[Federal Register Volume 59, Number 152 (Tuesday, August 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19414]


[[Page Unknown]]

[Federal Register: August 9, 1994]


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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9679 and D-9680]

 

Proposed Exemptions; Lake Dallas Telephone Company, Inc. Defined 
Benefit Pension 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 restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register Notice. Comments and request for a 
hearing should state: (1) the name, address, and telephone number of 
the person making the comment or request, and (2) the nature of the 
person's interest in the exemption and the manner in which the person 
would be adversely affected by the exemption. A request for a hearing 
must also state the issues to be addressed and include a general 
description of the evidence to be presented at the hearing. A request 
for a hearing must also state the issues to be addressed and include a 
general description of the evidence to be presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Lake Dallas Telephone Company, Inc. Defined Benefit Pension Plan 
(Pension Plan) and Lake Dallas Telephone Company, Inc. 401(k) Profit 
Sharing Plan (P/S Plan; Collectively, the Plans) Located in Lake 
Dallas, Texas

[Application Nos. D-9679 and D-9680]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption 
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to the proposed sale from the Plans of two 
interests (the Interests) in a certain partnership to Lake Cities Land 
and Development, Inc. (Lake Cities), an affiliate of the Plans' sponsor 
and a party in interest with respect to the Plans, provided that the 
following conditions are satisfied:
    (1) the sale will be a one-time cash transaction;
    (2) no commissions or fees will be paid by the Plans as a result of 
the sale; and
    (3) the sale price will be the higher of: a) the aggregate fair 
market value of the Interests on the date of the sale; or b) the 
aggregate investment cost of the Interests to the Plans of $129,146.64.

Summary of Facts and Representations

    1. The Plans were established January 1, 1985. The Pension Plan is 
a defined benefit plan, and the P/S Plan is a profit sharing plan. The 
Plans have approximately 30 participants which participate in both 
Plans. As of December 31, 1993, the Pension Plan had $433,943.19 in 
total assets, and the P/S Plan had $1,708,137.83 in total assets. Lake 
Dallas Telephone Company, Inc. is the sponsor of the Plans (the 
Employer). The Employer is a regulated telephone company with $19.5 
million in assets incorporated in the State of Texas, and it provides 
telephone service to approximately 4,900 subscribers in Denton County, 
Texas. The Employer is a wholly-owned subsidiary of Tele-Max, Inc. Lake 
Cities is an affiliate of the Employer. The Plans' trustees are Kitna 
R. Griggs, President of the Employer, Greg A. Gross, Executive Vice 
President of the Employer, and Helen Hutto, Director of Administration 
of the Employer (the Trustees).
    2. In April and May of 1986, respectively, the Pension Plan 
purchased a 4.76% interest (P/P Interest) for $24,500 in cash; and the 
P/S Plan purchased a 20.48% interest for $105,350 in cash (P/S 
Interest, collectively; the Interests) in CFNVEST Southlake Joint 
Venture (the Partnership). The Interests are minority interests and are 
not publicly traded. The Plans' Trustees made the decision for the 
Plans to invest in the Partnership. At the time of acquisition, the P/P 
Interest represented approximately 56% of the Pension Plan's assets and 
the P/S Interest represented approximately 39% of the P/S Plan's 
assets.1
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    \1\The Department notes that the decisions to acquire and hold 
the Interests are governed by the fiduciary responsibility 
requirements of Part 4, Subtitle B, Title I of the Act. In this 
regard, the Department herein is not proposing relief for any 
violations of Part 4 which may have arisen as a result of the 
acquisition and holding of the Interests by the Plans.
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    3. The Partnership is a general partnership joint venture created 
in 1986 for the exclusive purpose of purchasing a 3.75 acre tract of 
undeveloped land in Southlake, Texas (the Land) and holding it as 
investment. It is represented that the Land is the only asset owned by 
the Partnership, which holds no investments and conducts no business 
other than holding and managing the Land. The Partnership was designed 
primarily for investment by tax exempt entities such as employee 
retirement plans, although ownership of Partnership interests is not 
limited to such entities. The Partnership currently consists of 
eighteen partners, fourteen of which are employee retirement plans. The 
assets of the Partnership are managed by Robert Cecil, the general 
partner and consultant to the Partnership. The Partnership is an 
unrelated party to the Plan, the Employer, the holding company and 
affiliates of the Employer. At the time the Partnership was formed, the 
city of Southlake, Texas was expected to expand rapidly. However, it is 
represented that the real estate market has not proven to be as 
profitable as originally projected.
    4. It is represented that because there is not an established 
market for the Interests and because the Land is the only asset owned 
by the Partnership, the Interests are valued according to the 
proportionate value of the underlying Land. In this regard, the 
applicant submitted an affidavit dated April 6, 1994, prepared by Mr. 
Cecil (the Affidavit). In the Affidavit, Mr. Cecil stated that he is 
independent of the Plans, the Employer and Lake Cities, the proposed 
purchaser of the Interests. Mr. Cecil represented that when considering 
the book value of the Partnership, its financial condition, lack of 
earning capacity, the potential return on the investment, as well as 
the history and nature of the Partnership and the lack of a market or 
comparable sales for the Interests, it was his opinion that the 
Interests have no value in and of themselves. Rather, the only value to 
be attributed to the Interests is the proportionate underlying value of 
the Land. Each Plan's pro rata ownership Interest in the Land 
represents the maximum fair market value of that Interest, before any 
discounts for minority interests and lack of marketability.
    5. The Land was appraised (the Appraisal) on June 29, 1993, by 
Jeffrey A. Walburn (Mr. Walburn), an independent certified real estate 
appraiser in the State of Texas. The Land, which is located in the City 
of Southlake, Tarrant County, Texas, is vacant and contains 3.75 acres. 
Mr. Walburn determined that the fair market value of the Land was 
$450,000 as of June 29, 1993. Accordingly, the maximum fair market 
value of the P/P Interest was $21,420 and the fair market value of the 
P/S Interest was $92,160, for an aggregate fair market value of 
$113,580. As such, as of December 31, 1993 the P/P Interest represents 
4.94% of the Pension Plan's total assets, and P/S Interest represents 
5.4% of the P/S Plan's total assets.
    6. Currently, the Plans are receiving no income from their 
investment. To date, the P/S Plan and the Pension Plan have received 
distributions of $3,845.37 and $894.28, respectively, from their 
investment.2 Since the original acquisition of the Interests, 
certain additional capital contributions and holding costs have been 
paid to the Partnership by the Plans in the aggregate amount of 
$4,036.29 (the Holding Costs), with the P/S Plan and the Pension Plan 
paying $3,394.76 and $641.53, respectively.
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    \2\Proceeds were paid by the State of Texas to the Partnership 
as payment for a right of way on the Land. The Partnership in turn 
distributed the payments to each partner on a proportionate basis.
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    7. The Trustees have made several unsuccessful attempts to sell the 
Interests to the other members of the Partnership. In this regard, the 
Partnership also has attempted to sell the Land, and a ``for sale'' 
sign has been posted on the Land for approximately two years. In this 
regard, the applicant represents that in rural areas it is the custom 
to sell undeveloped lots by posting signs on the property rather than 
hiring a real estate broker. The Trustees believe that their inability 
to sell the Interests is primarily due to the fact that the Interests 
are minority interests and also due to a decline in the real estate 
market. It is represented that there is no established market for the 
Interests. Moreover, because the Plans hold minority Interests, they 
cannot force a sale of the Land.
    8. On April 1, 1993, the Employer amended the P/S Plan in order to 
provide participant directed investments pursuant to section 404(c) of 
the Act and the regulations thereunder. The P/S Plan participants will 
be able to invest in mutual funds provided by PaineWebber Trust Company 
(Paine Webber). Paine Webber will provide third party administration 
and record keeping required to administer the P/S Plan. The applicant 
represents that because Paine Webber mutual funds are unable to accept 
in-kind transfers of the P/S Plan's assets, all P/S Plan assets must be 
liquidated before they can be invested in the mutual fund options and 
subject to participant direction. Until that time, the P/S Plan must 
incur the added administrative expense of separately trusteeing and 
accounting for the P/S Interest.
    9. For these reasons, the applicant proposes to sell the Interests 
to Lake Cities, a wholly owned subsidiary of Tele-Max, Inc., and 
therefore an affiliate of the Employer. Lake Cities desires to purchase 
the Interests in a one-time cash transaction. The purchase price will 
be the greater of: a) the aggregate fair market value of the Interests 
on the date of the sale;3 or b) the aggregate investment cost (the 
Aggregate Investment Cost) of the Interests to the Plans of 
$129,146.64.4 It is also represented that neither Lake Cities, nor 
any of its affiliates own property adjacent to or near the Partnership 
Land. Furthermore, no individual owner of the Employer (or any parent 
or subsidiary) own any interests in the Partnership, interest in the 
underlying Land, or interest in any real property adjacent to or near 
the Partnership Land.
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    \3\The applicant represents that the fair market value will not 
be discounted for the Interests' lack of marketability or the fact 
that the Interests are minority interests.
    \4\The Aggregate Investment Cost is determined as follows. The 
aggregate purchase price to the Plans was $129,850 ($24,500 for the 
P/P Interest + $105,350 for the P/S Interest) plus the aggregate 
Holding Costs of $4,036.29 ($641.53 for the Pension Plan + $3,394.76 
for the P/S Plan) minus the aggregate distributions to the Plans of 
$4,739.65 ($894.28 for the P/P Interest + $3,845.37 for the P/S 
Interest). Numerically, this is as follows (($129,850 + $4,036.29) - 
$4,739.65)) = $129,146.64 for the Aggregate Investment Cost to the 
Plans.
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    10. It is represented that the proposed transaction is 
administratively feasible, in the interest and protection of the Plans' 
participants and beneficiaries. The sale would be a one-time cash 
transaction and the Plans would incur no expenses or commissions with 
respect to the sale. The proposed transaction would enable the Plans to 
liquidate its assets and would facilitate restructuring of the P/S 
Plan. The proposed sale is protective of the Plans because Lake Cities 
will purchase the Interests from the Plans for the greater of: a) the 
aggregate fair market value of the Interests on the date of the sale; 
or b) the Aggregate Investment Cost of the Interests to the Plans of 
$129,146.64. Also, the Plans will be relieved of any liability with 
respect to the Partnership. Furthermore, the applicant represents that 
any amounts received by the Plans as a result of the proposed 
transaction, which are in excess of the fair market value of the 
Interests, will be treated as contributions to the Plans, but that 
these contributions will not exceed limitations of section 415 of the 
Internal Revenue Code.
    11. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (1) the sale will be a one-time cash transaction;
    (2) no commissions or fees will be paid by the Plans as a result of 
the sale;
    (3) the sale will enable the Plans to liquidate its assets and will 
facilitate restructuring of the P/S Plan;
    (4) the sale will allow the Plans to divest of non-income producing 
Interests that have depreciated in value; and
    (5) the sale price will be the higher of: a) the aggregate fair 
market value of the Interests on the date of the sale; or b) the 
aggregate investment cost of the Interests to the Plans of $129,146.64.

Tax Consequences of Transaction

    The Department of Treasury has determined that if a transaction 
between a qualified employee benefit plan and its sponsoring employer 
(or an affiliate thereof) results in the plan either paying less or 
receiving more than fair market value, such excess may be considered to 
be a contribution by the sponsoring employer to the plan, and therefore 
must be examined under the applicable provisions of the Internal 
Revenue Code, including sections 401(a)(4), 404 and 415.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

The Prudential Insurance Company of America Located in New Jersey

[Application No. D-9692]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, effective December 31, 1991, the restrictions of section 
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 transfer 
by the Prudential Insurance Company of America (Prudential) of certain 
assets from its general account (the General Account) into a separate 
account (the Separate Account), established and managed by Prudential, 
in connection with the conversion of one of Prudential's non-
participating group annuity contracts (the Non-Participating Annuity 
Contract) to a participating group annuity contract (the Participating 
Annuity Contract), issued by Prudential to the Retirement Program Plan 
for Employees of Union Carbide Corporation and its subsidiary companies 
(the Plan) and funded through the assets transferred to the Separate 
Account; provided that the following conditions are met: (a) Prudential 
transferred to the Separate Account sufficient assets to create a 
reserve the value of which equaled or exceeded 103% of the value of the 
Participating Annuity Contract liabilities, as of December 31, 1991; 
(b) an independent qualified appraiser determined the fair market value 
of the assets transferred into the Separate Account, as of the date of 
such transfer; (c) Prudential irrevocably guarantees the payment of 
benefits under the Participating Annuity Contract to the former 
participants of the Plan who retired prior to December 31, 1985, (the 
Retirees); (d) no additional contribution from the Union Carbide 
Corporation (Union Carbide) or its subsidiary companies or the Plan was 
or will be required to fund benefits to the Retirees or to any other 
participants and beneficiaries of the Plan; (e) prior to the transfer 
of assets between the General Account and the Separate Account, Union 
Carbide, acting as fiduciary on behalf of the Plan, determined that the 
transaction was feasible, in the interest of, and protective of the 
Plan and its participants and beneficiaries and would not affect the 
payment of benefits to the Retirees; (f) Union Carbide determined that 
the terms and conditions of the transaction were at least as favorable 
as those negotiated at arm's length in similar transactions with 
unrelated third parties; (g) prior to the conversion, Union Carbide 
negotiated, reviewed, and approved the transaction, and will monitor 
the transaction; (h) Union Carbide reviewed the appraisal and approved 
the transfer of each of the assets into the Separate Account prior to 
the date the transaction was entered; and (i) the Plan incurred no 
fees, commissions, costs, expenses, or other charges associated with 
the transaction and will pay no addition compensation as a result of 
the conversion of the Non-Participating Annuity Contract to the 
Participating Annuity Contract.5
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    \5\For purposes of this proposed exemption references 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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    Effective Date: If granted, this exemption will be effective 
December 31, 1991.

Summary of Facts and Representations

    1. The Plan is a defined benefit plan that is tax qualified under 
section 401(a) of the Code. The Plan is funded by a trust that is 
exempt from tax under section 501(a) of the Code. Manufacturers Hanover 
Trust Company serves as the trustee for the Plan. The Plan had total 
assets of approximately $3.1 billion and $2.58 billion, as of December 
31, 1990, and 1991, respectively. It is also represented that there 
were approximately 64,000 active individual participants in the Plan, 
as of December 31, 1991, and approximately 23,900 Retirees.
    2. The sponsor of the Plan is Union Carbide and its subsidiaries. 
Union Carbide is a large chemical manufacturer with operations in the 
United States and in countries abroad. Union Carbide is a New York 
corporation with its principal place of business located in Danbury, 
Connecticut. Union Carbide employs approximately 37,756 persons and, as 
of December 31, 1990, had total assets of approximately $8.133 billion.
    3. Prudential provides a variety of insurance products and 
services, including participating and non-participating annuity 
contracts, funding, and asset management to pension and profit-sharing 
plans subject to the provisions of Title I of the Act. In this regard, 
it is represented that Prudential and its affiliates provided insurance 
products and services to the Plan prior to the conversion. Accordingly, 
Prudential and its affiliates were parties in interest with respect to 
the Plan when the transaction was entered.
    4. On September 30, 1985, Union Carbide established a plan (the 
Spinoff Plan) that was separate from the Plan which is the subject of 
this proposed exemption. At that time, the liabilities for the accrued 
benefits of former participants who had retired on or before September 
30, 1985, and assets in an amount exceeding all such liabilities were 
transferred from the Plan to the Spinoff Plan. Union Carbide then, 
pursuant to section 4043 of the Act, filed a notice of intent to 
terminate the Spinoff Plan under section 4041 of the Act and received a 
favorable determination letter from the Internal Revenue Service and 
the Pension Benefit Guaranty Corporation. Accordingly, the Spinoff Plan 
was then terminated and the excess assets reverted to Union Carbide.
    It is represented that Union Carbide purchased irrevocable annuity 
contracts from Prudential to cover all vested accrued benefits of the 
former participants in the Spinoff Plan at the time it was terminated. 
One of the annuity contracts purchased was the Non-Participating 
Annuity Contract which is involved in this proposed exemption. However, 
because the actual date of Union Carbide's purchase of the Non-
Participating Annuity Contract was subsequent to the effective date of 
the termination of the Spinoff Plan, Union Carbide determined that it 
would cover certain additional former participants of the Plan who had 
retired between September 30, 1985, and December 31, 1985. Accordingly, 
under the terms of the Non-Participating Annuity Contract, Prudential 
agreed to provide an irrevocable commitment to cover and guarantee the 
payment of all benefits for those former participants who retired on or 
before December 31, 1985, and their beneficiaries. It is represented 
that these Retirees ceased to be participants of the Plan, pursuant to 
29 CFR Sec. 2510.3-3(d)(2)(ii) of the Department's regulations, as such 
individuals received a certificate describing the benefits to which 
they were entitled, the entire benefit rights of such individuals were 
fully guaranteed by Prudential, and such rights are enforceable by the 
sole choice of such individuals against Prudential. However, because 
the Non-Participating Contract covered this additional group of 
retirees it is represented that the Non-Participating Contract was 
issued by Prudential to the Plan. Further, because the Plan is the 
named holder under the provisions of such contract, it is represented 
that the Non-Participating Annuity Contract is deemed to be an asset of 
the Plan and is subject to the discretion of Union Carbide, acting as 
fiduciary for the Plan.
    5. Subsequent to the purchase of the Non-Participating Annuity 
Contract, the Separate Account was established for the purpose of 
converting the Non-Participating Annuity Contract held by the Plan into 
a Participating Annuity Contract funded through the Separate Account. 
The Separate Account was funded with fixed income investments (the 
Fixed Income Assets) transferred from the segment of Prudential's 
General Account to which liability for the benefits provided under the 
Non-Participating Annuity Contract had been assigned. It is represented 
that the in-kind transfer of the Fixed Income Assets avoided 
transaction costs in connection with the acquisition by the Separate 
Account of a suitable portfolio.
    It is represented that the Non-Participating Annuity Contract was 
converted to a Participating Annuity Contract funded through the 
Separate Account in order for the Plan and the Retirees to take 
advantage, in the event of Prudential's insolvency, of the additional 
protection from the creditors of the insurer which is typically 
available from a separate account structure, and also to obtain for the 
Plan the opportunity to participate risk free in any Separate Account 
earnings. It is represented that when the transaction was entered, the 
terms of the Participating Annuity Contract were at least as favorable 
as those provided under the Non-Participating Annuity Contract. Union 
Carbide further represents that the Participating Annuity Contract 
provides the same level and guarantee of benefit payments to Retirees 
as were provided under the terms of the Non-Participating Annuity 
Contract. In this regard, it is represented that the contractual 
relationship of the Retirees with Prudential was not impacted by the 
conversion of the Non-Participating Annuity Contract to the 
Participating Annuity Contract, as the individual certificates which 
were issued to the Retirees described the benefits which the Retirees 
are entitled to receive and provided those Retirees with the right to 
enforce the obligation to pay those benefits directly against 
Prudential. It is further represented that neither of these factors was 
affected by the conversion, because the guarantees provided in the 
individual certificates are not dependent on the continuation of the 
particular group annuity contract under which the certificates were 
issued. No additional contribution of assets was or will be required 
from Union Carbide or the Plan to Prudential or the Separate Account in 
order to fund benefits guaranted under the terms of the Participating 
Annuity Contract. In the event that the Fixed Income Assets transferred 
to the Separate Account are insufficient to pay all benefits, it is 
represented that Prudential's General Account continues to provide an 
irrevocable guarantee for the payment of benefits.
    Prudential established the Separate Account, and selected and 
transferred the assets into the Separate Account, subject to the 
approval of Union Carbide acting as fiduciary on behalf of the Plan. 
Once transferred, all of the underlying assets of the Separate Account 
were managed by Prudential or its affiliates exclusively. However, it 
is represented that Prudential did not provide investment advice to 
Union Carbide nor exercise discretionary control with respect to the 
decision to convert the Non-Participating Annuity Contract into the 
Participating Annuity Contract.
    6. The Separate Account was established by Prudential as a separate 
account under the definition as set forth in section 3(17) of the Act. 
The investment guidelines for the Separate Account (the Investment 
Guidelines) imposed certain percentage limitations on the amount that 
the Separate Account could invest in each sector of the fixed income 
security market and restricted investment to no more than five percent 
(5%) of its assets in securities issued by a single issuer. Other 
restrictions included that the Separate Account could invest no more 
than twenty-five percent (25%) of its assets in securities rated Baa, 
and a maximum of seventy-five percent (75%) of its assets in a 
combination of securities that have been rated A or Baa by one or more 
rating agency selected by the issuer of such securities. These 
Investment Guidelines corresponded to the guidelines relating to the 
quality of investments held in the segment of Prudential's General 
Account to which the Non-Participating Annuity Contract was assigned. 
Further, the Separate Account is required to be passively managed by 
Prudential in a manner intended to maintain this asset/liability match.
    7. Once the Separate Account was established, Prudential 
transferred the Fixed Income Assets in-kind from its General Account to 
the Separate Account. The Fixed Income Assets consisted entirely of a 
dedicated bond portfolio, containing either publicly traded or 
privately placed bonds.6 Further, the value of the Fixed Income 
Assets transferred from the General Account represented the remaining 
liabilities under the Non-Participating Annuity Contract plus an amount 
in excess of such liabilities sufficient to establish a reserve as 
required by applicable state insurance law. Prudential's intention was 
to use the Fixed Income Assets to provide for the payment of benefits 
and reasonable expenses related thereto under the terms of the 
Participating Annuity Contract maintained by the Separate Account. 
However, Prudential has also provided an irrevocable commitment of the 
assets of its General Account to pay benefits to the Retirees under the 
terms of the Participating Annuity Contract and the Separate Account. 
For this reason, it is represented that there was no incentive for 
Prudential to have transferred assets other than those of the highest 
quality to the Separate Account. Accordingly, on December 31, 1991, 
Prudential transferred Fixed Income Assets, valued at approximately $1 
billion, from its General Account to the Separate Account.7 
Prudential represents that this method of funding the Separate Account 
avoided the transaction costs that would have been incurred, had assets 
held in Prudential's General Account been liquidated and appropriate 
securities been purchased on behalf of the Separate Account with the 
proceeds from such a sale.
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    \6\It is represented that a portfolio is considered dedicated if 
there is a cash-flow match to the liabilities under the contract for 
the first twelve months and thereafter a duration match (within one-
half year) on subsequent liabilities.
    \7\Prudential represents that the in-kind transfer of the Fixed 
Income Assets to the Separate Account also permitted Prudential to 
recognize certain statutory gains on its financial statements. It is 
represented that at the time of the transfer, the market value of 
the transferred assets exceeded the book value at which the assets 
had been carried on Prudential's financial statements. Because 
assets in a separate account must be reported at market value, the 
statutory income statement surplus reflected a gain in the amount of 
the difference between book value and market value. As the surplus 
of a mutual insurance company is the equivalent of equity capital, 
it is represented that the surplus gain reflected on Prudential's 
financial schedules reflected a strengthening of its financial 
condition.
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    8. Prudential is uncertain as to whether the transaction, as 
consummated, involved violations of section 406(a) and 406(b) of the 
Act. In this regard, the prohibited transaction analysis depends on 
whether the Separate Account is deemed to hold ``plan assets'' that are 
subject to the fiduciary responsibility provisions of the Act, such 
that Prudential's transfer of such assets from the General Account to 
the Separate Account may have constituted a direct or indirect transfer 
of assets between a plan and a party in interest, described in section 
406(a)(1) (A) and (D) of the Act.8
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    \8\Section 29 CFR 2510.3-101(h) of the Department's regulations 
provides, in part, that a separate account does not hold ``plan 
assets'' for purposes of the Act, if it is maintained solely in 
connection with fixed contractual obligations of the insurance 
company under which the amounts payable to the plan are not affected 
in any manner by the investment performance of the separate account. 
In the opinion of Prudential, because there is a possibility that 
the Plan may participate in the investment performance of the 
Separate Account under the terms of the Participating Annuity 
Contract, it would appear that the underlying assets of the Separate 
Account are not eligible for this exception to the plan assets 
regulation and that such assets are ``plan assets.''
    Further, Prudential believes that the Separate Account could be 
deemed to hold ``plan assets'' for purposes of the Act, because the 
assets of the Separate Account do not appear to be held in 
connection with a ``guaranteed benefit policy,'' as defined in 
section 401(b)(2)(B) of the Act. Section 401(b)(2)(B), defines the 
term ``guaranteed benefit policy'' to mean an insurance policy or 
contract to the extent that such policy or contract provides for 
benefits the amount of which is guaranteed by the insurer. Such term 
includes any surplus in a separate account, but excludes any other 
portion of a separate account. Under section 401(b)(2), the assets 
of a plan are deemed to include such ``guaranteed benefit policy'' 
but are not, solely by reason of the issuance of such policy deemed 
to include the assets of the insurer.
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    If the Separate Account contained Plan assets, the question becomes 
whether Prudential acted as a fiduciary with respect to the Separate 
Account at the time the Fixed Income Assets were transferred. In 
Prudential's view, exemptive relief from section 406(b) may be 
necessary, because Prudential approved the assets transferred to the 
Separate Account from the segment of Prudential's General Account that 
formerly backed the Non-Participating Annuity Contract, or because 
Prudential is the manager of the Separate Account, even though the 
Separate Account did not hold any cash or other assets until after the 
transfer took place. In this regard, however, Prudential represents 
that Union Carbide acted as fiduciary with respect to the Plan, as 
discussed more fully in paragraph number eleven below. Accordingly, 
Prudential has requested exemptive relief from section 406(a) and 
406(b) for the transaction described herein.
    9. It is represented that all of the assets in the Separate Account 
are and will be managed exclusively by Prudential or its affiliates and 
that Prudential receives from the Separate Account certain customary 
fees and charges to compensate for services performed and risks assumed 
by Prudential. In this regard, Prudential receives an annual 
administrative charge equal to .05% of the outstanding liabilities 
under the terms of the Participating Annuity Contract and an annual 
investment management and custodial fee equal to .45% of the value of 
the Separate Account. Prudential also receives risk charges fixed at 
.90% of the Participating Annuity Contract liability amount which 
accrues daily beginning January 1, 1992. In this regard, it is 
represented that such risk charges are deducted from the Separate 
Account on a quarterly basis and that withdrawal of risk charges from 
the Separate Account is permitted only to the extent that the assets in 
the Separate Account exceed 107% of the contract liability amount of 
the Participating Annuity Contract which is equivalent to 110% of the 
actual benefit liabilities then remaining under the Participating 
Annuity Contract. It is further represented that other than the fees 
and charges described in this paragraph, Prudential does not receive 
any part of the earnings in the Separate Account, and that the Plan 
receives the entire benefit of favorable investment experience, if any, 
in the Separate Account.
    With respect to the fees Prudential receives from the Separate 
Account, Prudential represents that for two reasons it cannot under any 
circumstances receive more compensation in connection with the 
provision of services to the Separate Account under the terms of the 
Participating Annuity Contract than it was entitled to receive through 
the single premium for the Non-Participating Annuity Contract when 
initially purchased by Union Carbide. First, Prudential represents that 
generally it charges higher premiums for a participating annuity 
contract than for a non-participating annuity contract. However, with 
respect to conversion of the Non-Participating Annuity Contract to the 
Participating Annuity Contract that is the subject of this proposed 
exemption, no additional premiums or other consideration, beyond the 
single premium already paid by Union Carbide for the Non-Participating 
Annuity Contract, were or will be charged by Prudential to Union 
Carbide or the Plan in connection with the Participating Annuity 
Contract.
    Second, with regard to the fees and charges received by Prudential 
under the terms of the Participating Annuity Contract, it is 
represented that generally the same types of costs are taken into 
account for purposes of calculating the premium required for a non-
participating annuity contract. It is further represented that because 
such fees and charges are not the continuing obligation of the holder 
of a non-participating annuity contract, they are not set forth in a 
fee schedule but are primarily a matter of internal record keeping. 
According to Prudential, similar fees and charges were built into the 
single sum premium under the terms of the Non-Participating Annuity 
Contract and were pro-rated for the purpose of the conversion to the 
Participating Annuity Contract. It is represented that in accordance 
with the terms of the Participating Annuity Contract, Prudential 
transferred to the Separate Account assets attributable to the pro-
rated value of those internal fees and risk charges which had not yet 
accrued under the Non-Participating Annuity Contract at the time of the 
transfer. According to Prudential, it is entitled to reimbursement for 
the amount of such internal fees and risk charges over the life of the 
Participating Annuity Contract, and that such reimbursement does not 
constitute additional compensation.9
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    \9\Prudential has not requested relief for the institution of 
the fee schedule nor the receipt of fees from the Separate Account 
in accordance with the terms of the Participating Annuity Contract. 
The Department is expressing no opinion as to whether the change in 
the manner in which fees were and are charged to the Plans by 
Prudential as a result of the conversion from the Non-Participating 
Annuity Contract to a Participating Annuity Contract constituted a 
violation of section 406 of the Act. Accordingly, no relief is 
proposed, herein, beyond that covered by section 408(b)(2) of the 
Act for the provision of services by Prudential to the Separate 
Account or the receipt of fees for services rendered in connection 
with the transaction described in this proposed exemption.
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    10. Prior to the transfer of the Fixed Income Assets between the 
General Account and Separate Account, Prudential hired an independent 
accounting firm, Deloitte & Touche, to perform an independent appraisal 
of each of the Fixed Income Assets. In preparing this appraisal, 
Deloitte & Touche was provided with and reviewed information on: (a) 
the historical and prospective financial credit risk of the issuers; 
(b) the terms of the Fixed Income Assets; and (c) credit market data. 
Deloitte & Touche represents that it has extensive experience in the 
valuation of securities and that it receives less than one percent of 
its income from Prudential. Further, Deloitte & Touche represents that 
it had no present or contemplated future interest in the assets which 
were the subject of the appraisal and had no personal interest or bias 
with respect to the Fixed Income Assets or the parties involved. 
Deloitte & Touche also represents that the compensation it received in 
connection with preparation of the appraisal report was in no way 
contingent on the conclusions drawn therein.
    As described in paragraph number seven above, the Fixed Income 
Assets initially transferred to the Separate Account were publicly and 
privately placed debt instruments. In determining the fair market value 
of privately placed Fixed Income Assets, Deloitte & Touche read and 
analyzed summaries of pertinent provisions of the loan agreements, 
including interest rates, collateral provisions, call provisions, 
sinking fund provisions, and other terms having a material influence on 
value. With respect to the publicly traded Fixed Income Assets, 
Deloitte & Touche determined their value by applying the trading price 
on the date of transfer to the number of securities transferred into 
the Separate Account. Deloitte & Touche concluded that the publicly 
traded Fixed Income Assets and the privately placed Fixed Income Assets 
were valued, respectively, at $609,715,883 and $474,251,095, as of 
December 31, 1991. Accordingly, the total fair market value of the 
Fixed Income Assets was approximately $1.083 billion dollars, as of the 
same date.
    Initially due to delays in the availability of trade pricing 
information, it is represented that the fair market value of the Fixed 
Income Assets transferred into the Separate Account on December 31, 
1991, was based on fair market value of such assets, as of December 27, 
1991. This date was chosen for valuation purposes to insure that a 
consistent valuation date could be applied to each of the Fixed Income 
Assets. Once valuation information became available, Prudential, 
complying with state insurance law, provided for the transfer to the 
Separate Account of sufficient assets to create a reserve10 which 
equaled or exceeded 103% of the value of the Participating Annuity 
Contract liabilities on December 31, 1991.
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    \1\0Prudential maintains that funds of the General Account 
contributed in order to establish a reserve amount in the Separate 
Account, as required under state insurance law, are equivalent to 
``seed money,'' and should not be treated as ``plan assets'' for 
purposes of the Act. In this regard, Prudential cites to the 
analysis contained in Advisory Opinion 83-38A (July 22, 1983), for 
the proposition that ``seed money'' allocated by an insurer to its 
pooled separate accounts would not be treated as ``plan assets'' for 
purposes of the Act and that the redemption of the units of 
participation in these separate accounts by the insurer, according 
to the rules governing the redemption rights of those participating 
units, would not, solely by reason of the redemption, constitute a 
violation of section 406(a)(1) (A) and (D) and 406 (b)(1) and (b)(2) 
of the Act. Accordingly, Prudential has not requested exemptive 
relief from section 406(a)(1) (A) and (D) and 406 (b)(1) and (b)(2) 
of the Act with respect to the contribution to or with respect to 
the withdrawal from the Separate Account of such reserve amounts. In 
this regard, the Department, herein, is expressing no opinion 
whether any such transactions would violate section 406 of the Act 
and is offering no relief for such contribution or withdrawal of 
``seed money.''
    However, as the bulk of the assets in the Separate Account would 
not constitute ``seed money'' under Prudential's analysis, 
Prudential requests and the Department, herein, is proposing relief 
for the transfer of assets from the General Account to the Separate 
Account to the extent that such transaction may have constituted a 
prohibited sale or exchange, or use of plan assets for the benefit 
of a party in interest in violation of section 406(a)(1) (A) and (D) 
of the Act.
---------------------------------------------------------------------------

    Following the transfer, the valuation of the assets in the Separate 
Account and the calculation of the liabilities under the Participating 
Annuity Contract were reconciled. This reconciliation of assets and 
liabilities resulted in Prudential's transfer of two additional assets 
(the Additional Assets) to the Separate Account on January 10, 1992, in 
connection with three minor adjustments to the valuations. The transfer 
of these Additional Assets was approved by Union Carbide. The three 
adjustments are described in the three paragraphs immediately below.
    First, the valuation, as of December 27, 1991, assumed all coupons 
attached to the securities would be transferred to the Separate Account 
on December 31, 1991. However, a $920,000 coupon payment was due and 
paid to Prudential's General Account on December 30, 1991. Thus, the 
value of the Additional Assets which were transferred to the Separate 
Account equaled or exceeded the value of the coupon.
    Second, the option pricing model utilized in the December 27th 
appraisal overestimated the duration of some publicly traded bonds 
which resulted in a $530,000 overstatement in the initial valuations of 
these securities. It is represented that because these bonds were 
actually subject to a high call probability, the model should have 
assigned a duration of zero, instead of the three or four year duration 
actually assumed.
    Finally, the decline in interest rates between December 27, 1991, 
and December 31, 1991, resulted in an increased market value for the 
Separate Account, which caused the value of certain securities 
tentatively transferred to the Separate Account to exceed the dollar 
limitations established for the Separate Account by the Investment 
Guidelines. The securities that exceeded these limitations were valued 
at $900,000. Accordingly, they were replaced by portions of the 
Additional Assets described in the paragraph below.
    The Additional Assets transferred to the Separate Account in 
connection with the reconciliation were valued at $3,576,650, as of 
December 31, 1991. Although the value of these Additional Assets 
exceeded the amount required to be transferred by approximately $1.2 
million, these Additional Assets were selected, because they were the 
smallest available denominations that met the Investment Guidelines.
    11. It is represented that Union Carbide exercised fiduciary 
discretion with respect to this proposed transaction. In this regard, 
it is represented that Union Carbide is independent of Prudential in 
that it is not affiliated with Prudential and receives less than one 
percent of its annual income from Prudential.
    Before reaching its conclusions on the proposed transaction, Union 
Carbide, was provided with and reviewed the following information: (a) 
the appraisals of the value of the Fixed Income Assets prepared by 
Deloitte & Touche; (b) the terms of the Participating Annuity Contract, 
including the compensation to be retained by Prudential pursuant to 
such contract; (c) the calculation of the current value of the 
liabilities under the Participating Annuity Contract performed by 
Prudential using the methodology and assumptions, as set forth in the 
Participating Annuity Contract; (d) the list of the Fixed Income Assets 
selected by Prudential for transfer into the Separate Account; (e) a 
copy of the Investment Guidelines for the portfolio of the Separate 
Account; and (f) all additional information provided by Prudential or 
requested by Union Carbide.
    As fiduciary with respect to this transaction, Union Carbide 
represents that it: (a) reviewed the general investment strategy 
regarding the assets that were assigned to meet the liabilities under 
the Non-Participating Annuity Contract; (b) reviewed the Investment 
Guidelines of the Separate Account, and determined that such were 
appropriate, and that the transfer of the Fixed Income Assets was 
consistent with the Investment Guidelines; (c) reviewed the quality and 
diversification of the Fixed Income Assets transferred to the Separate 
Account and found such assets to be of high investment quality and 
sufficiently diverse to protect the interests of the Plan; (d) approved 
each of the Fixed Income Assets selected by Prudential from its General 
Account before such assets were transferred into the Separate Account; 
(e) reviewed the appraisal report prepared by Deloitte & Touche and 
determined that such report was reliable and complete, notwithstanding 
the fact that Deloitte & Touche relied on certain information provided 
by Prudential; (f) reviewed and approved the methodology for valuing 
the liabilities and the assumptions with respect to interest rates, 
mortality, and expenses that are set forth in the Participating Annuity 
Contract; (g) based on its review of the Deloitte & Touche appraisal 
report and on Prudential's calculations of the current value of 
contract liabilities, determined that the Fixed Income Assets were 
transferred to the Separate Account at fair market value and were 
sufficient to meet the liabilities due under the terms of the 
Participating Annuity Contract, as of the date of the transfer; (h) 
reviewed and approved the reconciliation as described more fully in 
paragraph number ten above; (i) reviewed and analyzed the terms of the 
Participating Annuity Contract, including the compensation Prudential 
receives thereunder, and determined that such terms were at least as 
favorable as those which could have been obtain in arm's length 
negotiations with unrelated third parties; (j) determined that the 
conversion was in the best interest of the Retirees, because it did not 
affect Prudential's irrevocable commitment to use the assets in its 
General Account to provide payment for benefits under the certificates 
issued to the Retirees and because in the event Prudential becomes 
insolvent, the assets in the Separate Account will be protected from 
the claims of Prudential's general creditors; and (k) gave due 
consideration to the cash flow of the liabilities under the terms of 
the Participating Annuity Contract.
    Accordingly, prior to the transfer of the Fixed Income Assets 
between the General Account and the Separate Account, Union Carbide, 
determined that the transaction was in the best interest of the Plan 
and that adequate safeguards were adopted to protect the interest of 
the Retirees and of the Plan and its participants and beneficiaries. In 
addition, Union Carbide, acting as fiduciary, reviewed and approved the 
risk charges described in paragraph nine above.\11\
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    \1\1In this regard, the Department expects that Union Carbide, 
acting as fiduciary to the Plan, prudently considered the 
relationship of fees for services and risk charges paid by the Plan 
to the level of services provided by Prudential to the Separate 
Account and the risks assumed by Prudential in connection with the 
Participating Annuity Contract.
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    Five officers either of Union Carbide or Benefit Capital Management 
Corporation (BCMC), a wholly-owned subsidiary of Union Carbide that 
manages the investment portfolio of the Plan, were responsible for 
carrying out Union Carbide's functions as a fiduciary with respect to 
the transaction. As a group, it is represented that these individuals 
were qualified in that they had extensive experience with sophisticated 
investment analysis techniques, in-depth expertise relating to 
investments suitable to the Plan, and skill in negotiating terms and 
conditions of investments. These individuals had at their disposal 
various outside experts and in-house professionals to advise them in 
areas where more specialized expertise is required. It is represented 
that these individuals were responsible, either directly or through 
oversight of outside managers, for approximately $3.8 billion in assets 
of plans sponsored by Union Carbide.
    These individuals were employed by Union Carbide to perform the 
analysis and evaluation of the transaction and to issue a fiduciary 
report. Such a fiduciary report (the Original Report), as summarized 
above in this paragraph eleven, was issued in March of 1992. 
Subsequently, on February 3, 1993, one of the preparers of the Original 
Report, a Senior Vice President of BCMC and the investment manager of 
the Plan's fixed income portfolio, was arrested and incarcerated for 
tax fraud. As a result of this event, on April 27, 1993, Union Carbide 
terminated the employment of this individual (the Former Employee), 
effective August 17, 1992. Thereafter, this Former Employee on August 
31, 1993, was indicted for mail fraud, securities fraud, kickbacks with 
respect to an employee benefit plan, and on February 2, 1994, pled 
guilty in connection with these activities.
    BCMC and Union Carbide are cooperating with the U.S. Attorney's 
office in the investigation and prosecution of the matters described in 
the paragraph above. In this regard, an investigation was conducted 
under the direction of the law department of Union Carbide which found 
no indication that anyone else was implicated or was aware of the 
illegal activities of the Former Employee. It is represented that BCMC 
had preventative practices and procedures in place at the time and has 
enhanced such procedures, since the discovery of the wrongdoing on the 
part of the Former Employee.
    Union Carbide estimates that the loss to the Plan from the illegal 
activities of the Former Employee totaled approximately $3.5 million. 
In this regard, Union Carbide has made a claim against the insurer 
which provides fraud and dishonesty coverage to BCMC and the Plans. In 
addition, Union Carbide anticipates filing suit against various parties 
seeking satisfactory recovery of the loss to the Plan.
    Subsequently, three of the individuals who signed the Original 
Report, plus a fourth individual, issued a supplemental fiduciary 
report (the Supplemental Report), dated September 2, 1993. It is 
represented that the Former Employee did not participate in the 
preparation of the Supplemental Report. It is represented that the 
Supplemental Report confirmed that the conversion of the Non-
Participating Annuity Contract to the Participating Annuity Contract 
was in the best interest of the Retirees, because (1) such action does 
not affect Prudential's irrevocable commitment to use its General 
Account assets to provide payment for all benefits provided under the 
certificates issued to Retirees, and (2) the assets in the Separate 
Account should be protected from the claims of Prudential's general 
creditors in the event of insolvency.
    Subsequently, on March 28, 1994, the four individuals who signed 
the Supplemental Report, plus the fixed income investment manager who 
replaced the Former Employee, issued another report (the Restated 
Report) which reached the identical conclusions in support of the 
transaction which were issued in the Original Report. In this regard, 
the Restated Report contained the following conclusions: (1) Any 
earnings from the Separate Account that are not required to reimburse 
certain risk charges, management fees and administrative fees will be 
used to meet Plan liabilities; (2) in the event that the assets in the 
Separate Account are insufficient to cover all Participating Annuity 
Contract liabilities, Prudential will continue to provide the same 
irrevocable commitment to use its general assets to provide payment of 
all benefits provided under the Participating Annuity Contract; (3) 
under no circumstances will Union Carbide or the Plan be required to 
contribute additional assets to fund benefits under the Participating 
Annuity Contract; (4) in the event of Prudential's insolvency, the 
assets of the Separate Account should not be reached by Prudential's 
creditors; (5) the transfer of assets permits the Separate Account to 
avoid transaction costs in connection with the acquisition of a 
suitable portfolio; (6) the type and quality of the assets transferred 
to the Separate Account are consistent with the Separate Account's 
investment guidelines; (7) based on a review of the Deloitte & Touche 
appraisal report, the assets transferred to the Separate Account were 
transferred at fair market value and were sufficient to meet the 
liabilities due under the Non-Participating Annuity Contract as of the 
date of the transfer; and (8) the transaction is at least as favorable 
to current and former Plan participants and beneficiaries as an arm's 
length transaction with an unrelated third party. Further the Restated 
Report confirmed that Union Carbide would have performed the same 
analysis and reached the same conclusions set forth in Original Report, 
if the Former Employee had not participated in the original review of 
the transaction.
    The applicant maintains that exemption should be granted on the 
basis of Union Carbide's Restated Report for the following reasons: (1) 
Union Carbide, not the Former Employee individually, acted as the 
fiduciary on behalf of the Plan; (2) the Former Employee was only one 
of several persons assigned to carry out Union Carbide's duties as 
fiduciary; (3) Union Carbide has reconfirmed each of its determinations 
in the Original Report; (4) the securities transferred from the General 
Account of Prudential into the Separate Account were in no way involved 
with the Former Employee's improper activities; and (5) the indictment 
of the Former Employee did not affect whether the transaction was in 
the best interest of the Plan.
    12. In addition to the responsibilities described above, as named 
fiduciary on behalf of the Plan, Union Carbide is also responsible for 
monitoring the performance of any investment manager that it appoints 
on behalf of the Plan. Because the Separate Account is structured with 
a ``buy and hold'' strategy, it is represented that relatively little 
oversight should be required. As the transaction did not involve any 
ongoing prohibited transaction, no specialized continuing oversight is 
anticipated by Union Carbide. However, it is represented that Union 
Carbide will yearly arrange for an independent audit of the Separate 
Account for the purpose of reconciling the benefit payments made out of 
the Separate Account, determining the remaining contract liability, and 
calculating whether additional reserves are necessary, as the reserve 
amount that is required to be maintained in the Separate Account may 
vary with time and quality of the assets held in such Separate Account.
    13. It is represented that Union Carbide received no payments or 
other compensation in connection with the transaction, except to the 
extent that Union Carbide received reimbursement for the ``direct 
expenses'' of providing services to the Plan, pursuant to sections 
408(b)(2) and 408(c)(2) of the Act.\12\ In addition, Prudential will 
indemnify Union Carbide with respect to any action or threatened action 
to which Union Carbide is made a party by reason of Union Carbide's 
services as fiduciary.\13\
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    \1\2 The Department expresses no opinion, herein, as to whether 
the provision of services by Union Carbide and the compensation 
received therefor satisfy the terms and conditions as set forth in 
section 408(b)(2) of the Act.
    \1\3The Department does not hereby construe any exculpatory 
clauses agreed to between Union Carbide and Prudential, nor do such 
agreements in any way modify the fiduciary duties and 
responsibilities of either Union Carbide or Prudential with respect 
to the Plan, as imposed by reason of part 4, title I, of the Act.
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    14. In summary, Prudential, as applicant, represents that the 
transaction met the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) Prudential transferred to the Separate Account sufficient 
assets to create a reserve the value of which equaled or exceeded 103% 
of value of the Participating Annuity Contract liabilities, as of 
December 31, 1991;
    (b) the fair market value of the Fixed Income Assets transferred 
into the Separate Account was determined by an independent qualified 
appraiser, as of the date the transaction was entered;
    (c) Prudential irrevocably guarantees the payment of benefits to 
the Retirees;
    (d) no additional contribution from Union Carbide or the Plan was 
or will be required to fund benefits to the Retirees;
    (e) the Plan avoided transaction costs inherent in liquidating 
assets of the General Account in order to initially fund the Separate 
Account;
    (f) funding the Participating Annuity Contract through the Separate 
Account protects the Plan and the Retirees from the general creditors 
of Prudential;
    (g) prior to entering the transaction, Union Carbide, acting as 
fiduciary on behalf of the Plan, determined that the transaction was 
feasible, was in the interest of, and was protective of the Plan and 
its participants and beneficiaries and would not affect the payment of 
benefits to the Retirees;
    (h) after full disclosure, including the provisions regarding the 
compensation to be paid to Prudential, Union Carbide determined that 
the terms of the transaction were at least as favorable as those 
negotiated at arm's length with unrelated third parties in similar 
transactions;
    (i) prior to the conversion, Union Carbide negotiated, reviewed, 
and approved the transaction, and will monitor the transaction;
    (j) Union Carbide reviewed the appraisal and the transfer of each 
of the assets into the Separate Account prior to entering into the 
transaction; and
    (k) according to Prudential, the Plan incurred no fees, 
commissions, costs, expenses, or other charges associated with the 
transaction and will pay no additional compensation as a result of the 
conversion of the Non-Participating Annuity Contract to the 
Participating Annuity Contract.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

Berean Capital, Inc. (Berean) Located in Chicago, Illinois

[Application No. D-9745]

Proposed Exemption

I. Transactions

    A. Effective June 27, 1994, the restrictions of sections 406(a) and 
407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of 
the Code by reason of section 4975(c)(1) (A) through (D) of the Code 
shall not apply to the following transactions involving trusts and 
certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and an employee benefit plan when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.A. (1) or (2).

Notwithstanding the foregoing, section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan by any person who has discretionary authority or renders 
investment advice with respect to the assets of that Excluded 
Plan.14
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    \1\4Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
---------------------------------------------------------------------------

    B. Effective June 27, 1994, the restrictions of sections 406(b)(1) 
and 406(b)(2) of the Act and the taxes imposed by section 4975 (a) and 
(b) of the Code by reason of section 4975(c)(1)(E) of the Code shall 
not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) the plan is not an Excluded Plan;
    (ii) solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) a plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.15 For purposes of this 
paragraph B.(1)(iv) only, an entity will not be considered to service 
assets contained in a trust if it is merely a subservicer of that 
trust;
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    \1\5 For purposes of this exemption, each plan participating in 
a commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
---------------------------------------------------------------------------

    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that the conditions set forth in paragraphs B.(1) (i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B. (1) or (2).
    C. Effective June 27, 1994, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act, and the taxes imposed by section 4975(a) 
and (b) of the Code by reason of section 4975(c) of the Code, shall not 
apply to transactions in connection with the servicing, management and 
operation of a trust, provided:
    (1) such transactions are carried out in accordance with the terms 
of a binding pooling and servicing arrangement; and
    (2) the pooling and servicing agreement is provided to, or 
described in all material respects in the prospectus or private 
placement memorandum provided to, investing plans before they purchase 
certificates issued by the trust.16
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    \1\6In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions.

Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act or from 
the taxes imposed by reason of section 4975(c) of the Code for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. Effective June 27, 1994, the restrictions of sections 406(a) and 
407(a) of the Act, and the taxes imposed by sections 4975(a) and (b) of 
the Code by reason of sections 4975(c)(1)(A) through (D) of the Code, 
shall not apply to any transactions to which those restrictions or 
taxes would otherwise apply merely because a person is deemed to be a 
party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider described in 
section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), 
(G), (H) or (I) of the Code), solely because of the plan's ownership of 
certificates.

II. General Conditions

    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is in one of the three highest 
generic rating categories from either Standard & Poor's Corporation 
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc. 
(D & P) or Fitch Investors Service, Inc. (Fitch);
    (4) The trustee is not an affiliate of any member of the Restricted 
Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith; and
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, or 
any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.

III. Definitions

    For purposes of this exemption:
    A. Certificate means:
    (1) a certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; and
    (b) that entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) a certificate denominated as a debt instrument--
    (a) that represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) within the meaning of section 860D(a) of the 
Internal Revenue Code of 1986; and
    (b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which 
Berean or any of its affiliates is either (i) the sole underwriter or 
the manager or co-manager of the underwriting syndicate, or (ii) a 
selling or placement agent.

For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. Trust means an investment pool, the corpus of which is held in 
trust and consists solely of:
    (1) either
    (a) secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association);
    (b) secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T);
    (c) obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, multi-family 
residential and commercial real property (including obligations secured 
by leasehold interests on commercial real property);
    (d) obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U);
    (e) ``guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2);
    (f) fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1);
    (2) property which had secured any of the obligations described in 
subsection B.(1);
    (3) undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to made 
to certificateholders; and
    (4) rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship and other credit support 
arrangements with respect to any obligations described in subsection 
B.(1).

Notwithstanding the foregoing, the term ``trust'' does not include any 
investment pool unless: (i) the investment pool consists only of assets 
of the type which have been included in other investment pools, (ii) 
certificates evidencing interests in such other investment pools have 
been rated in one of the three highest generic rating categories by 
S&P's, Moody's, D & P, or Fitch for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. Underwriter means:
    (1) Berean;
    (2) any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
Berean; or
    (3) any member of an underwriting syndicate or selling group of 
which Berean or a person described in (2) is a manager or co-manager 
with respect to the certificates.
    D. Sponsor means the entity that organizes a trust by depositing 
obligations therein in exchange for certificates.
    E. Master Servicer means the entity that is a party to the pooling 
and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. Subservicer means an entity which, under the supervision of and 
on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. Servicer means any entity which services loans contained in the 
trust, including the master servicer and any subservicer.
    H. Trustee means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. Insurer means the insurer or guarantor of, or provider of other 
credit support for, a trust. Notwithstanding the foregoing, a person is 
not an insurer solely because it holds securities representing an 
interest in a trust which are of a class subordinated to certificates 
representing an interest in the same trust.
    J. Obligor means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. Excluded Plan means any plan with respect to which any member of 
the Restricted Group is a ``plan sponsor'' within the meaning of 
section 3(16)(B) of the Act.
    L. Restricted Group with respect to a class of certificates means:
    (1) each underwriter;
    (2) each insurer;
    (3) the sponsor;
    (4) the trustee;
    (5) each servicer;
    (6) any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) any affiliate of a person described in (1)-(6) above.
    M. Affiliate of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. Control means the power to exercise a controlling influence over 
the management or policies of a person other than an individual.
    O. A person will be independent of another person only if:
    (1) such person is not an affiliate of that other person; and
    (2) the other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. Sale includes the entrance into a forward delivery commitment 
(as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. Forward delivery commitment means a contract for the purchase or 
sale of one or more certificates to be delivered at an agreed future 
settlement date. The term includes both mandatory contracts (which 
contemplate obligatory delivery and acceptance of the certificates) and 
optional contracts (which give one party the right but not the 
obligation to deliver certificates to, or demand delivery of 
certificates from, the other party).
    R. Reasonable compensation has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. Qualified Administrative Fee means a fee which meets the 
following criteria:
    (1) the fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) the servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) the ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) the amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. Qualified Equipment Note Secured By A Lease means an equipment 
note:
    (a) which is secured by equipment which is leased;
    (b) which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (c) with respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as the 
trust would have if the equipment note were secured only by the 
equipment and not the lease.
    U. Qualified Motor Vehicle Lease means a lease of a motor vehicle 
where:
    (a) the trust holds a security interest in the lease;
    (b) the trust holds a security interest in the leased motor 
vehicle; and
    (c) the trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as the trust would receive 
under a motor vehicle installment loan contract.
    V. Pooling and Servicing Agreement means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.

    Effective Date: This exemption, if granted, will be effective 
for transactions occurring on or after June 27, 1994.

Summary of Facts and Representations

    1. Berean is a financial services company involved in securities 
brokerage. It is registered as a broker-dealer with the Securities and 
Exchange Commission under the Securities Exchange Act of 1934, and with 
the National Association of Securities Dealers. Berean is incorporated 
in the State of Delaware and is owned by two individual shareholders. 
The applicant represents that Berean has extensive experience in 
underwriting and trading of mortgage-backed and other asset-backed, 
pass-through securities.

Trust Assets

    2. Berean seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following 
categories of trusts: (1) single and multi-family residential or 
commercial mortgage investment trusts;17 (2) motor vehicle 
receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.18
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    \1\7The Department notes that PTE 83-1 [48 FR 895, January 7, 
1983], a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. Berean requests relief for single-family residential mortgages 
in this exemption because it would prefer one exemption for all 
trusts of similar structure. However, Berean has stated that it may 
still avail itself of the exemptive relief provided by PTE 83-1.
    \1\8Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of plan assets 
(29 CFR 2510.3-101(i)) provides that where a plan acquires a 
guaranteed governmental mortgage pool certificate, the plan's assets 
include the certificate and all of its rights with respect to such 
certificate under applicable law, but do not, solely by reason of 
the plan's holding of such certificate, include any of the mortgages 
underlying such certificate. The applicant is requesting exemptive 
relief for trusts containing guaranteed governmental mortgage pool 
certificates because the certificates in the trusts may be plan 
assets.
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    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.19
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    \1\9Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
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Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee. The sponsor or 
servicer of a trust selects assets to be included in the trust. These 
assets are receivables which may have been originated by a sponsor or 
servicer of the trust, an affiliate of the sponsor or servicer, or by 
an unrelated lender and subsequently acquired by the trust sponsor or 
servicer.
    On or prior to the closing date, the sponsor acquires legal title 
to all assets selected for the trust, establishes the trust and 
designates an independent entity as trustee. On the closing date, the 
sponsor conveys to the trust legal title to the assets, and the trustee 
issues certificates representing fractional undivided interests in the 
trust assets. Berean, alone or together with other broker-dealers, acts 
as underwriter or placement agent with respect to the sale of the 
certificates. All of the public offerings of certificates made to date 
and all of the public offerings of certificates presently contemplated 
have been or are to be underwritten on a firm commitment basis. In 
addition, Berean has privately placed certificates on both a firm 
commitment and an agency basis. Berean may also act as the lead 
underwriter for a syndicate of securities underwriters.
    Certificateholders are entitled to receive monthly, quarterly or 
semi-annually installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificateholders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from obligors by the servicer may be commingled with the 
servicer's assets during the month prior to deposit. In no event will 
the period of time between receipt of funds by the servicer and deposit 
of these funds in a segregated account exceed 45 days. Furthermore, in 
those cases where distributions are made semi-annually, the servicer 
will furnish a report on the operation of the trust to the trustee on a 
monthly basis. At or about the time this report is delivered to the 
trustee, it will be made available to certificateholders and delivered 
to or made available to each rating agency that has rated the 
certificates.
    5. Some of the certificates will be multi-class certificates. 
Berean requests exemptive relief for two types of multi-class 
certificates: ``strip'' certificates and ``fast-pay/slow-pay'' 
certificates. Strip certificates are a type of security in which the 
stream of interest payments on receivables is split from the flow of 
principal payments and separate classes of certificates are 
established, each representing rights to disproportionate payments of 
principal and interest.\20\
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    \20\It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(1)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this 
exemption.
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    Fast-pay/slow-pay certificates involve the issuance of classes of 
certificates having different stated maturities or the same maturities 
with different payment schedules. In certain transactions of this type, 
interest and/or principal payments received on the underlying 
receivables are distributed first to the class of certificates having 
the earliest stated maturity of principal, and/or earlier payment 
schedule, and only when that class of certificates have been paid in 
full (or has received a specified amount) will distributions be made 
with respect to the second class of certificates. Distributions on 
certificates having later stated maturities will proceed in like manner 
until all the certificateholders have been paid in full. The only 
difference between this multi-class pass-through arrangement and a 
single-class pass-through arrangement is the order in which 
distributions are made to certificateholders. In each case, 
certificateholders will have a beneficial ownership interest in the 
underlying assets. In neither case will the rights of a plan purchasing 
a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.\21\
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    \21\If a trust issues subordinated certificates, holders of such 
subordinated certificates may not share in the amount distributed on 
a pro rata basis with the senior certificateholders. The Department 
notes that the exemption does not provide relief for plan investment 
in such subordinated certificates.
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    6. For tax reasons, the trust must be maintained as an essentially 
passive entity. Therefore, both the sponsor's discretion and the 
servicer's discretion with respect to assets included in a trust are 
severely limited. Pooling and servicing agreements provide for the 
substitution of receivables by the sponsor only in the event of defects 
in documentation discovered within a short time after the issuance of 
trust certificates. Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed through to certificateholders.

Parties to Transactions

    7. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a homeowner or automobile 
purchaser, or leases property to the lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their business, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    8. The sponsor will be one of three entities: (i) a special-purpose 
corporation unaffiliated with the servicer, (ii) a special-purpose or 
other corporation affiliated with the servicer, or (iii) the servicer 
itself. Where the sponsor is not also the servicer, the sponsor's role 
will generally be limited to acquiring the receivables to be included 
in the trust, establishing the trust, designating the trustee, and 
assigning the receivables to the trust.
    9. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and as such is 
responsible for enforcing all the rights created thereby in favor of 
certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to Berean, the trust sponsor or the servicer. Berean 
represents that the trustee will be a substantial financial institution 
or trust company experienced in trust activities. The trustee receives 
a fee for its services, which will be paid by the servicer, sponsor or 
the trust as specified in the pooling and servicing agreement. The 
method of compensating the trustee which is specified in the pooling 
and servicing agreement will be disclosed in the prospectus or private 
placement memorandum relating to the offering of the certificates.
    10. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a trust, it is common for the 
receivables to be ``subserviced'' by their respective originators and 
for a single entity to ``master service'' the pool of receivables on 
behalf of the owners of the related series of certificates. Where this 
arrangement is adopted, a receivable continues to be serviced from the 
perspective of the borrower by the local subservicer, while the 
investor's perspective is that the entire pool of receivables is 
serviced by a single, central master servicer who collects payments 
from the local subservicers and passes them through to 
certificateholders.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (though they 
themselves may be related) will be unrelated to Berean. In other cases, 
however, affiliates of Berean may originate or service receivables 
included in a trust, or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    11. Where the sponsor of a trust is not the originator of 
receivables included in a trust, the sponsor generally purchases the 
receivables in the secondary market, either directly from the 
originator or from another secondary market participant. The price the 
sponsor pays for a receivable is determined by competitive market 
forces, taking into account payment terms, interest rate, quality, and 
forecasts as to future interest rates.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters. In some transactions, the sponsor 
or an affiliate may retain a portion of the certificates for its own 
account. In addition, in some transactions the originator may sell 
receivables to a trust for cash. At the time of the sale, the trustee 
would sell certificates to the public or to underwriters and use the 
cash proceeds of the sale to pay the originator for receivables sold to 
the trust. The transfer of the receivables to the trust by the sponsor, 
the sale of certificates to investors, and the receipt of the cash 
proceeds by the sponsor generally take place simultaneously.
    12. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and expectations as to the 
likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.22 This rate is generally determined by the same market forces 
that determine the price of a certificate. The price of a certificate 
and its pass-through, or coupon, rate together determine the yield to 
investors. If an investor purchases a certificate at less than par, 
that discount augments the stated pass-through rate; conversely, a 
certificate purchased at a premium yields less than the stated coupon.
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    \2\2The pass-through rate on certificates representing interests 
in trusts holding leases is determined by breaking down lease 
payments into ``principal'' and ``interest'' components based on an 
implicit interest rate.
---------------------------------------------------------------------------

    13. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor, and receive fees for acting in 
that capacity) will retain the difference between payments received on 
the receivables in the trust and payments payable (at the pass-through 
rate) to certificateholders, except that in some cases a portion of the 
payments on receivables may be paid to a third party, such as a fee 
paid to a provider of credit support or deposited into a reserve fund. 
Any funds on deposit in a reserve fund after the certificateholders 
(and the credit enhancement provider, if any) have been paid in full 
are generally paid to the sponsor or the servicer. The servicer may 
receive additional compensation by having the use of the amounts paid 
on the receivables between the time they are received by the servicer 
and the time they are due to the trust (which time is set forth in the 
pooling and servicing agreement). The servicer will be required to pay 
the administrative expenses of servicing the trust, including, in some 
cases, the trustee's fee, out of its servicing compensation.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid out of the 
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is 
established.
    14. The servicer may be entitled to retain certain administrative 
fees paid by a third party, usually the obligor. These administrative 
fees fall into three categories: (a) prepayment fees; (b) late payment 
and payment extension fees and fees related to the modification of the 
terms of an obligation as permitted by the provisions of the pooling 
and servicing agreement (including the partial release of collateral to 
the extent provided therein); and (c) fees and charges associated with 
foreclosure or repossession, or other conversion of a secured position 
into cash proceeds, upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    15. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts in itself or to commingle such payments 
with its own funds prior to the distribution dates. In these cases, the 
servicer would be entitled to the benefit derived from the use of the 
funds between the date of payment on a receivable and the pass-through 
date. Commingled payments may not be protected from the creditors of 
the servicer in the event of the servicer's bankruptcy or receivership. 
In those instances when payments on receivables are held in non-
interest bearing accounts or are commingled with the servicer's own 
funds, the servicer is required to deposit these payments by a date 
specified in the pooling and servicing agreement into an account from 
which the trustee makes payments to certificateholders.
    16. Berean will receive a fee in connection with the securities 
underwriting or private placement of certificates. In a securities 
underwriting, this fee would normally consist of the difference between 
what Berean receives for the certificates that it distributes and what 
it pays the sponsor for those certificates. In some public offerings, 
however, Berean may sell certificates on an agency basis in a best 
efforts underwriting. In those cases, Berean would receive an agency 
commission paid by the sponsor plus reimbursement for out-of-pocket 
expenses. In a private placement, the fee normally takes the form of an 
agency commission paid by the sponsor.

Purchase of Receivables by the Servicer

    17. The applicant represents that as the principal amount of the 
receivables in a trust is reduced by payment, the cost of administering 
the trust generally increases, making the servicing of the trust 
prohibitively expensive at some point. Consequently, the pooling and 
servicing agreement generally provides that the servicer may purchase 
the receivables remaining in the trust when the aggregate unpaid 
balance payable on the receivables is reduced to a specified percentage 
(usually 5 to 10 percent) of the initial aggregate unpaid balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to: (1) the unpaid 
principal balance on the receivable plus accrued interest, less any 
unreimbursed advances of principal made by the servicer; or (2) the 
greater of (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
certificates in the case of a trust that is not a REMIC.

Certificate Ratings

    18. The certificates will have received one of the three highest 
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance 
or other credit support (such as surety bonds, letters of credit, 
guarantees, or the creation of a class of certificates with 
subordinated cash flow) will be obtained by the trust sponsor to the 
extent necessary for the certificates to attain the desired rating. The 
amount of this credit support is set by the rating agencies at a level 
that is a multiple of the worst historical net credit loss experience 
for the type of obligations included in the issuing trust.

Provision of Credit Support

    19. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) from the credit support provider (which 
may be itself) or, (c) in the case of a trust that issues subordinated 
certificates, from amounts otherwise distributable to holders of 
subordinated certificates, and the master servicer will advance such 
funds in a timely manner. When the servicer is the provider of the 
credit support and provides its own funds to cover defaulted payments, 
it will do so either on the initiative of the trustee, or on its own 
initiative on behalf of the trustee, but in either event it will 
provide such funds to cover payments to the full extent of its 
obligations under the credit support mechanism. In some cases, however, 
the master servicer may not be obligated to advance funds but instead 
would be called upon to provide funds to cover defaulted payments to 
the full extent of its obligations as insurer. However, a master 
servicer typically can recover advances either from the provider of 
credit support or from future payments on the affected assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to enforce the certificateholders' rights, 
as both a party to the pooling and servicing agreement and the owner of 
the trust estate, including rights under the credit support mechanism. 
Therefore, the trustee, who is independent of the servicer, will have 
the ultimate right to enforce the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the servicer out of future payments on receivables held 
by the trust to the extent not covered by credit support. However, 
where the master servicer provides credit support to the trust, there 
are protections in place to guard against a delay in calling upon the 
credit support to take advantage of the fact that the credit support 
declines proportionally with the decrease in the principal amount of 
the obligations in the trust as payments on receivables are passed 
through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;
    (c) As frequently as payments are due on the receivables included 
in the trust (monthly, quarterly or semi-annually as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all past-due payments 
and the amount of all servicer advances, along with other current 
information as to collections on the receivables and draws upon the 
credit support. Further, the master servicer is required to deliver to 
the trustee annually a certificate of an executive officer of the 
master servicer stating that a review of the servicing activities has 
been made under such officer's supervision, and either stating that the 
master servicer has fulfilled all of its obligations under the pooling 
and servicing agreement or, if the master servicer has defaulted under 
any of its obligations, specifying any such default. The master 
servicer's reports are reviewed at least annually by independent 
accountants to ensure that the master servicer is following its normal 
servicing standards and that the master servicer's reports conform to 
the master servicer's internal accounting records. The results of the 
independent accountants' review are delivered to the trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount becomes a fixed dollar 
amount, subject to reduction only for actual draws. From the time that 
the floor amount is effective until the end of the life of the trust, 
there are no proportionate reductions in the credit support amount 
caused by reductions in the pool principal balance. Indeed, since the 
floor is a fixed dollar amount, the amount of credit support ordinarily 
increases as a percentage of the pool principal balance during the 
period that the floor is in effect.

Disclosure

    20. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, and any material risk factors with 
respect to the certificates;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets and the trustee's remedy for any breach thereof; 
a description of the procedures for collection of payments on 
receivables and for making distributions to investors, and a 
description of the accounts into which such payments are deposited and 
from which such distributions are made; identification of the servicing 
compensation and any fees for credit enhancement that are deducted from 
payments on receivables before distributions are made to investors; a 
description of periodic statements provided to the trustee, and 
provided to or made available to investors by the trustee; and a 
description of the events that constitute events of default under the 
pooling and servicing contract and a description of the trustee's and 
the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors; and
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates.
    21. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    22. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many trusts obtain, by 
application to the Securities and Exchange Commission, a complete 
exemption from the requirement to file quarterly reports on Form 10-Q 
and a modification of the disclosure requirements for annual reports on 
Form 10-K. If such an exemption is obtained, these trusts normally 
would continue to have the obligation to file current reports on Form 
8-K to report material developments concerning the trust and the 
certificates. While the Securities and Exchange Commission's 
interpretation of the periodic reporting requirements is subject to 
change, periodic reports concerning a trust will be filed to the extent 
required under the Securities Exchange Act of 1934.
    23. At or about the time distributions are made to 
certificateholders, a report will be delivered to the trustee as to the 
status of the trust and its assets, including underlying obligations. 
Such report will typically contain information regarding the trust's 
assets, payments received or collected by the servicer, the amount of 
prepayments, delinquencies, servicer advances, defaults and 
foreclosures, the amount of any payments made pursuant to any credit 
support, and the amount of compensation payable to the servicer. Such 
report also will be delivered to or made available to the rating agency 
or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the trustee 
summarizing information regarding the trust and its assets. Such 
statement will include information regarding the trust and its assets, 
including underlying receivables. Such statement will typically contain 
information regarding payments and prepayments, delinquencies, the 
remaining amount of the guaranty or other credit support and a 
breakdown of payments between principal and interest.

Secondary Market Transactions

    24. It is Berean's normal policy to attempt to make a market for 
securities for which it is lead or co-managing underwriter, and it is 
Berean's intention to attempt to make a market for any certificates for 
which Berean is lead or co-managing underwriter.

Retroactive Relief

    25. Berean represents that it has engaged in transactions related 
to mortgage-backed and asset-backed securities based on the assumption 
that retroactive relief would not be granted. However, it is possible 
that some transactions may have occurred that would be prohibited. For 
example, because many certificates are held in street or nominee name, 
it is not always possible to identify whether the percentage interest 
of plans in a trust is or is not ``significant'' for purposes of the 
Department's regulation relating to the definition of plan assets (29 
CFR 2510.3-101(f)). These problems are compounded as transactions occur 
in the secondary market. In addition, with respect to the ``publicly-
offered security'' exception contained in that regulation (29 CFR 
2510.3-101(b)), it is difficult to determine whether each purchaser of 
a certificate is independent of all other purchasers.
    Therefore, Berean requests relief retroactive for transactions 
which have occurred on or after June 27, 1994, the date Berean 
originally filed its exemption application with the Department.

Summary

    26. In summary, the applicant represents that the transactions for 
which exemptive relief is requested satisfy the statutory criteria of 
section 408(a) of the Act due to the following:
    (a) The trusts contain ``fixed pools'' of assets. There is little 
discretion on the part of the trust sponsor to substitute receivables 
contained in the trust once the trust has been formed;
    (b) Certificates in which plans invest will have been rated in one 
of the three highest rating categories by S&P's, Moody's, D&P or Fitch. 
Credit support will be obtained to the extent necessary to attain the 
desired rating;
    (c) All transactions for which Berean seeks exemptive relief will 
be governed by the pooling and servicing agreement, which is made 
available to plan fiduciaries for their review prior to the plan's 
investment in certificates;
    (d) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (e) Berean has made, and anticipates that it will continue to make, 
a secondary market in certificates.

Discussion of Proposed Exemption

I. Differences between Proposed Exemption and Class Exemption PTE 83-1

    The exemptive relief proposed herein is similar to that provided in 
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain 
Transactions Involving Mortgage Pool Investment Trusts, amended and 
restated as PTE 83-1 [48 FR 895, January 7, 1983].
    PTE 83-1 applies to mortgage pool investment trusts consisting of 
interest-bearing obligations secured by first or second mortgages or 
deeds of trust on single-family residential property. The exemption 
provides relief from sections 406(a) and 407 for the sale, exchange or 
transfer in the initial issuance of mortgage pool certificates between 
the trust sponsor and a plan, when the sponsor, trustee or insurer of 
the trust is a party-in-interest with respect to the plan, and the 
continued holding of such certificates, provided that the conditions 
set forth in the exemption are met. PTE 83-1 also provides exemptive 
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the 
trust is a fiduciary with respect to the plan assets invested in such 
certificates, provided that additional conditions set forth in the 
exemption are met. In particular, section 406(b) relief is conditioned 
upon the approval of the transaction by an independent fiduciary. 
Moreover, the total value of certificates purchased by a plan must not 
exceed 25 percent of the amount of the issue, and at least 50 percent 
of the aggregate amount of the issue must be acquired by persons 
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1 
provides conditional exemptive relief from section 406(a) and (b) of 
the Act for transactions in connection with the servicing and operation 
of the mortgage trust.
    Under PTE 83-1, exemptive relief for the above transactions is 
conditioned upon the sponsor and the trustee of the mortgage trust 
maintaining a system for insuring or otherwise protecting the pooled 
mortgage loans and the property securing such loans, and for 
indemnifying certificateholders against reductions in pass-through 
payments due to defaults in loan payments or property damage. This 
system must provide such protection and indemnification up to an amount 
not less than the greater of one percent of the aggregate principal 
balance of all trust mortgages or the principal balance of the largest 
mortgage.
    The exemptive relief proposed herein differs from that provided by 
PTE 83-1 in the following major respects: (1) The proposed exemption 
provides individual exemptive relief rather than class relief; (2) The 
proposed exemption covers transactions involving trusts containing a 
broader range of assets than single-family residential mortgages; (3) 
Instead of requiring a system for insuring the pooled receivables, the 
proposed exemption conditions relief upon the certificates having 
received one of the three highest ratings available from S&P's, 
Moody's, D&P or Fitch (insurance or other credit support would be 
obtained only to the extent necessary for the certificates to attain 
the desired rating); and (4) The proposed exemption provides more 
limited section 406(b) and section 407 relief for sales transactions.

II. Ratings of Certificates

    After consideration of the representations of the applicant and 
information provided by S&P's, Moody's, D&P and Fitch, the Department 
has decided to condition exemptive relief upon the certificates having 
attained a rating in one of the three highest generic rating categories 
from S&P's, Moody's, D&P or Fitch. The Department believes that the 
rating condition will permit the applicant flexibility in structuring 
trusts containing a variety of mortgages and other receivables while 
ensuring that the interests of plans investing in certificates are 
protected. The Department also believes that the ratings are indicative 
of the relative safety of investments in trusts containing secured 
receivables. The Department is conditioning the proposed exemptive 
relief upon each particular type of asset-backed security having been 
rated in one of the three highest rating categories for at least one 
year and having been sold to investors other than plans for at least 
one year.\23\
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    \23\In referring to different ``types'' of asset-backed 
securities, the Department means certificates representing interests 
in trusts containing different ``types'' of receivables, such as 
single family residential mortgages, multi-family residential 
mortgages, commercial mortgages, home equity loans, auto loan 
receivables, installment obligations for consumer durables secured 
by purchase money security interests, etc. The Department intends 
this condition to require that certificates in which a plan invests 
are of the type that have been rated (in one of the three highest 
generic rating categories by S&P's, D&P, Fitch or Moody's) and 
purchased by investors other than plans for at least one year prior 
to the plan's investment pursuant to the proposed exemption. In this 
regard, the Department does not intend to require that the 
particular assets contained in a trust must have been ``seasoned'' 
(e.g., originated at least one year prior to the plan's investment 
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales

    Berean represents that in some cases a trust sponsor, trustee, 
servicer, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates may be a pre-existing party 
in interest with respect to an investing plan.\24\ In these cases, a 
direct or indirect sale of certificates by that party in interest to 
the plan would be a prohibited sale or exchange of property under 
section 406(a)(1)(A) of the Act.\25\ Likewise, issues are raised under 
section 406(a)(1)(D) of the Act where a plan fiduciary causes a plan to 
purchase certificates where trust funds will be used to benefit a party 
in interest.
---------------------------------------------------------------------------

    \24\In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which Berean or 
any of its affiliates is either (a) the sole underwriter or manager 
or co-manager of the underwriting syndicate, or (b) a selling or 
placement agent.
    \25\The applicant represents that where a trust sponsor is an 
affiliate of Berean, sales to plans by the sponsor may be exempt 
under PTE 75-1, Part II (relating to purchases and sales of 
securities by broker-dealers and their affiliates), if Berean is not 
a fiduciary with respect to plan assets to be invested in 
certificates.
---------------------------------------------------------------------------

    Additionally, Berean represents that a trust sponsor, servicer, 
trustee, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates representing an interest in 
a trust may be a fiduciary with respect to an investing plan. Berean 
represents that the exercise of fiduciary authority by any of these 
parties to cause the plan to invest in certificates representing an 
interest in the trust would violate section 406(b)(1), and in some 
cases section 406(b)(2), of the Act.
    Moreover, Berean represents that to the extent there is a plan 
asset ``look through'' to the underlying assets of a trust, the 
investment in certificates by a plan covering employees of an obligor 
under receivables contained in a trust may be prohibited by sections 
406(a) and 407(a) of the Act.
    After consideration of the issues involved, the Department has 
determined to provide the limited sections 406(b) and 407(a) relief as 
specified in the proposed exemption.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete and accurately describe all 
material terms of the transaction which is the subject of the 
exemption. In the case of continuing exemption transactions, if any of 
the material facts or representations described in the application 
change after the exemption is granted, the exemption will cease to 
apply as of the date of such change. In the event of any such change, 
application for a new exemption may be made to the Department.

    Signed at Washington, DC, this 4th day of August, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration,U.S. Department of Labor.
[FR Doc. 94-19414 Filed 8-8-94; 8:45 am]
BILLING CODE 4510-29-P