paid to OLDE Discount.

(5) Investment performance histories and other information provided

by the Funds to OLDE;

(6) Ratings information received about the Funds from independent

sources such as Morningstar;

(7) Responses to oral or written inquiries of participants upon

request.

(i) The terms of each purchase or redemption of shares in the Funds

remain at least as favorable to an Account as those obtainable in an

arm's length transaction with an unrelated party.

(j) OLDE maintains for a period of six years the records necessary

to enable the persons described below in paragraph (k) to determine

whether the conditions of this exemption have been met, except that (1)

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

due to circumstances beyond the control of OLDE, the records are lost

or destroyed prior to the end of the six year period, and (2) no party

in interest, other than OLDE, 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 (k) below; and

(k)(1) Except as provided in paragraph (k)(2) and notwithstanding

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

referred to in paragraph (j) are unconditionally available at their

customary location for examination during normal business hours by--

(A) Any duly authorized employee or representative of the

Department, the Internal Revenue Service or the Securities and Exchange

Commission (the SEC), and

(B) Any participant or beneficiary of the Plan or duly authorized

employee or representative of such participant or beneficiary;

(2) None of the persons described in paragraph (k)(1)(B) shall be

authorized to examine trade secrets of OLDE, or commercial or financial

information which is privileged or confidential.

III. Definitions

For purposes of this proposed exemption:

(a) The term ``OLDE'' means OLDE Financial Corporation and any

affiliate of OLDE Financial, as defined in paragraph (b) of this

Section III.

(b) An ``affiliate'' of OLDE includes--

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

intermediaries, controlling, controlled by, or under common control

with OLDE.

(2) Any officer, director or employee or relative of such person,

or partner in any such person; and

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

officer, director, partner or employee.

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

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

individual.

(d) The term ``participant'' includes participants in the Plan and

their beneficiaries who may invest in the Funds.

(e) The term ``Fund'' or ``Funds'' means any open-end management

investment company or companies registered under the 1940 Act for which

OLDE Discount provides distribution and related services.

(f) The term ``net asset value'' means the amount calculated by

dividing the value of all securities, determined by a method as set

forth in a Fund's prospectus and statement of additional information,

and other assets belonging to each of the portfolios in such fund, less

the liabilities chargeable to each portfolio, by the number of

outstanding shares.

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

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

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

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

EFFECTIVE DATE: If granted, this proposed exemption will be effective

as of October 4, 1996 with respect to transactions involving the past

and continuing receipt, by OLDE Discount, of 12b-1 Fees that are

attributable to the Plan from the Funds. However, it will be

prospective for transactions involving the cash rebate, by OLDE

Discount, of such fees to either the Plan or to the Accounts.

Summary of Facts and Representations

1. The Plan is a defined contribution plan with a 401(k) cash or

deferred feature permitting employee pre-tax deferrals. The Plan was

established by OLDE Financial, effective July 1, 1995, and it allows

participants to direct the investment of their account balances among a

menu of investment options. Currently, these investment alternatives

consist of a series of ``load-type'' Funds that are offered by parties

unrelated to OLDE Financial and whose net asset values are listed daily

in financial and other news publications.3 The Funds have

been offered to the Plan at ``no-load'' pursuant to agreements with the

Fund sponsors.

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\3\ Among the mutual funds offered to Plan participants are the

Franklin Age High Income Fund I, the American Mutual Fund, the

Franklin Equity Income Fund, the GT Global International Growth

Fund, the Growth Fund of America and the Templeton Global Real

Estate Fund.

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The trustees of the Plan are Randal J. Mudge, President of OLDE

Financial, and Mack Sutton, Vice President and Chief Financial Officer

of OLDE Discount. As of December 31, 1997, the

[[Page 9865]]

Plan had 1,146 participants and total assets of approximately

$14,872,000.

2. OLDE Financial, the Plan sponsor, is a holding company with

several subsidiaries, the largest being OLDE Discount. OLDE Financial

maintains its principal place of business in Detroit, Michigan. It

generally performs administrative functions relating to the Plan,

including recordkeeping, reporting and disclosure and the purchases of

investments under the Plan. In this regard, the Plan Administration

Committee, which is comprised of five voting members, all of whom are

employees of OLDE, has the responsibility as a fiduciary for selecting

the investment alternatives that are available under the Plan from

which participants may choose, including the subject transactions that

are described herein. As such, the Plan Administration Committee is

empowered to add or remove mutual fund families that it makes available

to the Plan.4 No fee is charged to the Plan or to any

participants and beneficiaries for the services provided by OLDE

directly or through the Administration Committee.5

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\4\ In ERISA Advisory Opinion 97-15A (May 22, 1997), involving

the Frost National Bank, the Department stated, in part, in a

footnote reference (see Footnote 9, page 5) to the final regulation

regarding participant-directed individual account plans (the ERISA

Section 404(c) Plans) (57 FR 46906, 46924, n. 27 (October 12, 1992)

that ``the act of limiting or designating investment options which

are intended to constitute all or part of the investment universe of

an ERISA Section 404(c) Plan is a fiduciary function which, whether

achieved through fiduciary designation or express plan language, is

not a direct or necessary result of any participant direction of

such plan.''

\5\ The applicants believe that such services are covered by the

statutory exemptive relief provided under section 408(b)(2) of the

Act. However, the Department expresses no opinion herein on whether

such services are statutorily exempt.

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3. OLDE Discount is a full service discount broker with offices

located throughout the United States. OLDE Discount maintains its

principal place of business in Detroit, Michigan and its employees

participate in the Plan.

4. In its role as broker, OLDE Discount is often engaged in

arrangements whereby it receives certain fees from the Funds for

dividend distribution, tax reporting and statement distribution

services provided to shareholders who have purchased their Fund shares

through OLDE Discount. These 12b-1 Fees, which are paid to OLDE

Discount in accordance with Distribution Plans and Related Agreements

adopted under Rule 12b-1 of the 1940 Act, are calculated quarterly by

the Funds based on the dollar volume of mutual fund shareholders that

are customers of a given broker (i.e., who purchased the shares through

the broker and who are receiving shareholder services from that

broker).6

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\6\ Historically, the SEC has taken the position that section

12(b) of the 1940 Act makes it illegal for a mutual fund to finance

the distribution of its shares. Thus, the primary method used by

mutual funds to finance sales of their shares has been a front-end

sales charge deducted from the offering price of a mutual fund's

shares.

In 1980, the SEC adopted Rule 12b-1 under the 1940 Act. Rule

12b-1 allows a mutual fund to use a portion of its assets to pay for

charges related to the distribution of its shares. In effect, Rule

12b-1 provides a limited exception to the general principle stated

in section 12(b) of the 1940 Act by permitting a mutual fund to bear

expenses pursuant to a Rule 12b-1 Plan, provided such plan is

adopted and approved by the mutual fund shareholders as well as its

board of directors. Once these requirements are met, a mutual fund

may pay a percentage of its net assets on a periodic basis in

accordance with the Rule 12b-1 Plan the mutual fund has adopted.

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5. OLDE Discount has 12b-1 Fee arrangements with virtually every

mutual fund that is utilized by participants as investment alternatives

for their Accounts in the Plan.7 Although OLDE Discount

receives no commissions or fees from the Plan, or for that matter, the

participant Accounts, the Funds treat such transactions as purchases

for which annualized fees (ranging from 0.15 percent to 0.50 percent)

are due and payable to OLDE Discount.

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\7\ In the case of the Plan, OLDE Discount serves in a

facilitative role with regard to purchases of Fund shares. Based on

instructions received from the Plan, OLDE Discount utilizes

participant contributions that have been made to the Plan to acquire

Fund shares directly from the Funds on behalf of participant

Accounts. Under no circumstances will the Plan purchase Fund shares

from existing holdings of OLDE Discount.

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6. OLDE Discount has attempted to identify that portion of the 12b-

1 Fees it receives which are related to purchases made by it on behalf

of the Plan. With nearly every Fund, this is accomplished by coding

purchases made by OLDE Discount on behalf of the Plan in a distinct

manner. While 12b-1 Fees are received by OLDE Discount from each Fund

in a lump sum, these payments are generally accompanied by a detailed

breakdown of those fees that are attributable to the Plan. For those

Funds which do not provide such a breakdown, OLDE Discount calculates

the breakdown of Plan's portion of the 12b-1 Fees based on its own

internal coding system. Then, OLDE Discount applies the result to the

formula used by the Fund to calculate the 12b-1 Fees.

7. Because there is a time lag between the accrual and payment of

12b-1 Fees, few have been paid to OLDE Discount which are attributable

to the Plan. Such fees are, however, being maintained in a segregated

account titled ``OLDE Trailer Fee Segregation Account.'' The special

purpose account has been established in OLDE Financial's name with

Comerica, an unrelated bank. Between October 4, 1996 and December 31,

1997, the amount of 12b-1 Fees and interest held in the segregated

account totaled $24,826.

8. Due to potential prohibited transactions that may arise from its

receipt of 12b-1 Fees from the Funds which are attributable to the

Plan, OLDE has considered a number of options to remove these concerns.

First, OLDE considered an option that would allow OLDE Discount to

waive the receipt of all 12b-1 Fees, provided the Funds would agree to

remove their automatic 12b-1 Fee deductions from the Plan's

investments. However, in discussions with representatives for the

Funds, it became clear to OLDE that any waiver of 12b-1 Fees by OLDE

Discount would not result in the removal of the 12b-1 Fee deduction

presumably because the internal system for each Fund could not

accommodate this action. Thus, OLDE Discount's waiver of Plan-related

12b-1 Fees, would result in the Fund's retention of the Plan's

deduction. In other words, Plan participants would be still paying 12b-

1 Fees even if OLDE Discount did not receive them.

As a second option, OLDE considered offering mutual funds to the

Plan for which it did not have 12b-1 Fee arrangements. However, OLDE

deemed this option to be untenable because it would remove virtually

all Funds as investment options for Plan participants.

As a third option, OLDE considered hiring another brokerage firm to

facilitate the purchase and sale of Fund shares on behalf of the Plan.

Aside from the level of concern this alternative would create in

participants regarding the use of a competitor to perform transactions

with their Accounts, OLDE noted that this arrangement would result in

transaction fees as well as 12b-1 Fees being charged to Plan

participants.

Bearing these options in mind, OLDE considered a fourth alternative

for Plan participants and beneficiaries which would involve the

rebating, to the Plan by OLDE Discount, of the Plan's pro rata portion

of all 12b-1 Fees received by OLDE Discount. This option is the basis

for the exemptive relief that has been requested herein. Specifically,

OLDE requests an administrative exemption from the Department, which

will be effective as of October 4, 1996, with respect to the past and

continuing receipt, by OLDE Discount, of 12b-1 Fees that are

attributable to the Plan from the Funds. In addition, OLDE

[[Page 9866]]

requests prospective exemptive relief that would permit OLDE Discount

to make cash rebates of such 12b-1 Fees to the Plan or to the Accounts

of individual participants.

9. To implement the proposed Rebate Program, OLDE has developed the

following procedures:

(a) During the course of each calendar year, as it receives 12b-1

Fees from the Funds, OLDE Discount will calculate that portion of the

12b-1 Fees that are attributable to the Plan, including interest based

on the Federal Funds Rate plus 2 percent. (It is represented that this

interest rate will approximate the expected returns on the 12b-1 Fees

during the period prior to their segregation by OLDE Discount.)

(b) Within 30 days of receipt by OLDE Discount of the 12b-1 Fees,

OLDE Discount will separate and transfer the Plan's allocable portion

of the 12b-1 Fees, together with interest earned on such fees (as

determined in Step (a) above), to a money market account that will be

established in the Plan's name with Comerica.

(c) The Plan may draw upon its Comerica money market account during

the course of the year for the purpose of paying its administrative

expenses owed to unrelated parties.8

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\8\ In this regard, the Department notes that the use of amounts

in the Comerica money market account to pay third party expenses

would be permissible under section 408(b)(2) of the Act and the

corresponding regulations only if such expenses were incurred in

connection with a service otherwise exempt under section 408(b)(2)

and the Plan is obligated to pay such expenses under applicable Plan

provisions.

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(d) All facets of the Plan and the use of the Comerica money market

account will be subject to audit each year by the Plan's independent

auditors.

(e) Immediately following the end of each calendar year, any

remaining rebated 12b-1 Fees, after the payment of the administrative

expenses, will be allocated to the Accounts of Plan participants

(including alternate payees under Qualified Domestic Relations Orders

and beneficiaries of deceased participants) who had Account balances in

the Plan as of the last day of the calendar year for which the

calculation was made. This allocation will be made based on the

relative Account balance of each such participant as of the last day of

the calendar year for which the calculations was made.

10. As stated above, OLDE will establish a system of internal and

external accounting controls with respect to the Rebate Program. In

this regard, internal audit employees of OLDE will review the records

and statements with respect to the special purpose accounts established

by OLDE with Comerica. In addition, OLDE will retain the services of

Ernst & Young, an independent accounting firm, to audit, on an annual

basis, the OLDE Discount's rebating of 12b-1 Fees to either the Plan or

the Accounts. Such audits will provide independent verification of the

proper crediting of such fees. Specifically, the independent auditors

will be instructed to (a) review and test compliance with the

operational controls established by OLDE for purposes of the rebating;

(b) verify, on a test basis, the rebates made; (c) verify, on a test

basis, the coding system utilized by OLDE in making the rebates; and

(d) recompute, on a test basis, rebated amounts at the discretion of

the auditors. In the event any shortfalls are uncovered during the

audit as a result of errors made by OLDE, OLDE will make a cash payment

to the Plan equal to the amount of the error plus interest paid at

money market rates under the Comerica money market account for the

period of time of the error until the correction is made. Any excess

rebates will be corrected by a corresponding adjustment of future

rebates to the Plan in the amount of the excess rebate and will not

require that the Plan pay any interest.

11. It is represented that participants with Account balances in

the Plan will receive full written disclosures from OLDE concerning the

Funds, including, but not limited to, the following: (a) copies of

applicable prospectuses for the Funds discussing the investment

objectives of the Funds, the policies employed to achieve these

objectives, the relationship, if any, existing between OLDE Discount

and parties who act as sponsors, distributors, administrators,

investment advisers and sub-advisers, custodians and transfer agents to

the Funds; and (b) a statement describing the fee structure and the

12b-1 Fees. (OLDE will supplement such disclosures with information

describing the Rebate Program.); (c) upon written or oral request to

OLDE, a statement of additional information supplementing the

applicable prospectus, which describes the types of securities and

other instruments in which the Funds may invest, the investment

policies and strategies that the Funds may utilize, including a

description of the risks; (d) upon written request to OLDE, a copy of

OLDE Discount's distribution agreements pertaining to the various

Funds; and (e) copies of the proposed exemption and grant notice

describing the exemptive relief provided herein.

After receiving the foregoing disclosures, the participant will

acknowledge receipt of the documents in writing and provide

authorization to OLDE with respect to investing in the Funds. Each

additional purchase or redemption of shares in the Funds that is

directed by the participant will be conditioned on OLDE's making

available to the participant, copies of the applicable Fund prospectus

and disclosures regarding the fee structure and the 12b-1 Fees.

With respect to ongoing disclosures, OLDE 9 will provide

each participant investing in the Funds with (a) written confirmations

of each purchase or redemption transaction involving shares of a Fund;

(b) telephone quotations of such participant's Account balance; (c) a

monthly statement of account specifying the net asset value of the

assets in a participant's Account, a summary of current year

contributions, contributions since inception, beginning and ending

account balances, summaries of contributions, purchases and sales

during the month, a summary of the participant's final Account

portfolio, and, to the extent applicable during one month per year

only, any rebated fees that are allocated to the participant's Account;

(d) semiannual and annual reports that include financial statements for

the Funds as well as the fees paid to OLDE Discount; (e) investment

performance histories and other information provided by the Funds to

OLDE; (f) ratings information received about the Funds from independent

sources such as Morningstar; and (g) responses to oral or written

inquiries of participants upon request.

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\9\ As noted above, OLDE Financial represents that it is a

fiduciary with respect to the Plan by reason of its ability to

select investment alternatives for the Plan or to add or remove

mutual fund families that it decides to make available to the Plan.

However, OLDE Financial represents that neither it nor OLDE Discount

provides investment advice to Plan participants that would make

either entity a fiduciary with respect to the Plan within the

meaning of section 3(21) of the Act.

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Finally, OLDE will maintain, for a period of six years, written

records that will enable the Department, Plan participants and others

to determine whether the conditions of this exemption have been met.

12. In summary, it is represented that the transactions have

satisfied or will satisfy the statutory criteria for an exemption under

section 408(a) of the Act because:

(a) The decision to invest in the Funds has been made and will be

made by a Plan participant and not by OLDE.

(b) No sales commissions, other than 12b-1 Fees, have been paid or

will be paid by an Account in connection with the purchase or sale of

shares in the

[[Page 9867]]

Funds and no redemption fees have been or will be paid by an Account

with respect to the sale of shares of the Funds.

(c) The Plan or, if applicable, an Account, will receive a rebate

from OLDE Discount in the form of cash equal to its pro rata portion of

all 12b-1 Fees charged by OLDE Discount to the Funds under the Rebate

Program.

(d) Participants with Accounts in the Plan have received or will

receive full written disclosure of information concerning the Funds at

the time of, and subsequent to, such investment.

(e) The terms of each purchase or redemption of shares in the Funds

have remained and will remain at least as favorable to an Account as

those obtainable in an arm's length transaction with an unrelated

party.

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

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

Consolidated Associations of Railroad Employees Health Care Plan (the

Plan) Located in Topeka, Kansas

[Application No. L-10527]

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(a) of the Act shall not apply, effective June 10, 1997

to: (1) The current leasing (the Lease) of certain real property (the

Property) by the Plan to Century Health Solutions, Inc. (Century), a

party in interest with respect to the Plan; (2) the proposed new

leasing of substantially the same Property by the Plan to Century

effective April 1, 1998 (the New Lease); and (3) the possible future

sale of the Property by the Plan to Century pursuant to a right of

first refusal under the terms of the Lease, provided the following

conditions are satisfied: (a) The Property represents no more than 25%

of the value of the Plan's assets; (b) The terms of the Lease are, and

will remain, at least as favorable to the Plan as those obtainable in

an arm's-length transaction with an unrelated party; (c) the fair

market rental value is determined on an annual basis by a qualified,

independent appraiser; (d) the Plan's independent fiduciary has

determined that the transaction is appropriate for the Plan and in the

best interests of the Plan's participants and beneficiaries; (e) the

Plan's independent fiduciary will continue to monitor the transaction

and the conditions of the exemption and take whatever action is

necessary to enforce the Plan's rights under the Lease; and (f) the

Plan's independent fiduciary acts to ensure that any sale of the

Property by the Plan to Century is properly effected under the terms of

the Lease, pursuant to Century's right of first refusal in the event

the Plan receives a bona fide offer from a third party to purchase the

Property, and Century is not in default on any of its obligations under

the Lease.

EFFECTIVE DATE: If this proposed exemption is granted, it will be

effective June 10, 1997.

Summary of Facts and Representations

1. The Consolidated Associations of Railroad Employees (CARE) and

the Plan are the successors to the A.T. & S.F. Employees' Benefit

Association (EBA) and the EBA Health Care Plan, respectively. EBA was

the entity which, on behalf of the EBA Health Care Plan, initiated the

Lease which is the subject of this proposed exemption. EBA was a

traditional railroad hospital and medical benefit association whose

sole function was to sponsor and maintain a health care arrangement for

employees of the Santa Fe Railroad and their dependents. It did so for

more than 100 years. By 1993, EBA no longer provided point-of-service

hospitalization, but continued to provide point-of-service medical care

and pharmaceuticals through a medical clinic and pharmacy located at

its Topeka offices, and continued to provide indemnity benefits through

its Health Care Plan, which relied exclusively on a comprehensive

provider network.

2. EBA had a closely-related sister organization, the Santa Fe

Employees Hospital Association (EHA). EHA provided similar medical

benefits to Santa Fe Railroad employees in the southern and

southwestern United States. To achieve economies of scale, and thereby

to provide better benefits, EBA and EHA merged in July 1996, and became

CARE, a not-for-profit Kansas corporation. Following the merger, the

EBA and EHA Health Care Plans and their related trusts merged (on or

about January 1, 1997) so that CARE maintains a single welfare plan,

i.e., the Plan. The Plan currently has approximately 18,500

participants, and has assets of approximately $16 million. The Property

has a fair market value of approximately $3.6 million, and the Lease,

which encompasses 25% of the office space in the Property, thus

involves approximately 6% of the assets of the Plan.

3. In late 1992, a group of former (or soon to be former) EBA

employees formed Century. Century is a Missouri not-for-profit

corporation. The applicant represents that its principals and employees

are wholly independent of CARE. Its aim was to provide third party

claims administration and other medically related services to employee

welfare benefit plans. EBA and Century expected that Century would

perform third party claims administration for the EBA Health Care Plan

and also provide, directly to plan participants, point-of-service

health care in a medical clinic, not just to EBA Health Care

participants but to participants in other plans as well.

4. Accordingly, in late 1992, EBA (on behalf of the EBA Health Care

Plan) and Century entered into various agreements, including the Lease

and a services agreement. The applicant represents that the arrangement

for services by Century on behalf of the EBA Health Care Plan are

exempt pursuant to the provisions of section 408(b)(2) of the Act and

the regulations thereunder.10 The Lease, which first became

effective on April 1, 1993, was for approximately 17,145 square feet of

office space in the Property, which consists of an office building

located at 620 S.E. Madison, Topeka, Kansas. The Lease was amended

effective October 1, 1993, September 1, 1994 and May 1, 1995 for the

sole purpose of increasing the space leased to Century and the rent

paid to the EBA Health Care Plan, accordingly. The Lease, providing for

a three year term with two potential extensions of one year each, will

(with the extensions) expire on March 31, 1998. The parties are

contemplating entering into the New Lease, with terms that are similar

to the terms of the current Lease, to take effect April 1, 1998. The

Lease had an initial term of three years and the possibility of two

one-year extensions, and the New Lease is expected to have a similar

term. The Lease built in increases in rent in each of the first three

years and provided for increases based on the Consumer Price Index

(CPI) in each of the two one-year extensions. The Plan's independent

fiduciary (see rep. 7, below) has recommended a rent schedule for the

New Lease that is based in part on CPI increases, as well as increases

in operating costs.

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

\10\ The Department expresses no opinion herein as to the

applicability of Act section 408(b)(2) to the provision of such

services by Century.

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5. Except as provided below with respect to storage space, the rent

per square foot paid by Century under the Lease was $12 for the first

year, $13 for

[[Page 9868]]

the second year, and $14 for the third year. The Lease provides for

increases, based on the Consumer Price Index, in each of the two one-

year extensions. For the first one-year extension, the rate in effect

for the last year of the Lease served as the floor rent. For the second

one-year extension, the rate in effect for the first one-year extension

served as the floor rent. The modifications to the original Lease (the

modifications were effective in 1993 and 1994) provided for Century's

lease of additional space in the Property at the same rates which

applied to the original Lease agreement. The 1995 modification provided

for the leasing to Century of 308 square feet of uninhabitable storage

space, with the rent for that space set at $2.50 per square foot.

6. The applicant represents that prior to entering into the Lease

with Century, EBA had received inquiries from several potential third

party tenants, but none was willing to pay more than $8 or $9 per

square foot. On August 12, 1996, independent appraisers Kevin Nunnink

and Brian Coup of Nunnink Associates, Inc. (Nunnink), Kansas City,

Missouri, determined that as of April 1, 1993, a rate of $12 per square

foot for the Property, without any escalation, would have been a fair

market rental rate for the Property for a five year lease.

7. Effective May 1, 1997, CARE retained KOLL, The Real Estate

Services Company (KOLL), Kansas City, Missouri, to act as the Plan's

independent fiduciary with respect to the subject transaction. KOLL is

an international real estate company based in Newport Beach, California

which has 350 offices in the United States with 2,700 employees. The

Kansas City office manages over 1 million square feet of space and

provides third party brokerage services for local and national clients.

KOLL represents that it is not related to CARE or Century nor to any of

their principals, nor does KOLL have any business dealings with them.

KOLL further represents that it understands and accepts its position as

a qualified independent fiduciary with respect to the Plan, and its

duties, responsibilities and liabilities as such under the Act. KOLL

reviewed the Lease as of June 10, 1997 and made a detailed report as of

that date. KOLL represents that it has made a determination, as of that

date, that the Lease and retention of Century as a tenant at a market

rental rate for an additional Lease term are in the best interests of

the Plan and its participants and beneficiaries. KOLL represents that

it has reviewed the terms of the Lease document, considered the Lease

with respect to the Plan's diversification of investments and also

considered Century's performance of its obligations under the Lease.

KOLL notes that if Century left the Property, roughly 30% of the

Property would need to be re-leased, which could take up to 6-12 months

to accomplish. KOLL relied in part on the appraisal performed by

Nunnink in light of Nunnink's independence and the quality and timing

of the appraisal. KOLL represents that it will perform or cause to be

performed an updated fair market rental analysis in the 60 day period

preceding the date (April 1, 1998) of the New Lease, and further

represents that the terms of the New Lease will be no less favorable to

the Plan than the fair market rental rates as indicated by that

independent fair market rental analysis. KOLL represents that it will

continue to monitor the Lease and confirm the collection by the Plan of

rents paid by Century, determine whether it is appropriate to renew,

continue or extend the Lease to Century, set the terms and conditions

of any renewal or extension of the Lease, and take all actions

necessary to ensure that the Lease with Century, and the New Lease,

remain in the best interests of the Plan.

8. Under Section 44 of the Lease, Century has a right of first

refusal to purchase the Property from the EBA (now CARE) Health Care

Plan in the event the Plan receives a bona fide offer from a third

party to purchase the Property and Century is not in default of any of

its obligations under the Lease. Century's right (and obligation should

it choose to exercise its right) is to purchase the Property under the

terms and conditions that are contained in the third party's offer.

Century also has a right of first refusal over expansion space in the

Property. This proposed exemption would extend to the purchase of the

Property by Century pursuant to this right of first refusal. KOLL has

agreed, as part of its independent fiduciary's responsibilities, to act

on behalf of the Plan to ensure that this Section 44 of the Lease is

properly effected (or that modifications to the Lease are made if KOLL

considers such modifications necessary or advisable). Thus, KOLL will

ensure that any offer made to the Plan for the purchase of the Property

is, in fact, a bona fide third party purchase offer and that a sale of

the Property to Century, upon the exercise of Century's right of first

refusal, would be consistent with the rights and obligations of the

parties under the Lease.

9. The applicant represents that CB Commercial Real Estate Group,

Inc. (CB), has purchased KOLL. CB represents that it agrees to assume,

and shall assume, as the successor to KOLL, the duties and

responsibilities of the independent fiduciary with respect to the

subject transactions. CB endorses, ratifies and affirms all

representations made by KOLL with respect to the subject transactions.

10. The applicant represents that not later than 30 days after the

grant of the exemption proposed herein is published in the Federal

Register, notice of the exemption will be sent to the appropriate

Regional Office of the Department's Pension and Welfare Benefits

Administration. The appropriate parties in interest agree to pay any

civil penalty that may be due and owing by them under section 502(i) of

the Act with respect to the leasing of the Property by the Plan to

Century for the period before the exemption becomes effective.

11. In summary, the applicant represents that the subject

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

Act for the following reasons: (a) The Lease represents approximately

6% of the Plan's total assets; (b) the rental for the Property has been

demonstrated to be in excess of fair market rental terms as established

by a qualified, independent appraiser, and future terms for the New

Lease will be not less favorable to the Plan than those established by

a qualified, independent appraiser; (c) the Plan's independent

fiduciary, KOLL, has determined that the Lease is appropriate for the

Plan and in the best interests of the Plan's participants and

beneficiaries; (d) KOLL and its successor independent fiduciary, CB,

will continue to monitor the Lease and take whatever action is

necessary to protect the Plan's rights under the Lease; (e) before

entering into the New Lease, CB will determine that the New Lease is

appropriate for the Plan, in the best interests of its participants and

beneficiaries and protective of their rights; and (f) CB, as the Plan's

independent fiduciary, will ensure that any future sale of the Property

by the Plan to Century is properly effected under the terms of the

Lease, pursuant to Century's right of first refusal in the event the

Plan receives a bona fide third party purchase offer.

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

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

Thornton, Hegg, Reif, Johnston & Dolan Profit Sharing Plan and Trust

(the Plan) Located in Alexandria, Minnesota

[Application No. D-10563]

Proposed Exemption

The Department of Labor is considering granting an exemption

[[Page 9869]]

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

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

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

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

(b)(1) and (b)(2) of the Act and the sanctions resulting from the

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

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

(the Sale) by the Plan of certain real property (the Property) to

Robert M. Hegg (Mr. Hegg), a party in interest with respect to the

Plan; provided the following conditions are satisfied:

(A) The terms and conditions of the transaction are no less

favorable to the Plan than those which the Plan would receive in an

arm's-length transaction with an unrelated party;

(B) The Sale is a one-time transaction for cash;

(C) The Plan incurs no expenses from the Sale; and

(D) The Plan receives as consideration from the Sale the greater of

either the fair market value of the Property as determined by a

qualified, independent appraiser on the date of the Sale, or an amount

equal to the funds expended in acquiring and maintaining the Property,

less any income produced by the Property.

Summary of Facts and Representations

1. Thornton, Hegg, Reif, Johnston & Dolan, P. A., a Minnesota

professional association, is the sponsoring employer of the Plan (the

Employer). The Employer is in the general practice of law in

Alexandria, Minnesota, which includes advising clients in various legal

matters involving real estate matters.

2. The Plan is a defined contribution plan that is intended to

qualify under section 401(a) of the Code. The applicant represents that

as of December 31, 1997, the Plan had $1,668,933.96 and 12

participants. The fiduciaries of the Plan, who have investment

discretion over all the assets of the Plan, include Mr. Hegg and

Messrs. Thomas J. Reif, Scott T. Johnston, and Michael J. Dolan. All

the fiduciaries are shareholders and officers of the Employer.

3. The Property is agricultural land, located at 452 County Road 5,

Alexandria, Minnesota, approximately 10 miles from Alexandria,

Minnesota, and consists of 70 acres of unimproved land with

approximately 54 acres in tillable land and the remaining acreage in

woodland and pasture. The Property consists of four separate parcels

that were acquired over three years beginning in 1981 from an unrelated

party for the total sum of $45,000, and the applicant represents that

no expenses were incurred by the Plan when purchasing the Property. The

applicant represents that the Property has been leased to Daryl R.

Krohfeldt, an unrelated person, for farming purposes since 1981 through

1997 for the total sum of $ 23,210. The only expenses the Plan has

incurred from owning the Property is $5,602 for real estate taxes for

the years from 1981 through December 31, 1997, and $50.00 for fence

posts.

The Property was appraised by Virginia M. Swartz, of the Swartz

Appraisal Service, located in Alexandria, Minnesota, who determined

that the Property had a fair market value of $30,500, as of June 8,

1996. The Property was listed for sale, commencing April 23, 1997,

through April 1, 1998, with Jerry-Ginny Swartz Realty, Inc., located in

Alexandria, Minnesota. The realtor represents in a letter dated

December 31, 1997, that the Property has been advertised by various

methods, including signs posted on the site and advertisements in local

newspapers. Also, the realtor represents that no serious inquiries have

been received regarding the Property, and that at this time the demand

is limited for agricultural property in the area.

4. Mr. Hegg proposes to purchase the Property for cash in a one-

time transaction with no expenses incurred by the Plan. The applicant

represents that the Plan will receive as consideration from the Sale

the greater of either the fair market value of the Property as

determined on the date of the Sale by a qualified, independent

appraiser, or an amount equal to the funds expended by the Plan in

acquiring and maintaining the Property, less any income produced by the

Property

Mr. Hegg is prompted to take this action because of the decreasing

value of the Property since its acquisition by the Plan, and because of

the low yields to the Plan from its investment. Also, at this time, Mr.

Hegg desires to purchase the Property because of its illiquidity as an

investment as demonstrated by the inability of the Plan's realtor to

generate interest in the Property from prospective purchasers or to

sell the Property in the open market for its fair market value. The

applicant represents that the Plan desires to convert the funds from

the Sale into more liquid assets with greater yields, and assets

requiring less expenses in administration for the Plan.

5. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 408(a) of the Act because

(a) the Sale is a one-time transaction for cash; (b) the Plan will not

incur any expenses from the transaction; (c) the Plan will be able to

convert the funds from the Sale into more liquid and higher yielding

assets which will be less expensive to manage and administer for the

fiduciaries of the Plan; and (d) the Plan will receive the greater of

either the fair market value of the Property as determined on the date

of the Sale by a qualified, independent appraiser, or an amount equal

to the funds expended by the Plan in acquiring and maintaining the

Property, less any income produced by the Property.

FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver 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

[[Page 9870]]

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 20th day of February, 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 98-4840 Filed 2-25-98; 8:45 am]

BILLING CODE 4510-29-P